Dev. Specialists, Inc. v. Kaplan (In re Irving Tanning Co.)

• Decision Date: 09 August 2016
• Docket Number: Adv. Pro. No. 12-1024,Case No. 10-11757 Jointly Administered
• Citation: 555 B.R. 70
• Parties: In re: Irving Tanning Company, Prime Tanning Co., Inc., Prime Tanning Corp., Cudahy Tanning Company, Inc., Wismo Chemical Corp., Prime Tanning Company, Inc., Debtors. Development Specialists, Inc., as Trustee of the Irving/Prime Creditor s' Trust, Plaintiff/Counterclaim Defendant. v. Michael W. Kaplan, et. al., Defendants/Counterclaim Plaintiffs.
• Court: U.S. Bankruptcy Court — District of Maine

555 B.R. 70

In re: Irving Tanning Company, Prime Tanning Co., Inc., Prime Tanning Corp., Cudahy Tanning Company, Inc., Wismo Chemical Corp., Prime Tanning Company, Inc., Debtors.

Development Specialists, Inc., as Trustee of the Irving/Prime Creditor s' Trust, Plaintiff/Counterclaim Defendant.

v.Michael W. Kaplan, et. al., Defendants/Counterclaim Plaintiffs.

Case No. 10-11757 Jointly Administered

Adv. Pro. No. 12-1024

United States Bankruptcy Court, D. Maine.

Signed August 9, 2016

Maire Bridin Corcoran Ragozzine, Esq., Robert J. Keach, Esq., Paul McDonald, Timothy J. McKeon, Esq., Bernstein, Shur, Sawyer & Nelson, P.A., Portland, ME, for Plaintiff/Counterclaim Defendant.

Christian T. Chandler, Esq., Curtis Thaxter LLC, Portland, ME, Lawrence G. Green, Esq., Tal M. Unrad, Esq., Burns & Levinson, LLP, Boston, MA, for Defendants/Counterclaim Plaintiffs.

MEMORANDUM OF DECISION

Peter G. Cary

, Chief Judge, United States Bankruptcy Court

I. Introduction.

This adversary proceeding emerges from the confirmed chapter 11 plan of the jointly administered cases of six debtors (the “Debtors”): Prime Tanning Company, Inc. (“Prime Delaware”), Irving Tanning Company (“Irving Tanning”), Prime Tanning Co., Inc. (“Prime Maine”), Cudahy Tanning Company, Inc. (“Cudahy”), Prime Tanning Corp. (“Prime Missouri”) and Wismo Chemical Corp. (“Wismo”). The Debtors were related. Prime Delaware was the parent corporation of Irving Tanning, Prime Maine and Cudahy. Prime Missouri was a wholly-owned subsidiary of Prime Maine, and Wismo was a subsidiary of Prime Missouri. The order confirming the chapter 11 plan authorized the creation of the Irving/Prime Creditors' Trust and granted plaintiff Development Specialists, Inc., as the trustee of that trust (the “Trustee”), the power to pursue various claims arising from the 2007 transfer of Prime Maine's shares (the “2007 Transaction”) and a later release of certain claims connected to that transaction (the “2010 Release”). In 2012, the Trustee commenced this action by filing a multi-count complaint (the “Complaint”) which seeks to avoid the 2007 Transaction and recover damages from the defendants, jointly and severally, in excess of $23.6 million.

There are two categories of defendants (the “Defendants”). Some are the former shareholders of Prime Maine: Michael Kaplan, Morris Stephen Kaplan (“Stephen Kaplan”), Marjory Kaplan, the Glenyce S. Kaplan Lifetime Trust-1994 (the “Lifetime Trust”), the Prime Tanning Co., Inc. Voting Trust-1994 (the “Voting Trust”) and the Estate of Leonard Kaplan (the “Shareholder Defendants”).¹ Others are the former directors of Prime Maine: Michael Kaplan, Stephen Kaplan, Glenyce Kaplan, Steven Goldberg, Eliseo Pombo, and Robert Moore (the “Director Defendants”). Four of the counts of the Complaint maintain that the Shareholder Defendants' actions in connection with the 2007 Transaction and the 2010 Release constitute actual fraudulent transfers under Maine's version of the Uniform Fraudulent Transfers Act. Eight of the counts allege that the Shareholder Defendants' actions constitute constructively fraudulent transfers under the same act. The final two counts assert that the Director Defendants breached their fiduciary duties of care and loyalty required by the Maine Business Corporation Act.

After consideration of the evidence, including the testimony of witnesses, the exhibits offered at trial, the various papers submitted by the parties, and the stipulations of the parties, as well as the controlling law and the earlier rulings in this adversary proceeding, I conclude that the Trustee has not met its burden on any of the fourteen counts against the Defendants and therefore judgment shall enter in their favor. Doing so moots the relief sought by the Counterclaim and it shall be dismissed.

II. Background.

The Debtors were in the leather industry business which, for purposes of this case, has two important segments; leather tanning and leather finishing. Leather tanning, also known as “wet bluing”, involves dehairing raw cattle hides and then chemically processing them until they are preserved and turn blue. Leather finishing takes the wet blued hides to their finished state so they can be formed into leather goods. Prime Maine operated a wet blue operation in St. Joseph, Missouri through its subsidiary Prime Missouri, and a leather finishing operation in Berwick, Maine.

The Kaplan family (including father Leonard Kaplan, mother Glenyce Kaplan, and their children Michael Kaplan, Stephen Kaplan and Marjory Kaplan) had a long relationship with the Prime Maine leather business. Leonard Kaplan's father initially founded the business in Maine over 100 years ago, leaving Leonard Kaplan a healthy business upon his death. Leonard Kaplan successfully expanded Prime Maine so that it reached a global market. At one point, the Prime Missouri tannery was one of the largest in the world, and the Prime Maine Berwick finishing facility was one of the largest in the United States.

After Leonard Kaplan's death in 2006, and prior to the 2007 Transaction, the Shareholder Defendants owned all of the shares of Prime Maine, and Michael Kaplan and Stephen Kaplan became co-chairmen of the board of directors of Prime Maine and Prime Missouri. During the relevant periods of time for this case, Mr. Goldberg (who was also the Executive Vice President of Prime Maine), Mr. Pombo, Ms. Kaplan and Mr. Moore were also members of the board of directors of Prime Maine. In addition, Mr. Goldberg and Mr. Moore were members of the board of directors of Prime Missouri, and Mr. Moore was the CEO and president of Prime Maine, Prime Missouri and Prime Delaware. Mr. Moore also served on the latter's board of directors.

In the years leading up to the 2007 Transaction, the tanning and finishing industry in the United States was in a state of contraction, in part due to foreign competition. Domestic leather tanning and finishing companies were experiencing pricing pressures, which reduced revenues and profitability. Revenues within the industry had dropped dramatically since 2000, and the decline was expected to continue. The Debtors were not immune to this. While Prime Maine had enjoyed many years of solid profitability, it suffered operating losses in fiscal year 2005 of just under $1 million on overall revenues of $190 million, and it projected losses for fiscal year 2006. In October of 2006, at the recommendation of Norman Spector, its counsel, Prime Maine retained Phoenix Management Services (“Phoenix”), an on-site management advisory and financial services firm, to assist the shareholders in evaluating courses of action to protect the equity value of their investment and to preserve value for the next generation of the Kaplan family. Phoenix performed an analysis of Prime Maine and Prime Missouri's financial and operational history and forecasts, and presented its written analysis and recommendations to the Prime Maine board of directors on December 19, 2006 (the “Phoenix Report”). Trustee's Trial Exhibit 12.

The Phoenix Report made a number of observations regarding Prime Maine and the industry:

Prime Missouri's operations were vulnerable to market pricing pressures, and 30% of its production was sold to a single China-based customer, Shanghai Richina Leather, which had “clearly indicated that if Prime Tanning is not interested in forming a venture aimed towards an IPO, it will move a portion, if not all, of its volume”;

Prime Maine's Berwick facility was operating at below break-even and faced increasing price pressures and decreasing production volume;

The 2006 net operating cash-flow was positive only as a result of recording a $1.5 million tax benefit, which at that time had not yet been realized; Working capital had grown significantly through 2005 as a result of an increase in inventory and receivables;

Globalization had and would continue to harm domestic manufacturers;

Domestic revenue had decreased over 18% since 2001 and was expected to decline from $2 billion per year in 2005 to $1.6 billion per year in 2010; and

Given the company's historical and current financial performance, as well as changes in the industry, customer concentration, and reliance on bank debt to fund operations, Prime Maine should be cautious regarding the fragility of its banking relationship with Bank of America.

The Phoenix Report presented three recommendations to the Prime Maine board: (i) develop and implement a financial turnaround plan; (ii) pursue a venture with an Asian partner; or (iii) divest the business. Phoenix recommended that a plan to shut down the Berwick plant be developed and implemented immediately.

Coincidentally, also late in December of 2006, Mr. Moore, on behalf of Prime Maine, began communicating with Mark Kehaya of Meriturn about Meriturn's interest in Prime Maine. Meriturn, a private equity firm involved in advising and investing in distressed companies, was familiar with Prime Maine from the due diligence efforts it undertook in 2005 when it acquired Irving Tanning out of bankruptcy. Mr. Kehaya believed there was an over-capacity in the production of leather in the United States, and an opportunity to consolidate, cut costs and make a profit. He also believed that there was no major international leather supplier, and that by creating one through a merger of Prime Maine with Irving Tanning, he could reach additional customers and gain additional markets. Mr. Moore, as directed by the Prime Maine board, told Mr. Kehaya that if Meriturn wished to purchase Prime Maine, it would need to establish that it had the financial capacity to consummate such a deal given that Prime Maine was generating revenues of $200 million and had a net book value in the mid $40 million range.

Negotiations commenced. Prior to reaching an agreement on the terms of the 2007 Transaction, Meriturn and Prime Maine exchanged several proposed letters of interest (“LOI”). In the first LOI, Meriturn offered to buy all of the stock of Prime Maine for $26...