Salvatore Lamonica, for the Estates of Transcare Corp. v. Tilton (In re Transcare Corp.)

• Decision Date: 30 April 2019
• Docket Number: Adv. Proc. No. 18-01021 (SMB),Case No. 16-10407 (SMB) (Jointly Administered)
• Citation: 602 B.R. 234
• Parties: IN RE: TRANSCARE CORP., et al., Debtor. Salvatore LaMonica, as Trustee for the Estates of TransCare Corp., et al., Plaintiff, v. Lynn Tilton, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

602 B.R. 234

IN RE: TRANSCARE CORP., et al., Debtor.

Salvatore LaMonica, as Trustee for the Estates of TransCare Corp., et al., Plaintiff,

v.Lynn Tilton, et al., Defendants.

Case No. 16-10407 (SMB) (Jointly Administered)

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

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

Signed April 30, 2019

STORCH AMINI PC, Attorneys for Plaintiff, 2 Grand Central Tower, 140 East 45th Street, 25th Floor, New York, NY 10017, Bijan Amini, Esq., Steven G. Storch, Esq., Avery Samet, 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 GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

STUART M. BERNSTEIN, United States Bankruptcy Judge:

Following the dismissal of his original complaint, see LaMonica v. Tilton (In re TransCare Corp.) , 592 B.R. 272, 287-92 (Bankr. S.D.N.Y. 2018), the Plaintiff, Salvatore LaMonica ("Trustee"), trustee of the administratively consolidated estates of TransCare Corporation and numerous debtor-affiliates (collectively, "TransCare" or the "Estate"), filed an Amended Complaint seeking to recover damages from the Defendants¹ under multiple theories. (See Amended Complaint , dated Nov. 28, 2018 ("Amended Complaint ") (ECF Doc. #53).)² Certain Defendants named in Count IV (Recharacterization of Debt as Equity against Ark II), Count VI (Lender Liability, Common Law Breach of Fiduciary Duty, and Common Law Assumption of Control against all Defendants other than Tilton), and Count XI (Constructive Fraudulent Transfer; Recovery of Same; Claim Disallowance against PPAS) moved to dismiss those Counts.³ (See Defendants' Motion to Dismiss Certain Claims Asserted in the Chapter 7 Trustee's Amended Adversary Complaint , dated January 14, 2019 ("Motion to Dismiss ") (ECF Doc. # 60); see also Defendants' Reply in Further Support of Their Motion to Dismiss Certain Claims Asserted in the Chapter 7 Trustee's Amended Adversary Complaint , dated March 15, 2019 ("Reply ") (ECF Doc. # 68).) The Trustee opposed the motion. (See Plaintiff's Opposition to Defendants' Partial Motion to Dismiss , dated March 1, 2019 ("Opposition ") (ECF Doc. # 63.))

At the March 28, 2019 hearing, the Court granted the motion to dismiss the constructive fraudulent transfer claim asserted in Count XI against PPAS and reserved decision on the balance of the Motion to Dismiss . For the reasons that follow, the Motion to Dismiss is granted as to Count VI and denied as to Count IV.

BACKGROUND⁴

Prior to bankruptcy, TransCare provided emergency medical transportation services, including 911 ambulance services, to hospitals and municipalities in New York, Pennsylvania and Maryland, and disability transportation services for municipal authorities, including the New York City Transit Authority ("MTA"). (¶¶ 1, 8.) Tilton indirectly owned the majority of TransCare's equity and was the sole member of TransCare's Board of Directors. (¶¶ 2, 9, 22.) She also managed and directly or indirectly owned the Entity Defendants, all part of the "Patriarch" family of companies. (¶ 9; see ¶¶ 10-14.) The Entity Defendants operated from the same headquarters in New York City, their employees worked together in the same office space, they shared the same email domain, documents and information (including information about TransCare), worked on matters without regard to which entity was their specific employer and held themselves out to the world as "Patriarch Partners." (¶ 29.) Tilton also controlled non-defendants Zohar CDO 2003-1, Ltd., Zohar II 2005-1, Ltd., Zohar III, Ltd. (collectively, the "Zohar Entities") as their collateral managers. (¶ 30.) Finally, Tilton owned 99% of and controlled non-Defendant Ark Investment Partners II, L.P. ("Ark Investment"). (Id. )

A. The 2003 Credit Agreement

TransCare had previously filed pre-negotiated chapter 11 cases in 2002. (¶ 20.) Prior to the 2002 case, Ark II had purchased approximately 51% of TransCare's outstanding senior secured debt, and it acquired approximately 51% of the shares of the reorganized TransCare under the confirmed plan in July 2003. (¶ 22.) The 2003 chapter 11 plan also provided for a $ 33.5 million credit facility for Reorganized TransCare that was memorialized in a Credit Agreement, dated Aug. 4, 2003 ("Credit Agreement"). (¶ 23.)⁵ PPAS served as administrative agent under the Credit Agreement, and approximately 51% of the loans under the Credit Agreement were held by two Tilton-controlled entities, Ark II and Ark Investment. (Id. )⁶ Zohar III, Ltd. took over Ark II's loan in 2007 and Ark II ceased to be a lender under the Credit Agreement. (¶ 27 n. 3.)

From at least 2014 through the filing of TransCare's bankruptcy, the lenders under the Credit Agreement included two third party lenders, Credit Suisse Alternative Capital LLC and First Dominion Funding I, the three Zohar Entities and Ark Investment. (¶ 27.) At the time the Credit Agreement was executed and at the time each amendment was executed, Tilton controlled PPAS (the administrative agent), the "Required Lenders" (as defined in the Credit Agreement) and TransCare. (¶¶ 25, 28.)

B. Tilton's Control of TransCare and the Entity Defendants

The gravamen of the Amended Complaint is that Tilton used her control over TransCare and the Entity Defendants to breach her fiduciary duties and self-deal, all to the detriment of TransCare. For example, she prohibited TransCare from refinancing the debt owed under the Credit Agreement, (¶ 31), and caused TransCare to pay over $ 11 million to PPAS on account of the loans under the Credit Agreement between 2012 and 2014. (¶ 38.) In a July 2012 written consent of the sole director, Tilton prohibited any TransCare officer from conducting various activities, including disclosing financial or shareholder information to any third party, entering into any contract not contemplated by the annual plan or engaging legal counsel, and restricted certain functions to a designated executive. (¶ 34.) As of 2015, however, Tilton had not approved an annual plan or selected a designated executive as contemplated in the 2012 written consent. (Id. ) Therefore, all powers remained in the board of directors, with Tilton as the sole director. (Id. ) Brian Stephen, in-house counsel at Patriarch Partners who claimed to represent TransCare's board, explained to TransCare's CEO, Glenn Leland, that Leland was prohibited from taking even preliminary steps to any actions requiring board approval. (¶ 35.) This effectively prohibited any independent action by TransCare's executives. (Id. )

Although Tilton retained complete control of TransCare, she rarely communicated directly with its executives, instead directing them to communicate through, and take orders from, her employees at various Patriarch entities. (¶ 36.) These employees included Stephen, Jean-Luc Pelissier (Executive Managing Director at PPMG), Michael Greenberg (Analyst at Patriarch Partners), Randy Jones (Managing Director at Patriarch Partners), Brad Schneider (Analyst at Patriarch Partners), and Scott Whalen (Tilton's son-in-law, Credit Analyst at Patriarch Partners until 2014/2015, and thereafter Director at PPMG). (¶¶ 35-36, 41.) Their orders to TransCare included the hiring and firing of TransCare's employees and the payment or non-payment of TransCare's vendors. (¶ 37.) In transactions between PPAS or Ark II and TransCare, Tilton would execute the agreements on behalf of PPAS or Ark II, and direct TransCare executives or employees of other Patriarch entities to execute the agreements on behalf of TransCare. (Id. ) For example, Greenberg executed amendments to the Credit Agreement on behalf of TransCare. (Id. ) TransCare lacked independent counsel in any transaction entered into with any of Tilton's companies. (Id. )

C. TransCare's Financial Decline and Potential Purchasers

From 2012 through 2014, TransCare operated profitably with revenues of approximately $ 130 million and positive EBITDA. (¶ 38.) The MTA Contract was TransCare's most lucrative business segment, historically generating $ 22 million in revenue and $ 3.7 million in EBITDA. (¶ 39.) By 2015, however, TransCare's costs grew and it began losing clients because it was not investing in new vehicles. (¶ 38.) Years of under-investment left TransCare without the financial ability to fund payroll, pay vendors, or obtain insurance in the ordinary course. (¶ 3.) TransCare's accounts payable grew and its critical vendors went unpaid. (¶ 38.) TransCare's executives were told that "not paying bills on time and in full was the ‘Patriarch way.’ " (Id. ) TransCare's business was in such distress that the MTA indicated that it might not renew the MTA Contract, which was set to expire in mid-2015, due to TransCare's deteriorating financial condition. (¶ 39.) TransCare had such poor credit that suppliers were refusing to supply parts for the MTA vehicles even though the MTA reimbursed TransCare for the parts. (Id. )

Throughout 2015, TransCare's financial distress resulted in nearly missing or actually missing critical payments such as payroll and payroll taxes, failing to pay essential vendors, such as EZ-Pass, and lacking sufficient cash on hand to pay necessary expenses like gasoline, uniforms, and replacement engine parts. (¶¶ 3, 40, 45-46, 48-53 & 61-65.) Regulators threatened to shut down the MTA business, (¶ 52), and key suppliers were refusing to continue doing business. (¶¶ 39, 61.) TransCare employees were forced to pay for tolls and gas out of pocket. (¶ 53.) 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. (¶ 40.) By the end of the year, employees were leaving in frustration, including the head of the MTA paratransit division. (¶ 63, 66.)

In 2015, the CEO of TransCare...