Fox v. Koplik
2013 U.S. Dist. LEXIS 123254
S.D.N.Y.2013Background
- Perry H. Koplik & Sons, Inc. (Debtor) was a closely held NY paper broker; Michael Koplik (CEO/sole shareholder) and Alvin Siegel (COO) were the primary officers. The Debtor had a $60M revolving credit facility (Fleet) and a trade credit insurance policy (Kemper) tied to American Tissue (ATC) receivables.
- From 1999–2001 the Debtor extended substantial trade credit (~$18–19M) and unsecured loans (~$8.5M) to major customer American Tissue; receivables were re-aged and some loans made informally.
- American Tissue filed Chapter 11 in Sept. 2001; shortly thereafter it was revealed that ATC’s senior executives had committed accounting fraud that materially overstated ATC’s financial condition.
- Kemper denied the Debtor’s ~$15M policy claim in Nov. 2001 on multiple grounds (overdue-debtor endorsement, non-approved subsidiaries, rescheduling/re-aging without insurer consent, failure to minimize loss, nondisclosure). Fleet declared default; Debtor entered a costly forbearance agreement.
- Trustee sued officers for breaches of fiduciary duty, negligence, gross mismanagement, and fraudulent transfers; Bankruptcy Court issued Proposed Findings awarding limited damages; district court reviewed de novo and largely adopted them, awarding damages for certain breaches, constructive fraudulent transfers (loan forgiveness), and prejudgment interest.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did officers breach duty of care by extending non-trade loans to ATC and did that cause Debtor's loss? | Trustee: officers ignored red flags (bounced checks, re-aging, late payments) and should have uncovered fraud; causation established. | Officers: ATC’s financials were falsified; even reasonable diligence would have been deceived; no proof they would have discovered fraud; business judgment protected. | Held: No recoverable breach-related damages for non-trade loans — Trustee failed to prove but‑for causation; ATC fraud made discovery unlikely. |
| Was extending trade credit that exceeded effective policy coverage a breach? | Trustee: officers should have avoided excess exposure and obtained full effective coverage. | Officers: reasonable informal due diligence + insurance (if complied with) made incremental exposure justifiable as business judgment. | Held: No breach for extending trade credit per se; with compliance the policy justified incremental risk; officers’ business judgment upheld. |
| Did officers violate Policy conditions (esp. re‑aging, Approved Debtors, cooperation) causing loss? | Trustee: failure to comply (re‑aging without insurer consent, omissions re subsidiaries, failure to minimize loss) breached duty, harming recovery under policy. | Officers: reliance on broker/agent, or estoppel defenses; correspondence showed insurer/agent awareness; not solely officer fault. | Held: Officers breached duty by failing to obtain insurer’s prior written consent for re‑aging and failing to ensure Policy compliance; that breach caused a measurable diminution in recoverable insurance proceeds — damages awarded ($2.15M). Failure to list some subsidiaries was not shown to be a sufficiently negligent omission. |
| Were loan-forgiveness transactions (to Koplik and Siegel) constructive fraudulent transfers and breaches of loyalty/care? | Trustee: loans forgiven while Debtor insolvent; no reasonably equivalent value given; breaches and recoverable transfers. | Officers: forgiveness was compensation-related, longstanding arrangement, or payment of related taxes — not fraudulent. | Held: Forgiveness constituted constructive fraudulent transfers and breaches; Koplik ($299,800) and Siegel ($100,000) liable; evidence did not support equivalent value defenses. |
| Prejudgment interest: entitlement and accrual dates | Trustee: entitled to prejudgment interest on breach-of-duty damages (from events giving rise to injury). | Officers: disagree on accrual start dates. | Held: Prejudgment interest awarded: for Policy‑related breaches from Nov 12, 2001 (Kemper denial); for Revolver/forbearance damages, interest accrues from March 6, 2002 (final payment date used). |
Key Cases Cited
- Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011) (procedural standard for bankruptcy court authority and district court review)
- Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255 (2d Cir.) (officers/directors owe duties of care and loyalty under New York law)
- Auerbach v. Bennett, 47 N.Y.2d 619 (N.Y. 1979) (business judgment rule protects good‑faith corporate decisions)
- Lindner Fund, Inc. v. Waldbaum, Inc., 82 N.Y.2d 219 (N.Y. 1993) (codification/statement of business judgment standard)
- Marx v. Akers, 88 N.Y.2d 189 (N.Y. 1996) (directors/officers approving self‑interested transactions bear burden to show fairness)