The deal between Allied Capital and its asset management subsidiary, Callidus Capital Management, to buy Katonah Capital is off. The deal was reportedly 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 four of its six CDOs. DeLucca, who formed Katonah in 1999 with Kohlberg, has formed Kingsland Capital (LMW, 2/7). The new outfit has a credit line from a bank and an equity investor lined up. 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.
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 immediately 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 that Katonah had grown too large and had too much at stake to have one individual as the sole key person for the funds. They 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 that its relationship with DeLucca was no longer viable and a sale to a new owner was in the best interest of the parties.
By departing to form Kingsland, DeLucca could trigger the key man provisions in four 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.
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.”