In Re TransCare Corporation ( 2023 )

21-2547; 21-2576
In re TransCare Corporation
United States Court of Appeals
For the Second Circuit
August Term 2022
Argued: December 16, 2022
Decided: August 28, 2023
Nos. 21-2547, 21-2576
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,
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In re TransCare Corporation
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, P ATRIARCH 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. *
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.
* The Clerk of Court is respectfully directed to amend the captions accordingly.
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In re TransCare Corporation
Before: MENASHI, NATHAN, and MERRIAM, Circuit Judges.
Lynn Tilton was the sole director and indirect owner of TransCare Corp.
When TransCare was on the brink of bankruptcy, Tilton created a plan to sell the
profitable parts of the business to herself. She directed Patriarch Partners Agency
Services, LLC, a company she controlled, to foreclose on the TransCare assets
associated with its profitable business lines. Patriarch Partners Agency Services
then sold those assets to two other companies that she created and controlled.
What remained of TransCare filed for Chapter 7 bankruptcy.
Both the bankruptcy court and the district court agreed that (1) Tilton had
breached her fiduciary duties 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 and her companies owed TransCare’s bankruptcy estate a combined total
of $39.2 million in damages.
We find no error in the determination of the bankruptcy and district courts
that Tilton breached her fiduciary duties to TransCare and engaged in an actual
fraudulent transfer. Tilton did not meet her burden to prove fair dealing or fair
price with respect to the sale of the TransCare assets, and nearly every badge of
fraud was present in the transfer. We also find no clear error in the damages
award, which was based on the projected future earnings of the TransCare assets
that Tilton had sold to herself. Accordingly, we AFFIRM. Judge Menashi dissents
in part in a separate opinion.
________
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.
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Haviland, Sidley Austin LLP, Washington,
DC, on the brief), for Appellees.
________
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
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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, we AFFIRM.
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 II CLO 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
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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.”
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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
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In re TransCare Corporation
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.
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• 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
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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 condition” that the sale of the entire company was not feasible.
Bankr. Op. at *18. The bankruptcy court found that Tilton’s decisions up to this
point were made in good faith and protected by the business judgment rule, and
neither party has challenged this conclusion on appeal. See id.
III. The Tilton Plan
After further discussions with Carl Marks failed to produce a solution,
Tilton directed her staff to build a business model that could continue a version of
TransCare under a new company. The “Tilton Plan” involved splitting TransCare
into two entities, which were referred to for planning purposes as “OldCo” and
“NewCo.” PPAS, as the agent acting on behalf of the Term Loan Lenders, would
foreclose on part of the Term Loan Lenders’ priority collateral; that collateral
would then be transferred to NewCo. The plan was for NewCo to operate the
most profitable divisions of TransCare as a going concern, while the remainder of
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TransCare—aka OldCo—would wind down for 60 to 90 days and then file for
bankruptcy. Tilton thus created two new Delaware corporations that would serve
as “NewCo”: Transcendence Transit, Inc. and Transcendence Transit II, Inc.
(collectively, Transcendence).
Tilton also procured a new source of financing to support TransCare while
the Plan was being implemented. Ark II, her personal investment fund, extended
a $6.5 million loan to TransCare that was secured by a blanket lien on TransCare’s
assets. Although Tilton’s team “had not received Credit Suisse’s consent to
subordinate its lien in connection with the Term Loan, Tilton signed an
intercreditor agreement on behalf of PPAS . . . that granted Ark II structural and
payment priority over the Term Loan Lenders, including Credit Suisse.” Distr.
Op. at *5. Despite already having subordinated Credit Suisse’s position, Tilton
directed her team to send an email to Credit Suisse “warning that TransCare was
going to be forced to file for bankruptcy because Credit Suisse would not agree to
subordinate its Term Loan position.” Id.; see also Joint App’x 432–34. “Credit
Suisse indisputably was not informed about the planned foreclosure” on the Term
Loan Priority Collateral. Distr. Op. at *5.
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Once the Plan was set, Tilton instructed her team to contact insurance
brokers. In one email explaining Transcendence’s business model to an insurance
broker, Tilton stated:
[T]here is a smaller, less risky transit business that we would like to
continue in a new company. This would include our NY Transit
business [providing paratransit services to the MTA] and our
suburban ambulance businesses in Hudson Valley, Pittsburgh
Pennsylvania and Maryland.
...
The models show that this business in 2016 would [have]
approximately . . . $4mm of EBITDA and would grow with the
additional transit business under the contract to . . . $7mm of EBITDA
in 2017. It is because this new business makes sense that I would be
providing all the new working capital for this business myself,
personally.
Joint App’x 1438. A “Transcendence Go Forward Model” prepared by Tilton’s
team assumed that Transcendence would operate six divisions of TransCare:
paratransit, Pittsburgh, Hudson Valley, Maryland, Westchester, and Bronx
911/Montefiore 911. Id. at 2012–13.
On February 24, 2016, after Transcendence had obtained insurance, the
Tilton Plan was put into motion. Shortly after midnight, Tilton authorized
foreclosure on the “Subject Collateral,” which included all of TransCare’s personal
property (including servers and related data), three contracts, and the stock of
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three subsidiaries: TransCare Pennsylvania, Inc., TC Hudson Valley Ambulance
Corp., and TC Ambulance Corp. Joint App’x 1479. Tilton’s team then directed
PPAS to accept the Subject Collateral in satisfaction of $10 million out of the $43
million balance on the Term Loan.
Tilton had arrived at a purchase price of $10 million based on the December
2015 book value of the six divisions that NewCo would operate under the
Transcendence Go Forward Model. However, before the foreclosure took place
TransCare lost several valuable contracts with Bronx Lebanon, Montefiore
Hospital, and the University of Maryland. As a result, Tilton decided not to
purchase the Bronx911/Montefiore911, Westchester, and Maryland operations.
Even though this drastically lowered the book value of the Subject Collateral,
Tilton did not adjust the $10 million purchase price. Her team provided an
updated financial model based on these reductions that projected a $4 million
annualized EBITDA.
That same morning—February 24, 2016—PPAS transferred the Subject
Collateral to Transcendence in exchange for $10 million. Though Transcendence
never issued any equity, Tilton testified at trial that it was her intent for Ark II to
own 55% of Transcendence (the same amount it owned in TransCare) and to give
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the other Term Loan Lenders the remaining 45%. See id. at 770–73; see also Distr.
Op. at *7. Later that day, TransCare and its remaining subsidiaries filed for
Chapter 7 bankruptcy.
The Tilton Plan began to encounter obstacles the very next day. After
Salvatore LaMonica was appointed as the Trustee for the TransCare estate, a
representative from PPAS informed the Trustee that PPAS had foreclosed on all of
TransCare’s physical assets, including ambulances that were still on the road.
However, the Trustee still owned the Certificates of Need (CONs) that were
required to operate the ambulances. The PPAS representative informed the Trustee
that TransCare could continue to operate the ambulances as long as the Trustee
reached an agreement with Tilton and Transcendence.
But that was not the end of the Tilton Plan’s problems. TransCare had $1.2
million in payroll obligations scheduled for the next day, and it was $200,000 short.
The Trustee made clear that he would not agree to operate TransCare unless he
could pay its employees, but neither Wells Fargo nor the Patriarch Entities were
willing to provide any more money to close this shortfall.
The final nail in the coffin came the following day, when the Trustee visited
TransCare’s corporate headquarters and found the president of Transcendence
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attempting to take possession of a computer server that Transcendence needed to
operate. The Trustee refused to surrender the server because it contained “all of
[TransCare’s] books and records.” Joint App’x 611. That evening, Tilton
concluded that Transcendence was a lost cause. She instructed the company to
cease all operations and issued a notice of termination to all of its employees. On
March 10, PPAS and Transcendence transferred the Subject Collateral back to the
Trustee. The collateral was liquidated, and its sale yielded $1.2 million for the
TransCare estate.
IV. Procedural History
In February 2018, the Trustee initiated proceedings against Tilton and her
companies in the Bankruptcy Court for the Southern District of New York. The
Trustee brought (inter alia) a fraudulent conveyance claim against PPAS and
Transcendence (referred to by the parties collectively as the Patriarch Entities), and
a breach-of-fiduciary-duties claim against Tilton. After a six-day bench trial, the
bankruptcy court (Bernstein, J.) issued an exhaustive 100-page “Findings of Fact
and Conclusions of Law” that concluded that the Patriarch Entities had engaged
in an actual fraudulent conveyance as defined by the bankruptcy code. The
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bankruptcy court also recommended finding that Tilton had violated her fiduciary
duties of loyalty and good faith.
Tilton and the Patriarch Entities filed objections to the bankruptcy court’s
recommendations and appealed the bankruptcy court’s decisions to the district
court. In September 2021, the district court (Kaplan, J.) issued an opinion that (1)
upheld the bankruptcy court’s liability determination as to the fraudulent
conveyance claim against the Patriarch Entities, and (2) adopted its
recommendation that Tilton be found liable for breaching her fiduciary duty to
TransCare.
The bankruptcy court and the district court calculated the parallel damages
owed to the TransCare estate by looking to the lost going-concern value of the
divisions that were part of the Subject Collateral. Once the bankruptcy court
concluded that the Patriarch Entities were liable for the fraudulent transfer, it
calculated the damages owed to the TransCare estate by using the February 2016
financial projections, which forecasted an annualized EBITDA of $4 million. The
bankruptcy court also looked to the December 2015 analysis of comparable
companies to arrive at an average “EBITDA multiple” of 10.1x. Bankr. Op. at *25;
see also id. at *31. Using these estimates, the bankruptcy court calculated the lost
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going-concern value to be $40.4 million. It then subtracted the liquidation value
of the Subject Collateral ($1.2 million) to arrive at a damages award of $39.2
million. Id. at *31–32.
The district court took a similar approach to calculating Tilton’s liability for
breaching her fiduciary duty. The court used the same valuation method to arrive
at the $39.2 million figure but further subtracted another $1 million to account for
the estimated “buyer capital investment,” or the amount of money that a buyer
would have to invest for the Subject Collateral to succeed as a going concern. Distr.
Op. at *16; see also id. at *15. Thus, the district court concluded that Tilton owed
the bankruptcy estate $38.2 million for the breach of her fiduciary duties, and the
Patriarch Entities owed $39.2 million for the fraudulent transfer. Id. at *16, *19.
Because these are parallel theories of liability with respect to the same injury, the
district court limited the Trustee to only a single satisfaction. Id. at *20.
Tilton and the Patriarch Entities appealed.
STANDARD OF REVIEW
The Trustee’s actual-fraudulent-conveyance claim was a “core” bankruptcy
proceeding brought under the Bankruptcy Code and New York law. See U.S. Lines
v. Am. Steamship Owners Mut. Prot. & Indem. Ass’n, Inc. (In re U.S. Lines, Inc.), 197
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In re TransCare Corporation
F.3d 631, 636 (2d Cir. 1999). In such cases, “we review the bankruptcy court
decision independently, accepting its factual findings unless clearly erroneous but
reviewing its conclusions of law de novo.” Midland Cogeneration Venture Ltd. P’Ship
v. Enron Corp. (In re Enron Corp.), 419 F.3d 115, 124 (2d Cir. 2005).
The Trustee’s fiduciary breach claim was a “non-core” bankruptcy
proceeding. With respect to non-core claims, the bankruptcy court issues
proposed findings of fact and conclusions of law that are reviewed de novo by the
district court. See In re U.S. Lines, Inc., 197 F.3d at 636. On appeal, we review the
district court’s findings of fact for clear error and its conclusions of law de novo.
See Harris Tr. & Sav. Bank v. John Hancock Mut. Life Ins. Co., 302 F.3d 18, 26 (2d Cir.
2002).
DISCUSSION
I. Liability
On appeal, Tilton challenges the district court’s liability conclusion that she
had breached her fiduciary duties by executing the Tilton Plan, and the Patriarch
Entities challenge the bankruptcy court’s liability conclusion that the Tilton Plan
was an actual fraudulent transfer. We address each of these objections in turn.
A. Breach of Fiduciary Duties
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Tilton argues that her sale of the Subject Collateral to herself did not breach
her fiduciary duties. Because TransCare and its subsidiaries were incorporated in
Delaware, the breach of fiduciary duty claim against Tilton is governed by
Delaware law. Hausman v. Buckley, 299 F.2d 696, 702–03 (2d Cir. 1962).
When a controlling shareholder engages in a self-dealing transaction
without approval by the company’s independent board, the transaction
constitutes a breach of the shareholder’s fiduciary duties unless it satisfies
Delaware’s “entire fairness” standard. Weinberger v. UOP, Inc., 457 A.2d 701, 710
(Del. 1983). The entire fairness standard is “Delaware’s most onerous standard
and requires that the defendant prove that the transaction was the product of both
fair dealing and fair price.” Burtch v. Opus, LLC (In re Opus E., LLC), 528 B.R. 30, 66
(Bankr. D. Del. 2015) (emphases added). The entire fairness standard is holistic
and unitary, which means that the fairness of the process can affect the fairness of
the price and vice versa. See Kahn v. Tremont Corp., 694 A.2d 422, 432 (Del. 1997).
Tilton does not dispute that the foreclosure and the sale of the Subject
Collateral was a self-interested transaction. Instead, she argues that the
transaction met the entire fairness standard because it was a “product of both fair
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dealing and fair price.” In re Opus E., LLC, 528 B.R. at 66. We conclude that Tilton
has failed to satisfy either prong of the entire fairness standard.
1. Fair Dealing
Fair dealing “embraces questions of when the transaction was timed, how it
was initiated, structured, negotiated, disclosed to the directors, and how the
approvals of the directors and the stockholders were obtained.” Weinberger, 457
A.2d at 711. Fair dealing typically requires procedural protections such as
appointing an independent special committee to assess the transaction or
obtaining the consent of disinterested stockholders. See, e.g., Reis v. Hazelett Strip-
Casting Corp., 28 A.3d 442, 464 (Del. Ch. 2011) (finding a violation of fair dealing
where “[p]rocedural protections were not implemented, and no one bargained for
the minority”); Strassburger v. Earley, 752 A.2d 557, 576–77 (Del. Ch. 2000) (finding
an absence of fair dealing because the negotiating and decision making processes
lacked “any independent representation of the interests of [the corporation’s]
minority public stockholders”).
We agree with the courts below that “‘[t]here was nothing fair about the
process through which Tilton effectuated’ the foreclosure and sale of the Subject
Collateral to Transcendence.” Distr. Op. at *9 (quoting Bankr. Op. at *20). This
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legal conclusion is reviewed de novo, but the underlying factual findings are
reviewed for clear error. The district court found that Tilton “presented no
evidence of true arms-length bargaining designed to protect the interests of the
company and/or the minority shareholders,” engaged in “no review by a
disinterested party, independent director, or independent financial advisor,” and
“presented no evidence that she considered any alternative other than selling the
Subject Collateral . . . to herself.” Id. Tilton does not demonstrate that any of these
findings were clear error.
Tilton claims she engaged in fair dealing because (1) she retained Carl
Marks as independent consultants to facilitate the sale of TransCare and followed
several of its recommendations; (2) she kept “essential stakeholders” (namely,
Wells Fargo) apprised of her decisions; (3) she intended to give the Term Loan
Lenders approximately 45% of Transcendence’s equity; and (4) after she decided
bankruptcy was inevitable in February 2016, there was no time or reason to
consider alternatives to the Tilton Plan, since no third party would have been
willing to buy the Subject Collateral in the relevant time frame. Appellant’s Br.
47–49. However, each of these objections misses the mark.
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First, Tilton’s retention of Carl Marks is irrelevant to the fair dealing
analysis. “Carl Marks indisputably was not hired to find a buyer or investor.”
Distr. Op. at *9 n.81 (cleaned up). The firm was instead hired to prepare a budget
that would help TransCare obtain bridge financing from Wells Fargo until Tilton
found a third-party buyer. Joint App’x 307. Thus, the question of whether Tilton
paid heed to Carl Marks’ budgetary advice has no bearing on whether she engaged
in fair dealing.
Second, Tilton cannot demonstrate that she protected disinterested
stakeholders by pointing to her communications with Wells Fargo. After all,
“Credit Suisse—the largest minority shareholder—not only apparently was left in
the dark throughout the process, but Tilton actively misled them about whether
and how the wind-down of OldCo was being financed.” Distr. Op. at *9. Tilton
argues that her deception of Credit Suisse is “irrelevant because foreclosure of the
Subject Collateral did not require Credit Suisse’s consent.” Appellant’s Br. 50. But
the very purpose of the fair dealing standard is to protect minority shareholders
who are, by definition, not needed to approve a transaction. See In re LNR Prop.
Corp. S’holders Litig., 896 A.2d 169, 176 (Del. Ch. 2005). Accepting Tilton’s
argument would create an exception to fair dealing that would swallow the rule.
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Third, Tilton’s purported intent to give the Term Loan Lenders a 45% stake
in Transcendence is neither dispositive in a fair dealing analysis nor clearly
supported by the record. Even if Tilton did intend to give the Term Loan Lenders
a stake in Transcendence at a later time, that would have little bearing on the
procedural fairness of the transaction, because the bargaining process was still
devoid of any opportunity for the independent shareholders to advocate for
themselves. Moreover, it is not clear that the Term Loan Lenders would even have
received this stake. The district court found that “there is no contemporaneous
evidence of [Tilton’s intent] other than a draft spreadsheet, apparently maintained
internally by Patriarch Partners,” and concluded that “Tilton’s self-serving
testimony that she would have given them a stake in [Transcendence] is not
persuasive.” Distr. Op. at *9 n.80. Based on the record before us, we cannot
conclude that the court’s findings were clearly erroneous. Even the members of
Tilton’s inner circle did not know of her purported intent to share Transcendence’s
equity when they implemented the Tilton Plan. See Joint App’x 438–39, 515–17.
Tilton’s fourth and final argument for fair dealing is her strongest, but it too
is unavailing. She contends that the district court erred “by faulting [her] for not
undertaking a third-party sale process that was . . . infeasible due to TransCare’s
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In re TransCare Corporation
daily unravelling and lack of any committed funding,” Reply Br. 21, and claims
that “no third party would have purchased TransCare’s debt-saddled lines [in
February 2016] without up-to-date financial statements or due diligence,”
Appellant’s Br. 50.
While it is certainly true that TransCare was in bad shape in February 2016,
it does not follow that the unusual, self-dealing process Tilton undertook was the
only viable pathway. Both the district court and the bankruptcy court
acknowledged that “TransCare was rapidly declining and time was running out.”
Bankr. Op. at *19; see also Distr. Op. at *10. Nevertheless, the district court found
that Tilton could have explored other pathways for a sale of the Subject Collateral.
For example, “a strategic third party [may] have been willing to buy certain of
[TransCare’s] more profitable and less risky business lines at that time, even if such
a transaction called for a condensed timeline and/or minimal due diligence.”
Distr. Op. at *10. (emphasis added) (internal quotation marks omitted).
Tilton claims that this would not have been feasible given that “every
TransCare division was either a borrower or guarantor of [TransCare’s] debt, and
the lenders’ blanket liens applied to each division’s assets.” Reply Br. 18. But this
argument “ignores the fact that Tilton sold the Subject Collateral free and clear of
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In re TransCare Corporation
any liens to herself without the consent of anyone by causing PPAS to foreclose on it
and subsequently transfer it to Transcendence.” Distr. Op. at *10. Tilton’s own
actions belie her argument that these profitable business lines were too “debt-
saddled” to be saleable to a third party.
Tilton also argues that a third-party sale would have been impossible
because “[t]he only third party interested enough to send a non-binding letter of
intent expressly conditioned any offer on satisfactory due diligence.” Appellant’s
Br. 41 (citing Joint App’x 1205). But it bears emphasizing that at no point did Tilton
even try to solicit any other offer from a third party. In fact, she forbade her staff
from pursuing any sales. Tilton points to a single, unsolicited opening offer as
conclusive proof that nobody would have been willing to buy the Subject
Collateral on a compressed timeframe with less due diligence. This evidence is
not sufficient to demonstrate that the district court’s factual findings were clear
error. Tilton cites Oberly v. Kirby, 592 A.2d 445, 470–71 (Del. 1991), to support her
argument that she was not required to explore alternative transactions with
“obvious drawbacks.” Appellant’s Br. 39. However, that case found that a failure
to explore alternative possibilities was not probative of unfair dealing because the
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In re TransCare Corporation
negotiations at issue were “lengthy, vigorous, and arm’s length.” Oberly, 592 A.2d,
at 470. No such procedural protections existed here.
Tilton’s arguments ultimately amount to a contention that she had only two
options available to her in February 2016: liquidation or the Tilton Plan. She asks
us to conclude that her willingness to invest $10 million of her own money in
acquiring Transcendence tells us nothing about whether a third party would have
also been willing to acquire TransCare’s profitable assets. However, Delaware
courts have observed that “the contemporaneous views of financial professionals
who make investment decisions with real money” are an “informative source of
probative evidence” because “people who must back their beliefs with their purses
are more likely to assess the value of the judgment accurately than are people who
simply seek to make an argument.” In re Appraisal of Dole Food Co., Inc., 114 A.3d
541, 557–58 (Del. Ch. 2014) (cleaned up). The district court rejected Tilton’s
characterization of TransCare’s sales prospects, and we see no reason to overturn
its finding as clearly erroneous.
2. Fair Price
The fair price aspect of an entire fairness analysis requires the proponent of
a self-dealing transaction to demonstrate that “the price offered was the highest
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In re TransCare Corporation
value reasonably available under the circumstances.” Cinerama, Inc. v. Technicolor,
Inc., 663 A.2d 1156, 1163 (Del. 1995) (citation omitted). When determining whether
a seller received a fair price, “an initial decision to be made is whether to value the
assets on a going concern basis or a liquidation basis.” Am. Classic Voyages Co. v.
JP Morgan Chase Bank (In re Am. Classic Voyages Co.), 367 B.R. 500, 508 (Bankr. D.
Del. 2007). Going-concern value is defined as “[t]he value of a commercial
enterprise’s assets . . . as an active business with future earning power,” and
liquidation value is “[t]he value . . . of an asset when it is sold in liquidation.”
Value, Black’s Law Dictionary (11th ed. 2019). “If liquidation in bankruptcy was
not ‘clearly imminent’ on the transfer date, then the entity should be valued as a
going concern.” Am. Classic Voyages, 367 B.R. at 508 (quoting Travelers Int’l AG v.
Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 134 F.3d 188, 193 (3d Cir.
1998)).
Tilton did not use either of these valuation methodologies to arrive at her
$10 million purchase price for the Subject Collateral; instead, she relied on the book
value of TransCare’s assets to arrive at her estimate. “Book value tends to
undervalue a business as a going concern because it does not fully account for
intangible value attributable to the operations.” Reis, 28 A.3d at 476.
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In re TransCare Corporation
Tilton does not contend that her use of book value was appropriate here, but
she argues that it was error for the district court to compare the sale price of $10
million to the going concern value of the Subject Collateral instead of the liquidation
value. Patriarch Partners’ internal projections estimated that the Subject Collateral
could generate an EBITDA of $4 million annually (which, as discussed infra at Part
II, leads to a going concern valuation well above $10 million). But because
TransCare was on its deathbed by February 2016, Tilton contends that the court
should have used liquidation value as the yardstick for its fair price analysis. She
claims $10 million was a fair price for the Subject Collateral because it was more
than eight times the liquidation value of $1.2 million.
Once again, this argument turns on a factual question: whether the Subject
Collateral had value as a going concern as of February 2016. It was not clear error
for the district court to conclude that it did. Although the parties agree that
TransCare as a whole was on its deathbed, that does not mean that the most
profitable divisions within TransCare were in the same position. Those divisions,
not TransCare as a whole, were the subject of the transaction and therefore of the
courts’ fair price analysis. Tilton herself admitted that the Subject Collateral had
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In re TransCare Corporation
going-concern value when she emailed an insurer and communicated her intent
to operate those divisions “in a new company.” Joint App’x 1438.
Nevertheless, Tilton cites the New Haven Inclusion Cases for the proposition
that creditors cannot “treat [a company] as a liquidating enterprise with respect to
certain items and as an operating [business] with respect to others, depending on
which approach happens to yield the higher value.” 399 U.S. 392, 482 (1970). In
that decision, the Supreme Court rejected a claim by bondholders that “Penn
Central should pay an added amount to reflect the going-concern value of the
[company]. This sum, it is stressed, would be calculated, not as an alternative to
liquidation value, but as a supplement to it.” Id. at 481 (emphases added) (internal
quotation marks omitted). A footnote goes on to say that two of the cases the
bondholders relied upon were inapposite, because “[i]n neither of these cases did
the New York courts require the taking authorities to pay both an operating and a
liquidating value.” Id. at 483 n.80 (emphasis added).
Thus, when read in context, the New Haven Inclusion Cases stand for the
relatively narrow proposition that stakeholders are not entitled to collect both
liquidation value and going concern value for a company’s assets. Here, the
Trustee argues that going concern value, not liquidation value, is the proper
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In re TransCare Corporation
measure of the Subject Collateral’s value. That argument is not foreclosed by New
Haven.
Tilton also argues that the Subject Collateral could not have had going-
concern value to anyone other than herself by February 2016. See Reply Br. 13
(“Unlike any third party, Tilton needed no financial statements or due diligence.”).
She essentially repackages her claim that her willingness to buy the Subject
Collateral for $10 million says nothing about its value to a third party. But as the
district court noted, Tilton has not met her burden to prove this claim because
“[h]er outright refusal to consider the possibility of selling any of TransCare’s
business lines undermined any chance that the company had at a third-party sale.”
Distr. Op. at *11. In other words, Tilton’s failure to implement a fair process
undermines her ability to demonstrate that she had obtained a fair price and
renders her argument “conclusory and circular.” Id; see also S. Muoio & Co. LLC v.
Hallmark Ent. Invs. Co., No. 4729-cc, 2011 WL 863007, at *16 (Del. Ch. Mar. 9, 2011)
(“[T]he fair price inquiry has most salience when the controller has established a
process that simulates arms-length bargaining, supported by appropriate
procedural protections.” (cleaned up)), aff’d, 35 A.3d 419 (Del. 2011). Under the
entire fairness standard, the burden rests on Tilton to show “no better
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In re TransCare Corporation
alternatives.” In re Latam Airlines Grp. S.A., 620 B.R. 722, 791 (Bankr. S.D.N.Y. 2020)
(relying on Delaware law). Tilton cannot meet that burden because she failed to
consider any pathway that she did not fully control.
For these reasons, the district court did not err in concluding that Tilton had
failed to demonstrate fair dealing or fair price. We therefore affirm the court’s
conclusion that Tilton breached her fiduciary duties to TransCare when she
executed the Tilton Plan.
B. Fraudulent Conveyance
The bankruptcy court concluded that the foreclosure and sale of the Subject
Collateral constituted an actual fraudulent conveyance under federal and New
York law. Under 11 U.S.C. § 548(a)(1)(A) and N.Y. Debt. & Cred. L. § 276, “a
bankruptcy trustee [may] recover fraudulent transfers . . . made with actual intent
to hinder, delay, or defraud creditors.” Kirschner v. Large S’holders (In re Trib. Co.
Fraudulent Conv. Litig.), 10 F.4th 147, 159 (2d Cir. 2021) (cleaned up), cert. denied sub
nom. Kirschner v. FitzSimons, 142 S. Ct. 1128 (2022); see also Sharp Int’l Corp. v. State
St. Bank & Tr. Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 56 (2d Cir. 2005). “[A]n intent
to hinder or delay is adequate even if it be not an intent to defraud.” In re Condon,
198 F. 947, 950 (S.D.N.Y. 1912) (Hand, J.), aff’d, 209 F. 800 (2d Cir. 1913).
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In re TransCare Corporation
The parties do not dispute that the foreclosure was a transfer of TransCare’s
property, or that Tilton’s subjective intent can be imputed to TransCare. Thus, the
key question in determining liability is whether the Trustee met his burden to
prove Tilton’s scienter.
Because “[a] transferor rarely admits her own fraudulent intent,” Bankr. Op.
at *30, courts look to the following “badges of fraud” to ascertain an intent to
hinder, delay, or defraud:
(1) the lack or inadequacy of consideration;
(2) the family, friendship, or close associate relationship between the
parties;
(3) the retention of possession, benefit or use of the property in
question;
(4) the financial condition of the party sought to be charged both
before and after the transaction in question;
(5) the existence or cumulative effect of a pattern or series of
transactions or course of conduct after the incurring of debt, onset
of financial difficulties, or pendency or threat of suits by creditors;
and
(6) the general chronology of the events and transactions under
inquiry.
Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1582–83 (2d Cir. 1983). Fraudulent
intent can also be inferred from the “secrecy, haste, or unusualness of the
transaction,” HBE Leasing Corp. v. Frank, 48 F.3d 623, 639 (2d Cir. 1995), or “the
concealment of facts and false pretenses by the transferor.” In re Trib., 10 F.4th at
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In re TransCare Corporation
160 (internal quotation marks omitted). “While the presence or absence of one
badge of fraud is not conclusive,” “the confluence of several can constitute
conclusive evidence of an actual intent to defraud, absent ‘significantly clear’
evidence of a legitimate supervening purpose.” Kirschner v. Fitzsimons (In re Trib.
Co. Fraudulent Conv. Litig.), No. 12-cv-2652, 2017 WL 82391, at *13 (S.D.N.Y. Jan. 6,
2017) (cleaned up), aff’d, 10 F.4th 147 (2d Cir. 2021).
The bankruptcy court concluded that “[v]irtually all of the badges of fraud
identified [in the case law] are present in this case[,] providing strong
circumstantial evidence of Tilton’s fraudulent intent.” Bankr. Op. at *30. We
agree. As the prior sections have already established, Tilton: failed to demonstrate
that $10 million was a fair price for the Subject Collateral; sold the Collateral to
herself; maintained control of the Collateral at all times in the transaction; retained
the most valuable parts of her business, free and clear of any liens; executed all of
the transfers after the onset of financial difficulties; conducted the entire
transaction hastily; and kept key stakeholders in the dark.
The Patriarch Entities do not dispute that these badges were present, but
they make two other arguments for reversal. As a threshold matter, they claim the
district court erred in reviewing the bankruptcy court’s fraudulent-intent
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In re TransCare Corporation
determination for clear error, when it should have been reviewed de novo. Next,
they argue that the lower courts ignored evidence of Tilton’s intent to benefit
creditors and save jobs. The Patriarch Entities also ask us to adopt a two-step test
that would allow them to rebut the presumption of fraudulent intent by
establishing a legitimate supervening purpose. We address these arguments in
turn.
The Patriarch Entities begin by citing United States v. McCombs for the
proposition that a reviewing court should review “the [lower] court’s ultimate
conclusion that the conveyance was fraudulent under section 276 de novo as an
issue involving the application of law to fact.” 30 F.3d 310, 328 (2d Cir. 1994).
However, McCombs is not on all fours, and a closer look at the decision actually
belies their assertion. In McCombs we said: “Were the fraudulent conveyance
inquiry merely a battle between the ‘badges’ on one hand and inferences of [the
transferor’s] nonfraudulent motivation on the other, we would be reluctant to
disturb the [trial] judge’s finding of actual fraudulent intent.” Id. But in McCombs,
the trial judge’s finding of fraudulent intent was premised on a finding that “was
flawed both legally and factually.” Id. (emphases added). Thus, McCombs suggests
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In re TransCare Corporation
that a finding of fraudulent intent is reviewed for clear error, unless that finding is
premised on a legal error.
This reading is consistent with our approach in the cases that followed
McCombs. See, e.g., The Cadle Co. v. Smith (In re Smith), 321 F. App’x 32, 32 (2d Cir.
2009) (summary order) (“The question of whether Debtor acted with intent to
hinder or defraud his creditors is a question of fact.”); United States v. Evseroff, 528
F. App’x 75, 77 (2d Cir. 2013) (summary order) (reviewing “de novo the district
court’s determination that Evseroff’s transfers to the Trust were actually
fraudulent,” but reviewing the “factual findings underpinning those legal
determinations” for “clear error”). It is also consistent with the decisions of our
sister circuits. See, e.g., Harman v. First Am. Bank of Md. (In re Jeffrey Bigelow Design
Grp., Inc.), 956 F.2d 479, 481 (4th Cir. 1992) (“For a finding of fraudulent intent in
an actual fraudulent transfer, a reviewing court must apply a clearly erroneous
standard.”); Wiggains v. Reed (In re Wiggains), 848 F.3d 655, 660–61 (5th Cir. 2017)
(same); Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348, 1353 (8th Cir. 1995)
(same); Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800, 805 (9th Cir. 1994)
(same). Therefore, we conclude that the district court was correct to review the
bankruptcy court’s finding of fraudulent intent for clear error.
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In re TransCare Corporation
Applying the clear error standard of review, we conclude that the evidence
of Tilton’s good faith is too weak to reverse the bankruptcy court’s determination
that she acted with fraudulent intent.
To start, the Patriarch Entities urge us to adopt a formal two-step inquiry
that allows evidence of a legitimate purpose to overcome a presumption of fraud.
The bankruptcy court shared this view of the test, noting that “the confluence of
several [badges] can constitute conclusive evidence of an actual intent to defraud,
absent significantly clear evidence of a legitimate supervening purpose.” Bankr. Op.
at *30 (emphasis added) (cleaned up). However, even if we were to adopt this test,
the evidence of Tilton’s good faith would be too slight for the Entities to prevail at
step two.
The Patriarch Entities first highlight an exchange that occurred during the
bench trial, in which the Trustee’s counsel was asked for evidence of Tilton’s
subjective intent. The Trustee’s Counsel responded: “I don’t know that we would
say that she wasn’t acting with an honest intention to reorganize or save the
company.” Joint App’x 822–23. The Entities claim that this concession by itself
warrants a reversal. However, Tilton’s intention to save the company is
nonetheless compatible with a finding that she “intended also to hinder or delay
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In re TransCare Corporation
TransCare’s other creditors—even if just temporarily to restore affairs.” Distr. Op.
at *18. Because “an intent to hinder or delay is adequate even if it be not an intent
to defraud,” this concession does not get the Patriarch Entities very far. Condon,
198 F. at 950.
The Patriarch Entities also call attention to Tilton’s testimony that she tried
“to collect as much as possible not only for Wells, but also for the remaining term
lenders.” Joint App’x 748. They argue that her good faith is corroborated by her
correspondence with Carl Marks and Wells Fargo, which “repeatedly stated her
intent to save jobs and repay creditors,” and the Patriarch Partners spreadsheet,
which noted that the Term Loan Lenders would receive 45% of Transcendence.
Appellant’s Br. 29–30.
Once again, the Patriarch Entities paint an incomplete picture of the events
leading to the Tilton Plan. They omit the fact that Credit Suisse—the largest
minority shareholder—was actively misled about the details of the restructuring.
They also fail to mention that “there was no evidence that Tilton consulted or
informed Wells Fargo before foreclosing on the Subject Collateral.” Distr. Op. at
*6. The record does not contain evidence that Tilton told the other Term Loan
Lenders of her intent to give them a minority stake in Transcendence. Nor were
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In re TransCare Corporation
members of her own inner circle cued in on this plan. In light of these facts, it was
not clear error for the bankruptcy court to conclude that Tilton acted with the
intent to hinder, delay, or defraud creditors.
We therefore affirm the bankruptcy court’s determination that Tilton
executed the transfer of the Subject Collateral with the intent to hinder, delay, or
defraud the other TransCare creditors. Because we conclude that both Tilton and
the Patriarch Entities are liable for the transfer of the Subject Collateral, we now
turn to the lower courts’ calculations of damages.
II. Damages
Tilton and the Patriarch Entities raise several general objections to the
damages calculations. They argue that both courts “erred in measuring damages
based on the Subject Collateral’s purported going concern value,” instead of the
liquidation value. Appellant’s Br. 51. They also claim that the lower courts
improperly shifted the burden of proof for damages onto them, instead of the
Trustee. And finally, they contend that the Trustee cannot be awarded the going-
concern value of the Subject Collateral, because he was responsible for
Transcendence’s failure to launch. According to the defendants, these purported
errors require us to modify the overall damages award from $39.2 million to $0.
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In re TransCare Corporation
We are unconvinced. We begin with an overview of the applicable legal standard
before turning to the parties’ arguments.
When a fiduciary breaches her duty of loyalty, “Delaware law dictates that
the scope of recovery . . . is not to be determined narrowly.” Thorpe ex rel. Castleman
v. CERBCO, 676 A.2d 436, 445 (Del. 1996). “The strict imposition of penalties under
Delaware law are designed to discourage disloyalty.” Id. Accordingly, courts have
the “very broad” power to fashion damages “as may be appropriate, including
rescissory damages.” Int’l Telecharge, Inc. v. Bomarko, Inc., 766 A.2d 437, 440 (Del.
2000). The plaintiff bears the burden of proving damages by a preponderance of
the evidence, but “Delaware does not require certainty in the award of damages
where a wrong has been proven and injury established.” Beard Rsch., Inc. v. Kates,
8 A.3d 573, 613 (Del. Ch. 2010) (quotation marks omitted), aff’d sub nom. ASDI, Inc.
v. Beard Rsch., Inc., 11 A.3d 749 (Del. 2010).
When a fraudulent transfer is avoided, the Bankruptcy Code provides that
“the trustee may recover, for the benefit of the estate, the property transferred, or,
if the court so orders, the value of such property.” 11 U.S.C. § 550(a). “The purpose
of § 550(a) is to restore the estate to the condition it would have been in if the
transfer had never occurred.” Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC,
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In re TransCare Corporation
568 B.R. 481, 486 (Bankr. S.D.N.Y. 2017). “The question of the amount of
recoverable damages is a question of fact . . . review[ed] for clear error.” Bessemer
Tr. Co., N.A. v. Branin, 618 F.3d 76, 85 (2d Cir. 2010) (quotation marks omitted).
Once again, the defendants argue that a sale of the Subject Collateral would
have been impossible, and therefore no harm flowed to the estate as a result of the
foreclosure. We are unconvinced by these points for essentially the same reasons
covered above.
It was not clear error for the courts to find that the Subject Collateral could
have been sold for substantially more than liquidation value if Tilton had
attempted to sell the Collateral to anyone but herself. Tilton had received
numerous unsolicited offers to buy part or all of TransCare as late as December
2015. She handpicked the business lines that were part of the Subject Collateral
after a thorough review of TransCare’s finances, and she chose them precisely
because she believed they had value as a going concern. Tilton argues that
TransCare was too distressed for a sale to be possible in February 2016, but the
Trustee’s expert specifically compared the business lines in the Subject Collateral
to other “smaller, distressed, low operating, or undercapitalized” companies when
he arrived at his damages estimate. Distr. Op. at *14. Tilton “did not offer any
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In re TransCare Corporation
substantive evidence of how [the expert] failed to account for risks, made
inappropriate assumptions, used incomplete or inaccurate financial information,
or excluded comparable companies.” Id. at *15.
We are similarly unpersuaded by the defendants’ claim that the courts
committed “legal error” by shifting the burden of proof onto them. As the district
court noted, “determining damages for breach of fiduciary duty ‘unavoidably
requires the court to make judgments concerning liability and other contingencies’
based on its responsible estimate of what would have happened if the defendant
had not acted disloyally.” Distr. Op. at *13 (quoting Bomarko, 766 A.2d at 441). In
this case, the Trustee had the burden of proof, which he met by providing expert
projections based on the evidence available to him. The defendants failed to rebut
it or provide their own estimate of damages. Accepting the Trustee’s estimate in
the absence of compelling rebuttal evidence is not the same as placing the burden
of proof on the defendants.
Next, the defendants argue that the fraudulent conveyance award was
improper because the Trustee, not Tilton, was responsible for the Subject
Collateral’s loss of going-concern value. The defendants claim that “the Trustee
himself smothered Transcendence in the crib the day it was born” by refusing to
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In re TransCare Corporation
turn over the TransCare computer servers. Appellant’s Br. 59. But regardless of
who was responsible for Transcendence’s downfall, the lower courts’ damages
calculations were not erroneous. We have explained that “breaches of a fiduciary
relationship . . . comprise a special breed of cases that often loosen normally
stringent requirements of causation and damages.” Milbank, Tweed, Hadley &
McCloy v. Boon, 13 F.3d 537, 543 (2d Cir. 1994). This is because “[a]n action for
breach of fiduciary duty is a prophylactic rule intended to remove all incentive to
breach—not simply to compensate for damages in the event of a breach.” ABKCO
Music, Inc. v. Harrisongs Music, Ltd., 722 F.2d 988, 995–96 (2d Cir. 1983). Similarly,
“when property declines in value after the [fraudulent] transfer, a trustee may
recover the value of the property at the time of the transfer rather than the property.”
5 Collier on Bankruptcy ¶ 550.02[3][a] (16th ed. 2022) (emphasis added). This is
true even if “[d]epreciation in the value of the property” occurs for reasons outside
of the transferor’s control, such as “market fluctuations.” Id. Therefore, the courts
did not err by awarding the Trustee the value of the Subject Collateral at the time
of the transfer.
Finally, the Patriarch Entities raise a challenge specific to the fraudulent
transfer award. They contend that awarding any damages once the Subject
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In re TransCare Corporation
Collateral was returned was legal error because § 550(a) of the Bankruptcy Code
permits the Trustee to recover only “the property transferred, or [its] value.” 11
U.S.C. § 550(a). However, the bankruptcy court subtracted the liquidation value
of the Subject Collateral from the going concern value to ensure that there was only
a single recovery. See Jones v. The Brand L. Firm, P.A. (In re Belmonte), 931 F.3d 147,
154 (2d Cir. 2019) (“Section 550(a) authorizes the Trustee to pursue recovery from
all available sources until the full amount of unlawfully transferred Estate
property is fully realized for the Estate’s creditors.”). Awarding the value of the
Subject Collateral was also appropriate because its value depreciated significantly
after the fraudulent transfer. See Andrew Velez Constr., Inc. v. Consol. Edison Co. of
N.Y. (In re Andrew Velez Constr., Inc.), 373 B.R. 262, 274 (Bankr. S.D.N.Y. 2007).
In sum, we find no error in the damages award of $39.2 million for the
fraudulent conveyance or the award of $38.2 million for the breach of fiduciary
duties.
* * *
After oral argument, we ordered supplemental briefing on whether the
damages awards resulted in a double recovery to the Trustee for the value of the
Certificates of Need, which were not part of the Subject Collateral. We also asked
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In re TransCare Corporation
the parties to explain whether that objection was raised by the defendants at any
stage of the proceedings. The letters submitted by the parties confirmed that the
defendants failed to raise this argument before the bankruptcy court, the district
court, or this Court.
The dissenting opinion concludes that this objection was fairly encompassed
within the defendants’ broader argument that the Trustee obtained a double
recovery by receiving the Subject Collateral and its going-concern value, even after
subtracting its liquidation value. Post at 4-6. But that argument, which we have
rejected here, is not just broader. It is meaningfully distinct from, and even at odds
with, the argument that the Trustee was entitled to that recovery but that the
bankruptcy court made an error in failing to subtract some items already
accounted for. The defendants did not advance that latter argument.
“In our adversarial system of adjudication, we follow the principle of party
presentation,” and courts are assigned “the role of neutral arbiter of matters the
parties present.” United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579 (2020).
Accordingly, courts “do not, or should not, sally forth each day looking for wrongs
to right. They wait for cases to come to them, and when cases arise, courts
normally decide only questions presented by the parties.” Id. (cleaned up). To be
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In re TransCare Corporation
sure, this rule is not “ironclad”: courts have “depart[ed] from the party
presentation principle . . . to protect a pro se litigant’s rights,” or in criminal cases
where significant liberty interests are at stake. Id. (internal quotation marks
omitted). Thus, we have explained that we may address an abandoned issue if the
“issue is necessary to avoid manifest injustice or . . . is purely legal and there is no
need for additional fact-finding.” United States v. Gomez, 877 F.3d 76, 92 (2d Cir.
2017).
This case does not meet either of those criteria. First, the new double-
counting argument requires the court to engage in factfinding, and it is therefore
not “purely legal.” Id. Determining which Certificates of Need were double-
counted requires an independent search of the record to determine which
Certificates were necessary to operate Transcendence. And second, the arguments
are not necessary to avoid “manifest injustice.” The parties in this case were on
notice about the damages calculations at all stages of litigation, and they were
represented by exceptionally able counsel who have demonstrated a thorough
command of the record. Perhaps for strategic reasons, defense counsel focused its
appeal on arguments that would reverse liability or vacate the entire damages
award. Further, any lingering skepticism regarding the damages awards we have
45
21-2547; 21-2576
In re TransCare Corporation
determined to be free from clear error, see post at 9, does not suggest ”manifest
injustice” here.
Therefore, in keeping with our role as “passive instruments of government,”
we limit our analysis to the issues the parties have asked us to review. Sineneng-
Smith, 140 S. Ct. at 1579. Because the defendants did not raise below and have not
raised on appeal the new double-counting issue with the Certificates of Need, we
affirm the district court’s damages award in full.
CONCLUSION
The judgments of the district court and the bankruptcy court are
AFFIRMED.
46
21-2547, 21-2576
In re TransCare Corp.
MENASHI, Circuit Judge, dissenting in part:
I agree that the attempted restructuring of TransCare
amounted to a fraudulent transfer and a breach of fiduciary duties. I
disagree, however, with the conclusion that there was no error in the
monetary awards to the estate.
I
When a bankruptcy court avoids a fraudulent transfer, the
trustee may recover for the benefit of the estate either “the property
transferred, or, if the court so orders, the value of such property.”
11 U.S.C. § 550(a). The trustee is entitled to a “single satisfaction,” id.§ 550(d), not to a “double recovery, or a windfall that would benefit
the estate,” In re Andrew Velez Constr., Inc., 373 B.R. 262, 275 (Bankr.
S.D.N.Y. 2007).
This principle is uncontroversial. On appeal, the trustee
acknowledges that the estate is entitled “only [to] the going-concern
value of the subject collateral, [but] not the going-concern value on
top of the liquidation value.” Appellee’s Br. 68. In its opinion, the
court similarly agrees that “stakeholders are not entitled to collect
both liquidation value and going concern value for a company’s
assets.” Ante at 29. Indeed, “it is the rare bankruptcy trustee that has
the audacity” to seek “the fair market value of property that was the
subject of an avoidable transfer, even after that trustee has already
recovered the equity value of the property.” In re Bean, 252 F.3d 113,
116 (2d Cir. 2001).1
1 The same principle barring double recovery applies to the damages
award for the breach of fiduciary duties. See Brookfield Asset Mgmt., Inc. v.
Rosson, 261 A.3d 1251, 1277 (Del. 2021) (“The double recovery rule prohibits
The bankruptcy court, however, failed to adhere to the single-
satisfaction principle here. After deciding that Lynn Tilton’s
attempted restructuring transaction was a fraudulent transfer, the
bankruptcy court awarded “the value” of the property transferred. In
re TransCare Corp., No. 18-1021, 2020 WL 8021060, at *31 (Bankr.
S.D.N.Y. July 6, 2020). Yet in doing so, it double-counted the value of
a Certificate of Need (“CON”)—a certificate issued by New York State
that was necessary for Transcendence to “operate the ambulances.”
Id. at *12 n.15. The estate received $1.9 million in net proceeds from
the liquidation of the CON and—on top of that—it was awarded the
full going-concern value of Transcendence. The estate thereby
received both the liquidation value of the CON and its value in
enabling Transcendence to operate as a going concern. The
bankruptcy court erred because it double-counted the value of a
critical operating asset.
Even the trustee agreed that he was not entitled to such a
double recovery. In the bankruptcy court, the trustee said that the
awards should be reduced by the liquidation proceeds from the sale
of Transcendence’s assets, including the CON. Plaintiff’s Proposed
Findings of Fact and Conclusions of Law ¶¶ 314, 319, In re TransCare
Corp., No. 18-1021, 2020 WL 8021060 (Bankr. S.D.N.Y. July 6, 2020),
ECF No. 134; see also TransCare, 2020 WL 8021060, at *28 n.27, *31. The
trustee would have offset the awards by $5.7 million to account for
the CON, accounts receivable, and physical assets that would have
been transferred to Transcendence but were returned and liquidated
for the benefit of the estate. The bankruptcy court adopted this
recommendation in part, reducing the awards by the liquidation
a plaintiff from recovering twice for the same injury from the same
tortfeasor.”).
2
value of the physical assets that would have enabled Transcendence
to operate. But the bankruptcy court declined to make a similar
reduction for the CON because the CON was not included in the
foreclosure transaction. This was erroneous because Transcendence
may be valued as a going concern only with the CON that was
necessary to operate the ambulances. 2
We review the “legal question of the applicable damages
measurement”—and the “mixed question[]” of applying that law to
the facts of this case—de novo. Bessemer Tr. Co. v. Branin, 618 F.3d 76,
85 (2d Cir. 2011). In my view, the bankruptcy court erred in failing to
reduce the awards by the value of the CON that was necessary for
Transcendence to operate as a going concern. I would vacate the
2 If Tilton’s restructuring plan had succeeded, Transcendence would have
operated three divisions: (1) paratransit services for the New York
Metropolitan Transit Authority (“MTA”); (2) Pennsylvania ambulance
services, and (3) Hudson Valley ambulance services, which required a
CON. Transcendence would have received TransCare’s personal property,
including the computer servers; three contracts, including the MTA
paratransit contract; and the stock of TransCare Pennsylvania, Inc., TC
Hudson Valley Ambulance, Inc., and TC Ambulance Corp.—all of which
constituted the “Subject Collateral.” The trustee liquidated the Hudson
Valley and TC Ambulance CONs for a total of $3.2 million in net proceeds
to the estate. While the parties now acknowledge that “none of the CONs
were included in the Subject Collateral,” Tilton “believed that by
foreclosing on the stock” of the three TransCare entities, “Transcendence
would be able to use their CONs even though title to the CONs would not
pass to Transcendence.” TransCare, 2020 WL 8021060, at *12 n.15. Tilton had
initially planned for Transcendence to operate the Bronx 911/Montefiore
911 division, organized as TC Ambulance Corp., but that division lost its
contracts days before the transaction. In the final plan, Transcendence
would operate the Hudson Valley division, and the Hudson Valley CON
would have been necessary for its ambulances to operate.
3
judgment and remand to the district court to reduce the awards by
the value of the CON that was double-counted.
II
The court does not disagree that the estate received a double
recovery of both the liquidation value and going-concern value of the
CON. Instead, the court decides that we should not address the issue
because it was insufficiently presented by the parties. Ante at 44.
While “courts normally decide only questions presented by the
parties,” United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579 (2020)
(alteration omitted) (quoting United States v. Samuels, 808 F.2d 1298,
1301 (8th Cir. 1987) (Arnold, J., concurring in the denial of rehearing
en banc)), we are not “hidebound by the precise arguments of
counsel,” id. at 1581. We also have “discretion to consider arguments
waived or forfeited below because our waiver and forfeiture doctrine
is entirely prudential.” United States v. Gomez, 877 F.3d 76, 95 (2d Cir.
2017) (alterations omitted) (quoting In re Nortel Networks Corp. Sec.
Litig., 539 F.3d 129, 133 (2d Cir. 2008)).
In this case, the parties addressed the issue of double-counting,
so I would reach that issue in the context of the CON. In their opening
brief, the defendants argued as follows:
The Bankruptcy Code thus gives the Trustee a choice:
recover either the Subject Collateral or its value. The
Trustee here, however, recovered both the Subject
Collateral (which he liquidated pursuant to a court-
approved stipulation) and its purported going-concern
value (in damages). As a result, the damages award
violates the bedrock principle that [t]he trustee is not
entitled to double recovery, or a windfall that would
benefit the estate.
4
Appellant’s Br. 52 (internal quotation marks and citation omitted).
This argument encompasses the bankruptcy court’s erroneous
double-counting of the value of the CON. The trustee responded that
“[w]hen the bankruptcy court calculated damages, it subtracted the
liquidation value of the subject collateral ... from the going-concern
value ... ensur[ing] that the trustee will receive only the going-concern
value of the subject collateral, not the going-concern value on top of
the liquidation value.” Appellee’s Br. 67-68. But the bankruptcy court
failed to apply this principle with respect to the CON.
To be sure, the defendants offered a broader double-counting
argument according to which, “[h]aving chosen to liquidate the
Subject Collateral and distribute the proceeds, the Trustee cannot
argue that damages is a more appropriate remedy.” Appellant’s Br.
53. 3 In other words, the defendants argued that any award based on
the value of the Subject Collateral was erroneous, netted or not,
because the property was returned and liquidated.
I agree with the court that this argument is incorrect. A
bankruptcy court may remedy a fraudulent transfer by awarding the
“value of such property” transferred instead of the property itself. If
it elects to do so, as the bankruptcy court did here, it must apply
appropriate offsets to avoid double-counting the value of assets.
There is no rule that precludes it from awarding the value of the
transferred property when some of that property has been liquidated.
See Aalfs v. Wirum (In re Straightline Invs., Inc.), 525 F.3d 870, 883 n.3
3 See also Reply Br. 24 (“[T]he statute does not say that trustees can choose
to recover both the property and its value, so long as damages are netted. ...
Having already recovered the property by receiving the Subject Collateral
free of all liens, the Trustee could not also recover its value in damages—
netted or not.”) (internal quotation marks omitted).
5
(9th Cir. 2008) (“Although the statute contains the conjunction ‘or,’ at
least one court has held that the remedies of the value of the property
or the property itself are not mutually exclusive, and the bankruptcy
court may award a judgment that involves both types of recovery, as
long as it does not result in double recovery for the estate.”).
Still, the parties sufficiently addressed the issue of double-
counting such that I would correct the improper double-counting that
did occur.
III
Even if the defendants had not addressed double-counting at
all, we still would have “broad discretion” to consider the issue.
Gomez, 877 F.3d at 92 (quoting Booking v. Gen. Star Mgmt. Co., 254 F.3d
414, 418 (2d Cir. 2001)). We have said that “[w]e are ‘more likely to
exercise our discretion (1) where consideration of the issue is
necessary to avoid manifest injustice or (2) where the issue is purely
legal and there is no need for additional fact-finding.’” Id. (quoting
Baker v. Dorfman, 239 F.3d 415, 420 (2d Cir. 2000)). I would exercise
our discretion to address the double-counting error because the
awards appear to be inflated based on several questionable
assumptions.
First, the bankruptcy court determined that the Subject
Collateral, which would become Transcendence, had going-concern
value at the time of the transfer. But Transcendence never became
operational. Transcendence “was in fact not operating at any given
time.” Transcendence Transit II, Inc., 369 N.L.R.B. No. 101 (June 10,
2020). Transcendence—along with the entire TransCare enterprise—
shut down two days after the restructuring transaction. The trustee did
not offer evidence that a third party would have purchased all or part
of TransCare in February 2016 on the compressed timeframe
6
necessary to stabilize operations. By that time, TransCare was in a
“rapidly deteriorating condition” that made a sale of the company
infeasible. TransCare, 2020 WL 8021060, at *18. In place of such
evidence, the bankruptcy court relied on the fact that Tilton, in
devising a restructuring plan, considered parts of the company to be
viable. But the company’s rapid collapse—despite Tilton’s effort and
incentive to preserve its value—suggests that it was not.4
Second, even accepting that Transcendence had going-concern
value, the awards were not based on historical performance or even
on ordinary management projections. The district court valued
Transcendence at $40.4 million based on a projected EBITDA of $4
million and a 10.1x multiple. In the prior two years, however,
TransCare achieved an EBITDA of only about $500,000 and $1.4
million. The only source for the projection of $4 million in EBITDA is
an email that Tilton’s staff sent to an insurance broker seeking
coverage as Transcendence, unsuccessfully, attempted to operate. See
J. App’x 1831; In re TransCare Corp., No. 20-CV-06274, 2021 WL
4459733, at *5 (S.D.N.Y. Sept. 29, 2021) (“Beginning on February 10,
2016, Tilton and her staff provided insurance brokers with financial
information about Transcendence for the purpose of binding a new
insurance policy.”). Similarly, in selecting the proper multiple based
on comparable companies, there was no evidence that the companies
were—as the third-party financial advisor described TransCare—
“operating at an absolute breaking point” because “[v]irtually all key
customers are pursuing or considering replacement options ... [and]
4 Moreover, as the court acknowledges, we may not fault Tilton’s decisions
prior to February 2016. “The bankruptcy court found that Tilton’s decisions
up to this point were made in good faith and protected by the business
judgment rule, and neither party has challenged this conclusion on appeal.”
Ante at 10.
7
loss of another key customer will likely create ‘domino effect.’”
J. App’x 1681.5
Third, the loss of going-concern value was not fully attributable
to the fraudulent transfer or to the breach of fiduciary duties. The
trustee blocked Transcendence from accessing its computer server,
which it needed to operate, and he refused to agree to make employee
payroll due to a $200,000 shortfall. The trustee’s independent decision
to withhold access to the server—which was part of the Subject
Collateral—was at least partially responsible for the cessation of
operations and the loss of going-concern value. The awards do not
account for the loss in value attributable to the trustee’s actions.
Diminutions in value after a fraudulent transfer are typically borne
by the party that effected the transfer. 6 But the awards in favor of the
5 The court observes that “Tilton had received numerous unsolicited offers
to buy part or all of TransCare as late as December 2015.” Ante at 40. But
Tilton’s decision to reject those offers is protected by the business judgment
rule. See supra note 4. It is far from clear that such offers were available in
February 2016 when the company was on the verge of bankruptcy. And the
amounts offered were nowhere close to $40.4 million. National Express
initially offered $15 to 18 million—revised downward to $8 to $9 million in
July and December of 2015—for the MTA contract that was supposed to
generate $4 million in annual EBITDA. Richmond County Ambulance
Service offered to purchase TransCare for eight times EBITDA, which
would have valued the company at approximately $11 million given the
2015 performance.
6
See 5 Collier on Bankruptcy ¶ 550.02 (16th ed. 2022) (“Depreciation in the
value of the property due to market fluctuations may support the
bankruptcy court in ordering restitution of the property’s value at the time
of the transfer. Thus, when property declines in value after the transfer, a
trustee may recover the value of the property at the time of the transfer
rather than the property.”).
8
trustee could have accounted for the trustee’s contribution to the loss
of value.7
Aside from the double-counting of the CON, I agree with the
court that, all things considered, the amounts awarded were not
clearly erroneous. “Under the clearly erroneous standard, there is a
strong presumption in favor of a trial court’s findings of fact if
supported by substantial evidence. We will not upset a factual finding
unless we are left with the definite and firm conviction that a mistake
has been committed.” Bessemer, 618 F.3d at 85 (quoting White v. White
Rose Food, 237 F.3d 174, 178 (2d Cir. 2001)). There was such evidence
for each step of the awards. The EBITDA projection was “sufficiently
credible to send to insurance brokers to procure insurance for
Transcendence and commit to invest up to $10 million of her own
funds”; the defendants did not identify a more appropriate EBITDA
multiple; the defendants set in motion a restructuring transaction that
left critical assets under a liquidating trustee’s control. Transcare, 2020
WL 8021060, at *25. But the fact that the awards were based on such
arguable findings supports the exercise of our discretion at least to
correct the “manifest injustice” of the double-counting error so that
the awards are not further inflated. Gomez, 877 F.3d at 93.
7 See In re EBC I, Inc., 380 B.R. 348, 362-66 (Bankr. D. Del. 2008) (explaining
that the debtor bears the “burden of proving that it lost anything of value”
from the transaction and that the bankruptcy court “must determine the net
effect of the transaction on the debtor”), aff’d, 400 B.R. 13 (D. Del. 2009), aff’d,
382 F. App’x 135 (3d Cir. 2010); In re Olsen Indus., Inc., No. 98-140, 2000 WL
376398, at *12 (D. Del. Mar. 28, 2000) (“In order to prevail on a claim for
breach of fiduciary duty, a plaintiff must demonstrate by a preponderance
of the evidence that the defendant’s conduct proximately caused its
injury.”).
9
A decision on appeal to eliminate double-counting would not
require additional fact finding. Only the CON associated with one
subsidiary, TC Hudson Valley Ambulance Corporation, was double-
counted because only the Hudson Valley division would have
continued to operate ambulance services in New York as part of
Transcendence. See TransCare, 2020 WL 8021060, at *12; see also
J. App’x 1969.8 The trustee recovered for the estate $1.9 million from
the CON. See J. App’x 1976. I would vacate and remand for the district
court to reduce the awards by the same amount.
* * *
I would vacate and remand for the district court to recalculate
the awards to the estate without double-counting. For that reason, I
dissent in part.
8 The Pennsylvania and paratransit divisions would not operate
ambulances in New York and therefore would not require New York
CONs.
10