81 F.4th 37
2d Cir.2023Background
- Lynn Tilton was TransCare’s sole director and majority indirect owner; she controlled Patriarch entities including PPAS (the Term Loan administrative agent).
- Facing imminent default in early 2016, Tilton devised the “Tilton Plan”: PPAS foreclosed on selected TransCare assets (the “Subject Collateral”) and sold them to Transcendence Transit, Inc. and Transcendence Transit II, Inc.—companies Tilton created and controlled—for $10 million on Feb. 24, 2016.
- TransCare filed Chapter 7 the same day; Transcendence failed to operate, returned the assets, and the estate later liquidated the collateral for roughly $1.2 million.
- The bankruptcy court found an actual fraudulent conveyance and recommended Tilton breached fiduciary duties; the district court adopted those conclusions and calculated damages based on lost going-concern value (using a $4M EBITDA projection and a 10.1x multiple), yielding approximately $39.2 million (with minor offsets).
- Tilton and the Patriarch Entities appealed liability and damages; the Second Circuit affirmed the liability findings and the damages awards, while Judge Menashi dissented in part (arguing double-counting of a Certificate of Need).
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Tilton / Patriarch) | Held |
|---|---|---|---|
| Whether Tilton’s self-dealing sale breached fiduciary duties under Delaware law (entire fairness) | Transaction failed entire fairness; Tilton controlled process and price, no independent protections | Tilton: acted to save viable parts of the business, time-pressured, retained Carl Marks, and intended to share equity with lenders | Court: Held breach; Tilton failed to prove fair dealing or fair price (no independent process, misled stakeholders, sale undervalued vs going-concern) |
| Whether the foreclosure/sale was an actual fraudulent conveyance under §548(a)(1)(A) and N.Y. law | Trustee: badges of fraud (self-sale, inadequate consideration, secrecy, haste, post-debt transactions) show intent to hinder/delay/defraud creditors | Entities: disputed review standard and urged recognition of legitimate supervening purpose | Court: Held actual fraud; nearly all badges present, legitimate-purpose evidence insufficient; review of factual finding for clear error affirmed |
| Appropriate measure of damages: going-concern value vs liquidation value | Trustee: damages measured by lost going-concern value of the Subject Collateral (EBITDA projection × market multiple) less liquidation proceeds | Defendants: TransCare was doomed so liquidation value is proper; Trustee failed to prove going-concern loss; burden-shifting error; Trustee caused Transcendence’s failure | Court: Held damages based on going-concern value were not clearly erroneous; Trustee met burden with expert projections and defendants failed to rebut; set-offs for liquidation were applied where appropriate |
| Whether estate received a double recovery (value of Certificates of Need counted twice) | Trustee: subtraction of liquidation proceeds avoids double recovery; damages award proper | Defendants: Trustee liquidated collateral and obtained its going-concern value—double recovery impermissible | Court: Declined to reach a new double-counting argument not raised below; affirmed award; (Menashi, J. dissent: would remand to deduct value of CON that was double-counted) |
Key Cases Cited
- Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) (entire fairness requires fair dealing and fair price)
- Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997) (entire fairness is holistic; process affects price analysis)
- Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156 (Del. 1995) (fair price inquiry and valuation considerations)
- Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574 (2d Cir. 1983) (badges of fraud for actual fraudulent conveyance)
- HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) (secrecy, haste, and unusualness as indicia of intent to defraud)
- In re U.S. Lines, Inc., 197 F.3d 631 (2d Cir. 1999) (standard of review for core bankruptcy proceedings)