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Complaint Alleges Vertex CEO Unlawfully Transferred Assets From Former Company

By Cece Nunn, posted Nov 18, 2016
Vertex Railcar Corp. at 202 Raleigh St. in Wilmington is shown Friday morning. (Photo by Cece Nunn)
A complaint in a Massachusetts bankruptcy case says the CEO of Wilmington-based Vertex Railcar Corp. "unlawfully" caused his previous company to transfer railcar design drawings and manpower to a new company, before filing for Chapter 7 bankruptcy in 2015.

The complaint was filed in August in U.S. Bankruptcy Court in Massachusetts by attorneys for the trustee of the bankruptcy estate of Vertex Fab & Design, the company acquired by Vertex Railcar Corp. CEO and founder Donald Croteau in May 2012. Vertex Fab & Design, based in Middleboro, Massachusetts, had designed and manufactured vessels and tanks for industrial uses, but Croteau filed for bankruptcy on behalf of the firm in May 2015.

Vertex Railcar Corp., Vertex Rail Technologies and Croteau are named as defendants in the complaint, which says Croteau, “as manager and sole owner, unlawfully caused the Debtor, Vertex Fab and Design LLC ... to transfer its most valuable assets, namely railcar design drawings, to a newly created entity, Vertex Rail Technologies LLC, which is wholly controlled and majority owned by Croteau, without receiving any reasonably equivalent value.”   

The complaint (read the full complaint here) includes 92 factual allegations, some of which are denied and others acknowledged in Croteau’s official answer. The complaint also alleges 14 counts of fraudulent transfers, and Croteau's answer filing includes a demand for a trial by jury.

The responses to the complaint, filed by attorneys representing Croteau, Vertex Railcar Corp. and Vertext Rail Technologies in October, denied a number of the specific allegations (read Croteau's filed response here).

Vertex Railcar Corp. was created when Vertex Rail Technologies entered into a joint venture with China Southern Railway (now part of CRRC Corporation) and a private equity firm in 2015. In November of the previous year, Gov. Pat McCrory had traveled to Wilmington to announce that Vertex Rail would be adding 1,300 jobs at the former Terex Crane facility in Wilmington, 202 Raleigh St., where Vertex Railcar Corp. has been manufacturing rail cars.

Company officials said in May that Vertex had 221 employees after 60 had been laid off. But when asked Thursday how many employees are currently working at Vertex Railcar Corp. and how many rail cars had been produced to date, a company spokesman would not provide answers.

“For competitive reasons, we have nothing to report at this time. Vertex’s long-term plan remains the same — to produce 8,000 railcars a year at the Wilmington facility, which will require 1,300 workers. How and when we scale to producing 8,000 railcars per year will be determined by market demand," wrote Foster Sayers, general counsel, government liaison and public relations manager for Vertex Railcar Corp., in an email Thursday.

The bankruptcy court complaint alleges that before the November 2014 announcement in Wilmington, Croteau had diverted his efforts to developing opportunities for Vertex Rail Technologies at the expense of Vertex Fab & Design, and that from 2013 through early 2015 he had also directed the efforts of key employees at Vertex Fab & Design to the development of Vertex Rail Technologies while failing to pay the older company’s debts.

Vertex Railcar Corp. officials on Thursday declined a request for comment from the Greater Wilmington Business Journal on the complaint.

“In keeping with corporate policy, Vertex is unable to comment on pending litigation," Sayers said in an email.

Michael P. Connolly, a Boston attorney representing the Vertex Fab & Design bankruptcy trustee Donald R. Lassman (also a Massachusetts attorney), said on Friday, "We refer you to the documents that have been filed with the court," when asked about the complaint. 

The allegations say Vertex Rail Technologies bought the rail designs developed by the Vertex Fab & Design employees for $250,000, an amount that was $1.75 million less than they were worth according to Tucker & Metzler, a valuation advisory firm.

During his negotiations with China Southern Railway to invest in the new rail car manufacturing venture, Croteau at one point made it a condition that part of the funding for the new company would be used to close out Vertex Fab & Design and address its outstanding liabilities, the complaint says. But China Southern Railway (CSR) balked at using the funds for the older company.

“In response to CSR’s resistance to paying any of Vertex Fab’s debts, Croteau told CSR: ‘The only reason that VRT [Vertex Rail Technologies] is here today is because of the time, money, personnel and skill at VFD [Vertex Fab & Design] ... all of that was given to VRT with the understanding that when ready VFD would be closed properly,” the complaint says, citing an email exchange between Croteau and an apparent CSR representative.

By April 2015, Vertex Rail Technologies had transferred all of its assets into the joint venture agreement, and Vertex Fab & Design “did not receive any consideration for the transfer of assets from Vertex Rail Tech. to Vertex Rail Corp,” the allegations say.

The complaint alleges 14 counts of fraudulent transfers.

The next step in addressing the complaint portion of the bankruptcy case is an initial conference scheduled for Nov. 21, according to a scheduling order issued Oct. 19 by U.S. Bankruptcy Judge Joan N. Feeney.

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