Mercury Cos., Inc. v. FNF Sec. Acquisition, Inc. (In re Mercury Cos., Inc.)

• Decision Date: 31 March 2014
• Docket Number: Adversary No. 10-01133 MER,Case No. 08-23125 MER
• Parties: In re: MERCURY COMPANIES, INC., Debtor. MERCURY COMPANIES, INC., Plaintiff/Counter-Defendant, v. FNF SECURITY ACQUISITION, INC., Defendant/Counter-Claimant and FIDELITY NATIONAL TITLE COMPANY, USA DIGITAL SOLUTIONS, INC., AMERICAN HERITAGE TITLE AGENCY, INC. and MERCURY SERVICES OF UTAH, INC. Defendants.
• Court: U.S. Bankruptcy Court — District of Colorado

In re: MERCURY COMPANIES, INC., Debtor.MERCURY COMPANIES, INC., Plaintiff/Counter-Defendant, v. FNF SECURITY ACQUISITION, INC., Defendant/Counter-ClaimantandFIDELITY NATIONAL TITLE COMPANY, USA DIGITAL SOLUTIONS, INC.,AMERICAN HERITAGE TITLE AGENCY, INC.and MERCURY SERVICES OF UTAH, INC. Defendants.

Case No. 08-23125 MER

Adversary No. 10-01133 MER

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLORADO

Signed/Docketed: March 31, 2014

The Honorable Michael E. Romero

Chapter 11

ORDER

Twenty-three days before filing its Chapter 11 bankruptcy petition, Plaintiff Mercury Companies, Inc. ("Mercury") sold several of its Colorado-based subsidiaries to Defendant FNF Security Acquisition, Inc. ("FNF").¹ Mercury now seeks to recover the alleged value of the Colorado Subsidiaries as a fraudulenttransfer under 11 U.S.C. § 548.² Mercury has also raised claims for breach of contract and recovery of payments made to the Colorado Subsidiaries as preferential transfers under § 547.

JURISDICTION

The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(F) and (H) as it concerns proceedings to determine, avoid or recover preferences or fraudulent transfers.

BACKGROUND FACTS³

In April 2008, Mercury executed a Credit Agreement with Comerica Bank ("Comerica") as part of a $45 million loan (the "Comerica Loan"). The Comerica Loan was secured by substantially all of Mercury's assets and the assets of its subsidiaries, including accounts receivable. On July 25, 2008, Mercury's lenders swept Mercury's bank accounts and removed approximately $40 million of cash from those accounts.⁴ As a result of a variety of factors, including the sweep, on July 30, 2008, Mercury management made the decision to close numerous operating subsidiaries, ceased operations at 161 locations and began downsizing employees in California, Texas and Arizona. With respect to the Colorado Subsidiaries, Mercury's only remaining operations, Mercury was anticipating a payroll of approximately $1.6 million coming due on August 6, 2008.

Prior to the sweep, the Colorado Subsidiaries had, roughly, a 30% market share in Colorado. In other words, approximately 30% of all real estate transactions pending in Colorado were closed through the offices of one of the Colorado Subsidiaries. This, in the minds of Mercury management, made the Colorado Subsidiaries an attractive candidate for acquisition.

Mercury's first attempt was an offer to sell the Colorado Subsidiaries to their largest underwriter, First American Title ("First American"), for $1 million. First American refused, as they wanted to purchase only assets, not stock, and further, desired additional time for due diligence. After failing to negotiate an immediate sale with First American, Mercury contacted FNF, another major national title insurance company, and proposed a sale of the stock in the Colorado Subsidiaries for $5 million.

After FNF representatives met and negotiated with Mercury management, the parties executed a Stock Purchase Agreement (the "SPA") on August 5, 2008. The SPA called for a purchase price of $5 million to be paid in cash, and FNF immediately wired $1 million of the purchase price directly to Mercury. FNF took control of the Colorado Subsidiaries on the same date, after Mercury timely delivered all the shares free of liens and claims.

On August 6, 2008, FNF wired an additional $1,484,004 toward the purchase price directly to Comerica Bank, satisfying Mercury's outstanding obligations to Comerica. Comerica released any liens it had on the shares and the assets of the Subsidiaries. After these payments, $2,515,996 of the purchase price remained outstanding, which amounts still have yet to be paid.

DISCUSSION

A. Does Mercury Have Standing to Pursue this Adversary Proceeding?

The ability of a party to enforce a claim once held by the bankruptcy estate is limited to that which is retained under the terms of a confirmed chapter 11 plan, which constitutes a contract between a debtor and the creditors of the bankruptcy estate.⁵ The United States Court of Appeals for the Tenth Circuit recently reaffirmed its use of a two-step inquiry to determine standing to pursue post-confirmation claims:

We determine whether a party has standing to enforce estate claims under § 1123(b)(3)(B) using the two-part test laid out in Citicorp Acceptance Co. v. Robison (In re Sweetwater), 884 F.2d 1323, 1326 (10^th Cir. 1989). First, we ask whether a confirmed plan expressly appointed the party to enforce the claims. Id. Second, we ask whether the appointed party qualifies as a representative of the estate. Id.

"The first element requires that the appointed party be approved by the court, which can be accomplished simply by approval of [a] plan" that expressly authorizes the party to prosecute claims post confirmation. Retail Mktg. Co. v. King (In re Mako), 985 F.2d 1052, 1054 (10^th Cir. 1993). SMDI does not dispute that the Liquidating Trustee was properly appointed by the Joint Plan to litigate the estate's claims in the AP. See Paige, 413 B.R. at 904-05.

In evaluating the second element—whether a party represents the estate—our "primary concern is whether a successful recovery by the appointed representative would benefit the debtor's estate and particularly, the debtor's unsecured creditors." Sweetwater, 884 F.2d at 1327 (quotation omitted).⁶

The Confirmed Plan⁷ at Sections 8.2(d)(ii) and (xvi), provides as follows:

d. In addition to any other powers described in this Plan, the powers and duties of the Debtor shall include, all of which may be undertaken without Court approval:

ii. To investigate and prosecute or abandon all Causes of Action belonging to or assertible by the Estate, including all Avoidance Claims. . . .

xiv. To prosecute and/or settle the Adversary Proceeding brought by the Debtor against FNF Security Acquisition, Inc. (Adv. Proc. No. 10-01133 MER), including the authority to return the purchase price received in respect of the relevant entities if and to the extent FNF Security Acquisition, Inc. is determined to have been a good faith transferee of a fraudulent transfer. . . ⁸

Thus, in this case, the Confirmed Plan clearly provides for Mercury, headed by Mr. Tom Connolly as CEO until entry of a final decree, to pursue this specific adversary proceeding. In addition, recovery by Mercury would result in additional funds for the payment of creditors. Therefore, the Court finds bothelements of the Paige test have been met, and Mercury possesses standing to prosecute this matter.

B. Did the Sale of Stock in the Colorado Subsidiaries Constitute a Fraudulent Transfer Under Section 548(a)(1)?

Section 548(a)(1) provides:

The trustee may avoid any transfer . . . of an interest of the debtor in property, or any obligation . . . incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was . . . indebted; or

(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer[.]⁹

Thus, a trustee (or, as in this case, the named agent under a confirmed plan), may recover, from the transferee, any transfer made by the debtor within two years of filing of the bankruptcy petition, if the debtor either: 1) actually intended to defraud creditors in making the transfer ("actual" fraud); or, as alleged here, 2) received less than "a reasonably equivalent value" in exchange, and was insolvent when the transfer was made ("constructive" fraud).¹⁰ Mercury, as the party seeking to avoid the transfer as constructively fraudulent under § 548(a)(1)(B), bears the burden of proof by a preponderance of the evidence.¹¹

The parties agree Mercury was insolvent on the date of the transfer. Thus, the remaining question is whether Mercury received reasonably equivalent value for the stock in the Colorado Subsidiaries.

1. The Court Considers Expert Testimony Useful in Evaluating Reasonably Equivalent Value, But Finds It Is Not Determinative.

Mr. Neil H. Demchick ("Demchick"), Mercury's expert, and Mr. Scott P. Peltz ("Peltz"), FNF's expert, while agreeing on many points in reaching their opinions of the value of the stock in the Colorado Subsidaries, nonetheless reached vastly different conclusions. As of the date of the sale, August 5, 2008, Peltz opined the stock had a negative value of approximately $5 million. By contrast, Demchick opined that the stock of the Colorado Subsidiaries on that same date had a positive value of $14,676,408.

Both experts agreed the income approach was the preferred valuation method. In addition, both experts valued the Title Companies (Heritage Companies, Inc.; Security Title Guaranty Co.; and Title America, Inc.) differently from USA Digital Solutions, based on the differing nature of these businesses. Further, both experts used a "going concern" value because the Colorado Subsidiaries were operating entities at the time of sale.

The experts noted the income approach consists of estimating future ownership benefits of property and discounting those benefits to a present value using an appropriate discount rate, thus accounting for the time value of money. In calculating value under the income approach, both Demchick and Peltz used the discounted cash flow methodology for the Title Companies. Specifically, they projected the Title Companies' revenues and expenses in the future, then discounted the revenues and expenses back to a present value as of the date of the sale.

Demchick and Peltz projected revenue growth of 0.1% in 2009 and 6.4% in 2010 based on national forecasts, and both assumed 3.0% growth for 2011 and all...