LaMonica v. Tilton (In re Transcare Corp.)

• Decision Date: 18 October 2018
• Docket Number: Adv. Proc. No. 18-01021 (SMB),Case No. 16-10407 (SMB)
• Parties: IN RE: TRANSCARE CORP., et al., Debtors. Salvatore LaMonica, as Trustee for the Estates of TransCare Corp., et al., Plaintiff, v. Lynn Tilton, et al., Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

592 B.R. 272

IN RE: TRANSCARE CORP., et al., Debtors.Salvatore LaMonica, as Trustee for the Estates of TransCare Corp., et al., Plaintiff,

v.Lynn Tilton, et al., Defendants.

Case No. 16-10407 (SMB)

Adv. Proc. No. 18-01021 (SMB)

United States Bankruptcy Court, S.D. New York.

Signed October 18, 2018

STORCH AMINI PC, Attorneys for Plaintiff, 2 Grand Central Tower, 140 East 45th Street, 25th Floor, New York, NY 10017, Steven G. Storch, Esq., Avery Samet, Esq., John W. Brewer, Esq., Jaime B. Leggett, Esq., Of Counsel

PROSKAUER ROSE LLP, Attorneys for Defendants, Eleven Times Square, New York, NY 10036-8299, Michael T. Mervis, Esq., Timothy Q. Karcher, Esq., Nicole A. Eichberger, Esq., (pro hac vice ), Of Counsel

MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS THE COMPLAINT AND GRANTING LEAVE TO AMEND

STUART M. BERNSTEIN, United States Bankruptcy Judge:

The Plaintiff, Salvatore LaMonica ("Trustee"), the trustee of the administratively consolidated estates of TransCare Corporation and numerous debtor-affiliates (collectively, "TransCare" or the "Estate"), commenced this adversary proceeding to recover damages from the defendants under several theories discussed below. The non-individual defendants have moved to dismiss all or a portion of many of the Trustee's claims. (See Memorandum of Law in Support of Motion to Dismiss , dated May 4, 2018 ("Defendants' Memo ") (ECF Doc. # 11)¹ ; see also Defendants' Reply to Plaintiff's Opposition to Defendants' Partial Motion to Dismiss Certain Claims Asserted in the Chapter 7 Trustee's Adversary Complaint , dated June 18, 2018 ("Defendants' Reply ") (ECF Doc. # 17.) ) The Trustee opposes the motion. (See Plaintiff's Opposition to Defendants' Partial Motion to Dismiss , dated June 11, 2018 ("Plaintiff's Opposition ") (ECF Doc. # 16.) ) For the reasons that follow, the motion is granted in part and denied in part, and the Trustee is granted leave to amend.

BACKGROUND²

TransCare provided emergency medical transportation services to hospitals and municipalities throughout the Northeast and disability transportation services for municipal authorities, such as the New York City Transit Authority ("MTA"). (¶ 1.) The Defendant Lynn Tilton was the sole member of TransCare's Board of Directors, (¶¶ 2, 10), and the sole owner, chief executive officer and principal/manager of the "Patriarch" family of companies. (¶ 10; see ¶¶ 13-21.) As used in the Complaint , the term "Patriarch" refers to all of the Defendants (collectively, the "Patriarch Defendants") other than Tilton, and includes the following entities: Patriarch Partners Agency Services, LLC ("PPAS"), Patriarch Partners, LLC, Patriarch Partners Management Group, LLC ("PPMG"), Ark II CLO 2001-1, Limited ("Ark II"), Ark Investment Partners II, L.P. ("Ark Partners"), 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., and Transcendence Transit II, Inc. (¶ 4 n. 2.) The Complaint alleges that Patriarch operated wholly under Tilton's control and pursuant to her directives "as a wholly-integrated entity." (¶ 34.)

A. The Lending Agreements

By a Credit Agreement dated August 4, 2003 ("Credit Agreement"),³ TransCare issued debt obligations to eight lenders (collectively, the "Original Lenders"). Two of the Original Lenders were the Patriarch Defendants, Ark II and Ark Partners. (Credit Agreement § 5.4, Schedule 1.0.) The other six Original Lenders were First Dominion Funding I, First Dominion Funding II, CSAM Funding II, CSAM Funding III, Atrium CDO and Zohar CDO 2003-1, Limited. (Id. ) Each Original Lender appointed PPAS as the Administrative Agent to act on its behalf consistent with the terms of the Credit Agreement, and to exercise the powers reasonably incidental thereto. (¶ 11; Credit Agreement § 11.1.) According to the Complaint , TransCare granted PPAS a senior secured lien on all of its assets, (¶ 29), although the Credit Agreement suggests that the Original Lenders were the secured parties and PPAS was their agent with respect to their liens. (See Credit Agreement §§ 11.10, 11.12.)

The Credit Agreement was amended by Amendment 22, dated as of January 25, 2013. While the amendment did not modify the material terms of the Credit Agreement, it was signed by a different group of lenders (the "Lenders"). In addition to PPAS, which signed as Administrative Agent, the Lenders included the Defendant Ark Partners and Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited and Zohar III, Limited (collectively, the "Zohar Entities"). The Defendant Tilton signed on behalf of PPAS, Ark Partners and the Zohar Entities as manager of each Lender. Notably, Ark II was no longer listed as one of the Lenders, and the schedule of outstanding loans as of January 8, 2013 attached to Amendment 22 did not list any outstanding loans owed to Ark II. The form of Amendment 22 provided to the Court included signature lines for two additional lenders, First Dominion Funding I and Credit Suisse Alternative Capital, Inc., but their signatures did not appear on the document.

Under the Credit Agreement, TransCare agreed to pay principal and interest to PPAS in installments for the benefit of the Lenders according to a schedule set forth in the Credit Agreement. (See Credit Agreement §§ 2.3, 5.1, 5.4, Schedule 1.0.) All payments were to be made to PPAS "prior to 12:00 noon, New York City time, on the due date thereof" to be distributed to the Lenders on a pro rata basis. (Id. § 5.9(a), (c).) PPAS was authorized to waive certain conditions with the written consent of the "Required Lenders," but could not modify the time or amount of the payments due under the Credit Agreement without the consent of each affected Lender. The Credit Agreement provided, in pertinent part:

The Required Lenders may, or, with the written consent of the Required Lenders ... the Administrative Agent may ... waive, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; ... provided, however ... that no such waiver and no such amendment, supplement or modification shall ... reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof ... without the consent of each Lender affected thereby ....

(Id. § 12.1 (emphasis in original).)

The Complaint avers that the Credit Agreement and the amendments to the Credit Agreement were not the product of arm's length transactions because Tilton controlled both Patriarch and TransCare. (¶ 31.) TransCare does not contend, however, that the Original Lenders did not fund the loan or that the terms of the Credit Agreement were unfair.⁴

On October 13, 2006, TransCare entered into a revolving credit facility with Wells Fargo, N.A. ("Wells Fargo") to fund the operations of the company. (¶ 32.) The same day, Wells Fargo and PPAS entered into an inter-creditor agreement pursuant to which PPAS recognized Wells Fargo's first lien on all of TransCare's assets and accounts receivable, including TransCare's right to payment under its "MTA Contract." (¶ 32.) The MTA Contract, under which TransCare provided paratransit services for MTA customers using vehicles leased from the MTA, was TransCare's most profitable business unit. (¶¶ 32, 41.) PPAS took a first lien position on TransCare's vehicles and certain miscellaneous physical assets only, and agreed it would not take any action to foreclose or otherwise enforce any liens junior to Wells Fargo. (¶ 33.)

B. The Deterioration of TransCare's Financial Condition and the Defendants' Mismanagement and Self-Dealing

The gravamen of the Complaint concerns Tilton's response to TransCare's deteriorating financial condition, and charges mismanagement and two forms of self-dealing that overlap. First, she continued to insist that TransCare make interest payments under the Credit Agreement even though PPAS had the authority to waive the interest payments and TransCare lacked the funds to meet its operational and employee obligations. Second, she continued to rebuff suggestions to sell and offers to purchase TransCare's assets to meet its liquidity needs. Third, and arguably instead, she stole a corporate opportunity by causing the most valuable TransCare's assets to be transferred to affiliates through a strict foreclosure, and then crediting TransCare's outstanding debt under the Credit Agreement in an amount substantially less than the value of the foreclosed assets.

Between 2012 and 2014, the Debtor had net revenues of approximately $130 million and positive EBITDA, (¶ 40), and in 2012, PPAS modified the Credit Agreement to provide TransCare with an additional $2 million. (¶ 40.) Nevertheless, TransCare's costs grew and it lost clients because of its inability to invest in new vehicles. (¶ 40.) TransCare's executives were told that not paying bills on time and in full was the "Patriarch way." (¶ 40 (quotation marks in original).) As a result, TransCare's payables grew, and critical vendors went unpaid. (¶ 40.) During the same period, TransCare paid over $11 million to PPAS on account of the loans. (¶ 40.)

In early 2015, the MTA indicated its reluctance to renew the MTA Contract, scheduled to expire that summer, due to TransCare's deteriorating financial condition, and particularly, TransCare's inability to obtain replacement parts for the MTA vehicles. (¶ 41.) On February 4, 2015, TransCare executives warned Tilton that the company lacked cash to make payroll the following day, and faced a projected $6.7 million shortfall by the end of March. (¶ 42.)

On February 5, 2015, Glenn Leland, TransCare's CEO, advised Patriarch of a potential resolution to TransCare's financial problems. National Express had communicated an interest...