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Allied/Kohlberg End $40 Mln Katonah Deal Following DeLucca Departure

The deal between Allied Capital and its asset management subsidiary, Callidus Capital Management, to buy Katonah Capital Management is off.

The deal between Allied Capital and its asset management subsidiary, Callidus Capital Management, to buy Katonah Capital Management is off. As first reported on LMW's Web site, the deal was worth $40 million to Kohlberg & Co., Katonah's parent, but following the departure of Joyce DeLucca and several employees, the letter of intent was terminated Feb. 9, according to a lawsuit filed by Katonah and Kohlberg & Co. against DeLucca. Kohlberg is still attempting to sell Katonah, but is also seeking a high-quality portfolio manager to meet key-man provisions in its CDOs.

DeLucca, who formed Katonah in 1999 with Kohlberg, has set up Kingsland Capital (LMW, 2/7). The new outfit has a credit line from a bank, an equity investor lined up and a number of ex-Katonah employees working at its New York office includingTom Liu, Brian Carlson,Robert Perry, Jacob Killion and Andrew Stern. DeLucca left the asset management firm because Katonah was attempting to sell the management contracts of its CDOs to Allied, according to multiple market sources, both on the buyside and sellside.

Steve Kayman, a partner at Proskauer Rose, who is defending DeLucca against the law suit, said, "Unfortunately, people can sue for almost anything in America, no matter how meritless the claim. This is a case in which Katonah is trying to punish my client for moving on and pursuing her own career goals." He declined further comment. Officials at Allied declined comment. A Katonah spokesman also declined comment on behalf of Christopher Lacovara, principal at Kohlberg and a member of Katonah's management committee. Calls to DeLucca were not returned.

The lawsuit, a copy of which was obtained by Loan Market Week, seeks "injunctive relief and to recover compensatory and punitive damages arising from breaches of contract and fiduciary duties and tortuous interference with Katonah's business relations by DeLucca, who was portfolio manager and principal." The suit alleges that DeLucca formulated a "scheme" to take control of Katonah's assets for her own benefit.

Kohlberg's take on the situation is that in the summer of 2003, it believed Katonah had grown too large and had too much at stake to have one individual as the sole key person for the funds. According to the claim, the firm asked DeLucca to search for an additional key person as back up. DeLucca did not search for the new key person, the suit claims, adding that she stalled because she wanted control. When resolution was not reached, Kohlberg decided its relationship with DeLucca was no longer viable and a sale to a new owner was in the best interest of the parties.

The suit also alleges that the "assault of Katonah is also impeding Katonah's ability to attract a high quality portfolio manager to serve as the new contractually designated key-person, and to attract supporting staff to replace the defectors who followed DeLucca."

By departing to form Kingsland, DeLucca triggered the key man provisions in five of the six Katonah CDOs. One source said the first Katonah deal had 100% equity investment from Kohlberg even though it has a key-man provision. The second deal does not have a key-man provision. On the other deals, Katonah has 60 days to find a replacement manager and then the investors have 15 days to approve that manager. According to Standard & Poor's, all the CDOs are in compliance with the minimum coverage tests required by the respective indentures. Katonah I has passed its noncall date and is eligible to be called. Katonah II will reach its noncall date in April 2005. All of the CDOs are still active in their reinvestment periods.

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