LaMonica v. Tilton (In re TransCare Corp.)

• Docket Number: 21-2547,21-2576
• Decision Date: 28 August 2023
• Citation: LaMonica v. Tilton (In re TransCare Corp.), 81 F.4th 37 (2nd Cir. 2023)
• Parties: IN RE: TRANSCARE CORPORATION, Debtor. Salvatore LaMonica, as Chapter 7 Trustee of the Jointly-Administered Estates of TransCare Corporation, et al., Plaintiff-Appellee, Shameeka Ien, Plaintiff, v. Lynn Tilton, Defendant-Appellant, Patriarch Partners Agency Services, LLC, Patriarch Partners, LLC, Patriarch Partners Management Group, LLC, Ark II CLO 20011, Limited, ARK Investment Partners II, L.P., LD Investments, LLC, Patriarch Partners II, LLC, Patriarch Partners III, LLC, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, Patriarch Partners XV, LLC, Transcendence Transit, Inc., Transcendence Transit II, Inc., Defendants. Patriarch Partners Agency Services, LLC, Transcendence Transit, Inc., Transcendence Transit II, Inc., Appellants, v. Salvatore LaMonica, as Chapter 7 Trustee of the Jointly-Administered Estates of TransCare Corporation, et al., Trustee-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

81 F.4th 37

IN RE: TRANSCARE CORPORATION, Debtor.

Salvatore LaMonica, as Chapter 7 Trustee of the

Jointly-Administered Estates of TransCare Corporation, et al., Plaintiff-Appellee,Shameeka Ien, Plaintiff, v. Lynn Tilton, Defendant-Appellant,

Patriarch Partners Agency Services, LLC, Patriarch Partners, LLC,

Patriarch Partners Management Group, LLC, Ark II CLO 20011, Limited, ARK Investment Partners II, L.P.,

LD Investments, LLC, Patriarch Partners II, LLC, Patriarch Partners III, LLC,

Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC,

Patriarch Partners XV, LLC, Transcendence Transit, Inc., Transcendence Transit II, Inc., Defendants.

Patriarch Partners Agency Services, LLC, Transcendence Transit, Inc.,Transcendence Transit II, Inc., Appellants, v. Salvatore LaMonica, as Chapter 7 Trustee of the

Jointly-Administered Estates of TransCare Corporation, et al., Trustee-Appellee.

No. 21-2547

No. 21-2576

United States Court of Appeals, Second Circuit

Argued: December 16, 2022

Decided: August 28, 2023

Appeals from the United States District Court for the Southern District of New York, Nos. 20-cv-6523 & 20-cv-6274, Lewis A. Kaplan, Judge.

Mark A. Perry, Weil, Gotshal & Manges LLP, Washington, DC (Michael T. Mervis, Proskauer Rose LLP, New York, NY, Kellam M. Conover, Gibson Dunn & Crutcher LLP, Washington, DC, on the brief), for Appellants.

Carter G. Phillips, Sidley Austin LLP, Washington, DC (Avery Samet, Amini LLC, New York, NY, William R. Levi, Aaron P. Haviland, Sidley Austin LLP, Washington, DC, on the brief), for Appellees.

Before: Menashi, Nathan, and Merriam, Circuit Judges.

Nathan, Circuit Judge:

This case arises from a transaction executed by Lynn Tilton, a private equity investor and the sole director of TransCare Corporation.When TransCare was on the verge of bankruptcy, Tilton hatched a plan to salvage the profitable parts of the business and spin them off into a new company.She directed Patriarch Partners Agency Services, LLC(PPAS), a company she controlled, to foreclose on select TransCare assets associated with TransCare's profitable business lines.PPAS then sold those assets to two other companies that Tilton created and controlled: Transcendence Transit, Inc. and Transcendence Transit II, Inc.(collectively, Transcendence).What remained of TransCare filed for Chapter 7 bankruptcy.

However, Tilton's plan fell apart when the new business was unable to get off the ground.Transcendence shut down after only three days and its assets were returned to the bankruptcy estate, where they were liquidated.

In the bankruptcy proceedings below, the bankruptcy court and the district court agreed that (1) Tilton had breached her fiduciary duties to TransCare by engaging in a self-interested transaction that failed to meet the entire fairness standard, and (2) the foreclosure on TransCare's assets was an actual fraudulent conveyance.The district court calculated that Tilton, PPAS, and Transcendence owed the bankruptcy estate a combined total of $39.2 million in damages, based on the projected future earnings of the profitable TransCare assets that Tilton had transferred to Transcendence.Tilton, PPAS, and Transcendence appeal the judgments.For the reasons explained below, weAFFIRM.

BACKGROUND

I.Ownership and Debt Structure

TransCare, a Delaware corporation headquartered in New York, contracted with hospitals and municipalities in the mid-Atlantic region to provide ambulance and paratransit services.The company's board consisted of a single member, Lynn Tilton, who was also the indirect owner of about 61% of its equity.Two of Tilton's personal investment vehicles—Ark IICLO 2001-1, Ltd. (Ark II) and Ark Investment Partners II, LP(AIP)—owned 55.7% and 5.6% of TransCare's stock, respectively.Credit Suisse owned and/or managed about 26% of TransCare, and the remaining 12.7% was owned by various individuals and entities.As the sole director, Tilton maintained ultimate control over all of TransCare's significant financial and operational decisions.

TransCare had two lines of credit that are relevant to this action.The parties refer to these credit agreements as the "Asset-Backed Loan" and the "Term Loan."The Asset-Backed Loan was a revolving loan facility from Wells Fargo.The Term Loan was a credit agreement between TransCare and several entities, including (1) AIP, (2) the "Zohar Funds," a group of three funds that were controlled by Tilton but funded by outside investors, (3) Credit Suisse, and (4) First Dominion Funding I (collectively, the Term Loan Lenders).PPAS acted as the administrative agent on behalf of all the Term Loan Lenders, and Tilton was the sole manager and indirect owner of PPAS.

Both the Term Loan and the Asset-Backed Loan were backed by blanket liens on TransCare's assets, but PPAS and Wells Fargo entered into an intercreditor agreement granting the Term Loan Lenders "a first priority lien on TransCare's vehicles, certain other physical assets, capital stock of the subsidiaries, and intellectual property," and Wells Fargo"a first priority lien on all other assets . . . , including the accounts (such as accounts receivable) and general intangibles."Lamonica v. Tilton(In re TransCare Corp.), Nos. 20-cv-6274 & 20-cv-6523, 2021 WL 4459733, at *3(S.D.N.Y.Sept. 29, 2021)(hereinafter Distr. Op.).

II.Financial Troubles

By the end of 2014, TransCare began to experience serious financial problems that affected its ability to continue operating.Throughout the following year, TransCare struggled to pay employees and vendors and "depended on Tilton affiliates to cover shortfalls."Ien v. TransCare Corp.(In re TransCare Corp.), 614 B.R. 187, 210(Bankr. S.D.N.Y.2020).On October 14, 2015, Wells Fargo issued a notice of non-renewal and informed TransCare that the Asset-Backed Loan would expire, with the outstanding balance of $13 million due by January 31, 2016.At the time, TransCare also owed approximately $43 million on the Term Loan.

Thus, by mid-December 2015, "Tilton understood that Wells Fargo was not going to stay in past January 31 absent a sale process."Lamonica v. Tilton(In re TransCare Corp.), No. 18-1021, 2020 WL 8021060, at *6(Bankr. S.D.N.Y.July 6, 2020)(hereinafter Bankr. Op.).As part of the sale process, a credit officer at Tilton's investment firm, Patriarch Partners, LLC(a separate legal entity from PPAS), identified comparable acquisitions and public companies that were similar to TransCare.The analysis found that the similar companies had been valued at approximately eight to eleven times their annualized earnings before interest, taxes, depreciation, and amortization (EBITDA).

Tilton also asked her team to prepare a 2016 budget that would convince Wells Fargo to extend the Asset-Backed Loan while she looked for a potential buyer.Wells Fargo acknowledged that a sale of TransCare would require bridge financing to keep the company afloat until a deal was closed, but it conditioned its extension of the Asset-Backed Loan on a requirement that Patriarch Partners, LLC contribute to critical operating expenses.As part of the negotiations with Wells Fargo, Tilton also agreed to retain Carl Marks Advisory Group LLC to serve as a third-party financial advisor and to help with the budgeting process.

Throughout 2015, TransCare had received several offers from other ambulance companies to acquire certain assets and contracts.In particular,

• In February 2015, National Express offered $15 to $18 million to buy TransCare's paratransit services contract with the New York Metropolitan Transit Authority (MTA).

• In March 2015, the Richmond County Ambulance Service(RCA) emailed Tilton seeking to purchase some or all of TransCare for up to eight times TransCare's EBITDA.

• In July 2015, RCA sent a follow-up email reiterating its interest in purchasing or operating TransCare.

• Also in July 2015, National Express sent Glenn Leland, TransCare's CEO, a Letter of Intent offering to purchase the MTA contract for $6 to $7 million and assume up to $2 million in liabilities.

• In December 2015, National Express contacted Leland again to reiterate that its offer to buy the contract was "still out there."Bankr. Op. at *6.

• Also in December 2015, another member of Tilton's team informed her "that Leland had received unsolicited calls from several potential purchasers in the ambulance business including Falck, [American Medical Response], RCA, and Enhanced Equity."Id. at *7.

However, Tilton never pursued any of these opportunities and prohibited her employees from speaking to potential buyers.Leland testified that when he informed Tilton about the February 2015 offer from National Express, he"was called to Lynn Tilton's office," where "she came in and told me, 'Don't ever [expletive] sell one of my companies.' "Joint App'x 273.When asked why she did not consider these offers, Tilton explained that she wanted to "try to get the company back" to "the $12 to $14 million dollars of EBITDA a year" that it had historically earned so she could sell the company "at a price that would have covered both Wells and the term loan lenders."Id. at 679-80.

After the bridge financing was secured, TransCare's managers worked to determine how much capital TransCare would need to survive until a sale.On January 27, 2016, Carl Marks produced a "2016 Plan Executive Summary" concluding that TransCare was "operating at an absolute breaking point."Joint App'x 1680-81.It determined that Patriarch Partners would need to pledge over $7.5 million to keep TransCare afloat, with $3.5 million needed in the next two weeks.Id. at 1684.Tilton considered but ultimately rejected this plan because she did not "want to keep funding into a black hole that cannot be filled."Id. at 1668-69.As of February 3, 2016, TransCare still had no agreement with Wells Fargo or Credit Suisse for a new line of credit and was in default on the Term Loan.

Thus, by February 5, 2016, Tilton determined based on TransCare's "rapidly deteriorating...