In Re: Transcare Corporation

Background

The case arose from an adversary proceeding in the bankruptcy of TransCare Corporation. The bankruptcy court held a six-day bench trial and issued findings and conclusions concerning several claims. The district court reviewed the bankruptcy court’s final rulings on core bankruptcy claims under appellate standards and reviewed its proposed findings on the non-core claim against Lynn Tilton.

Tilton was TransCare’s sole director and controlled Patriarch Partners Agency Services, LLC (PPAS), as well as Transcendence Transit, Inc. and Transcendence Transit II, Inc. TransCare was experiencing serious financial distress and depended on secured credit facilities. On February 24, 2016, Tilton caused PPAS to foreclose on assets connected to TransCare’s most profitable business lines. PPAS accepted the assets in satisfaction of $10 million of debt and then sold them to Transcendence for $10 million. TransCare and related entities later filed for bankruptcy.

The bankruptcy trustee, Salvatore LaMonica, challenged the transaction. The bankruptcy court found that the foreclosure was an actual fraudulent conveyance, meaning a transfer made with actual intent to hinder or delay creditors, and awarded $39.2 million against PPAS and Transcendence. It also recommended finding Tilton liable for breaching her duties of loyalty and good faith under Delaware law, with $41.8 million in damages. Because the two claims addressed the same injury, the bankruptcy court concluded that the trustee could receive only one satisfaction.

Tilton’s Fiduciary-Duty Liability

The district court adopted the bankruptcy court’s recommendation that Tilton breached her fiduciary duties. Because Tilton stood on both sides of the transaction, Delaware’s entire-fairness standard applied. That standard requires the fiduciary to prove both fair dealing, including a fair process, and a fair price, considering the transaction as a whole.

The court concluded that Tilton did not prove fair dealing. She controlled every aspect of the transaction, there was no independent director, financial adviser, or other disinterested review, and there was no evidence of arms-length bargaining. The unaffiliated Term Loan lenders were not informed about the planned foreclosure, and Tilton had prohibited discussions with potential buyers of all or part of TransCare. The court also rejected the argument that TransCare’s financial distress excused the lack of a fair process. Although selling TransCare as a whole may have been infeasible, the court said that did not establish that a fair sale of selected business lines was impossible.

The court also held that Tilton failed to prove a fair price. The $10 million valuation was based on book value and did not adequately account for the value of the assets as an operating business. The calculation also failed to include the value of certain physical assets, certificates needed to operate ambulances, and the MTA contract. The court therefore concluded that Tilton was liable for breaching the duties of loyalty and good faith.

Damages Against Tilton

The district court modified the fiduciary-duty damages award from $41.8 million to $38.2 million. It accepted the use of the lost going-concern value of the transferred assets as the measure of damages. The trustee’s expert used comparable-company and prior-transaction analyses and calculated a mean earnings multiple of 10.1 times projected annualized earnings before interest, taxes, depreciation, and amortization.

Using the 10.1-times multiple and $4 million in projected annualized earnings, the court calculated damages of $40.4 million. It then applied deductions of $1 million for expected buyer capital investment and $1.2 million for value recovered through liquidation, producing a final award of $38.2 million against Tilton.

PPAS and Transcendence’s Appeal

The district court affirmed the bankruptcy court’s judgment against PPAS and Transcendence in its entirety. The court held that the foreclosure was an actual fraudulent conveyance under the Bankruptcy Code and New York Debtor and Creditor Law. It upheld the finding that TransCare acted with intent to hinder or delay creditors.

The court relied on the circumstances surrounding the transaction, including the lack or inadequacy of consideration, Tilton’s control of the entities involved, the transfer of assets to a company she controlled, the secrecy and haste of the foreclosure, the financial distress of TransCare, and the fact that the assets were transferred free of the creditors’ liens and TransCare’s unsecured debt. The court found no clear error in the bankruptcy court’s factual findings.

The court also affirmed the $39.2 million damages award against PPAS and Transcendence. It agreed that the estate was entitled to recover the going-concern value of the transferred assets, calculated using the 10.1-times earnings multiple and reduced by the $1.2 million liquidation-value deduction.

Disposition

The court affirmed the bankruptcy court’s judgment avoiding the foreclosure as an actual fraudulent conveyance and awarding $39.2 million against PPAS and Transcendence. It closed PPAS and Transcendence’s appeal. Judge Lewis A. Kaplan overruled Tilton’s objection to the finding of fiduciary-duty liability, modified the proposed damages award against her to $38.2 million, and stated that the trustee was entitled to only a single satisfaction for the same injury.