Romay v. Mediaset Espana Communications S.A.Romay v. Mediaset Espana Communications S.A.
MEMORANDUM OPINION ON FINAL JUDGMENT
THIS MATTER came before the Court for trial upon the Complaint to Avoid
JURISDICTION AND PROCEDURAL HISTORY
The Court has jurisdiction over this adversary proceeding pursuant to
On May 14, 2019 (the “Petition Date“), America-CV Station Group, Inc. (“America CVSG” or “Debtor“) filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court“) for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code“) under Case No. 19-16355-BKC-AJC (the “Main Case“). Three other companies affiliated with the Debtor also filed for bankruptcy: Caribevision Holdings, Inc. (“Caribevision“)1 under Case No. 19-16359-BKC-AJC, America-CV
Network, LLC (“America-CV Network“) under Case No. 19-16976-BKC-AJC, and Caribevision TV Network, LLC (“Caribevision Network“) under Case No. 19-16977-BKC-AJC (Caribevision, America-CV Network, and Caribevision Network are collectively, the “Affiliated Debtors“).
Before the bankruptcy cases were filed, the Romay Parties2 on the one hand and America CVSG and the Affiliated Debtors on the other were involved in extensive litigation including the First Romay State Court Litigation (defined hereinafter) and the Second Romay State Court Litigation (defined hereinafter). Based upon the Second Romay State Court Litigation, the Romay Parties filed joint and several claims in the amount of $12,919,740.88 against each of America CVSG and the Affiliated Debtors (the “Romay Claim“)3 in each of the bankruptcy cases. During the chapter 11 cases the Debtor, the Affiliated Debtors, and the Romay Parties settled the Second Romay State Court Litigation and that settlement (the “Romay Settlement“)
lump sum cash distribution of $1.5 million pursuant to the Plan.
On February 24, 2021, the Plaintiff filed this adversary proceeding. Various issues were resolved by pre-trial and mid-trial motions. The remaining issues are the subject of this ruling.5
FINDINGS OF FACT AND CONCLUSIONS OF LAW6
Mediaset7 is a Spanish company with its principal place of business in Madrid, Spain, where it conducts the vast majority of its business, focusing for the most part on television broadcasting. Mediaset operates primarily outside the United States. In 2008, Mediaset purchased a minority interest in Pegaso Television, Inc. (“Pegaso“), a Delaware corporation. Pegaso owned a minority interest in Caribevision, also a Delaware corporation. Caribevision in turn owned stock in America CVSG which collectively operated television and radio stations
in the United States, including Puerto Rico (collectively the “Broadcast Businesses“). Caribevision itself did not have operations. At some point the operations of the Broadcast Businesses were transferred to another affiliate America-CV Network. However, America CVSG continued to own the licenses to operate the Broadcast Businesses, the use for which America-CV Network paid a monthly fee to America CVSG.
At some point after Mediaset purchased its interest in Pegaso, Caribevision and the Romay Parties entered into a joint venture arrangement pursuant to which Caribevision owned 50% of America CVSG and Omar Romay, in his individual capacity, together with some of the other Romay Parties owned the other 50%. Romay was operating the Broadcast Businesses pursuant to the joint venture agreement.
In 2011, Caribevision, along with other entities holding direct or indirect interests in the Broadcast Businesses (including Mediaset), sued the Romay Parties and others (the “First Romay State Court Litigation“) alleging that Romay had breached his fiduciary duties to Caribevision and that the Romay Parties had breached the joint venture agreement. In November 2015, a $58 million verdict was entered in favor of Caribevision, Mediaset, and others against the Romay Parties and other defendants (the “Romay Judgment“). Around this time the FCC scheduled what is called a reverse auction for broadcast licenses.10
On December 7, 2015, the parties to the First Romay State Court Litigation agreed to split up their businesses pursuant to a settlement in which America CVSG (the entity that owned the broadcast licenses used in the Broadcast Businesses) would sell those licenses through an FCC “reverse auction“, and the proceeds would be divided in a waterfall designed to pay the Romay Judgment to the successful plaintiffs and give some proceeds to the Romay Parties. The settlement was premised on the expectation that the sale of the TV licenses in the FCC reverse auction (the “FCC Auction“) would yield more than $200 million in proceeds, so that, even after accounting for the $58 million Romay Judgment, there would still be substantial profits to be split between Caribevision and the Romay Parties. The First Romay State Court Litigation settlement was reflected in a Confidential Settlement Agreement (the “CSA” or “December 2015 Agreement“). Under the CSA, the entities responsible for making decisions about management of the Auction as well as of America CVSG, and America-CV
Network, as well as distribution of any auction proceeds were Caribevision, Caribevision Network,
Disputes arose almost immediately about Romay‘s entitlement to any of the Auction Proceeds. After the Auction results were finalized in April of 2017, Romay demanded between $8-9 million. Members of the Caribevision board of directors, including counsel, held extensive internal discussions regarding the FCC Auction results, the Auction Proceeds, and whether Romay should receive any of it. Ultimately, Caribevision decided that based on its interpretation of the CSA, as well as its advice from counsel, it would not distribute any Auction Proceeds to Romay.
On December 12, 2017, the Romay Parties initiated a lawsuit against America CVSG, Caribevision, Caribevision Network, and Caribevision Station Group, LLC (collectively the “Caribevision Defendants“), and Spanish Broadcasting Systems, Holdings Group, Inc. seeking to recover what the Romay Parties claimed was their share of the Auction Proceeds and other damages (the “Second Romay State Court Litigation“) for a total claim of $21,000,000.00.
Even before the Second Romay State Court Litigation was filed, Mediaset had decided it wanted out of the Broadcast Businesses. After extensive negotiations, on March 23, 2018, Mediaset and Grupo Colte, S.A. de C.V. (“Grupo Colte“), the largest shareholder of Pegaso, entered into a Share Purchase Agreement whereby Grupo Colte agreed to purchase Mediaset‘s shares in Pegaso
(the “SPA“). Pursuant to the SPA, Grupo Colte purchased from Mediaset 21,594,787 shares of stock (the “Shares“) in Pegaso.
Pursuant to the SPA, the purchase price for the Shares was $12,500,000.00, payable by Grupo Colte in three installments. The first installment in the amount of $10,000,000.00 was due to Mediaset on April 23, 2018. The second installment, in the amount of $1,250,000.00 was due on March 31, 2019. The third installment, also in the amount of $1,250,000.00, was conditioned on the outcome of the Second Romay State Court Litigation. On April 23, 2018 (the “Transfer Date“), America CVSG sent a wire of $10,000,000.00 from its Iberia Bank account to Mediaset (the “Transfer“). According to Mediaset, it did not realize the funds were not sent by Grupo Colte until after Mediaset became aware of the alleged fraudulent transfer claim.
The Adversary Complaint has three counts – Count I seeks relief under
Constructive Fraud
To prevail on a claim for recovery of a constructively fraudulent transfer,
the Plaintiff must prove that the Debtor “received less than a reasonably equivalent
- [The Debtor] was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; [or]
- [The Debtor] was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; [or]
- [The Debtor] intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor‘s ability to pay as such debts matured[.]
A. America CVSG did not receive reasonably equivalent value for the Transfer.
Reasonably equivalent value, although not defined in the Bankruptcy Code, focuses on what a debtor has received in exchange for the transfer. See Menchise v. Clark (In re Dealers Agency Services, Inc.), 380 B.R. 608, 619-20 (Bankr. M.D. Fla. 2007) (internal citations omitted). The Eleventh Circuit has recognized that the “concept of ‘reasonably equivalent value’ does not demand a precise dollar-for-dollar exchange.” Advanced Telecomm. Network, Inc. v. Allen (In re Advanced Telecomm. Network, Inc.), 490 F.3d 1325, 1336 (11th Cir. 2007). Still, value must be quantifiable and objectively comparable to the amount the debtor gave up. See Menotte v. Leonard (In re Leonard), 418 B.R. 477, 486 (Bankr. S.D. Fla. 2009) (holding that debtor did not receive reasonably equivalent value under section 548(a)(1)(B) when the debtor gave value of $56,000 and received value of $18,250).
Mediaset argues that America CVSG received reasonably equivalent value in exchange for the Transfer by virtue of a book entry in the general ledger of
America CVSG describing the Transfer to Mediaset as a loan to Pegaso.12 However, that is all there was – a book entry, and only on the books of America CVSG. There was no promissory note evidencing an obligation from Pegaso to America CVSG. None of Pegaso‘s books or records, or tax returns, ever listed an obligation from Pegaso to America CVSG. There was a $10,000,000.00 promissory note signed near the time of the Transfer, with Pegaso as the borrower and America Teve Holdings, Inc. as the lender. That promissory note does reference the purchase of the Mediaset Shares. However, Pegaso was not the purchaser of the Mediaset Shares – Grupo Colte was. And America Teve Holdings, Inc. did not provide the funds for the Transfer; that was America CVSG. There is no dispute that there was no written agreement between Pegaso and America CVSG with respect to the $10,000,000.00 journal entry. And Mediaset has not established by a preponderance of the evidence
by a preponderance of the evidence.“) (internal citations omitted).
Under Florida law, a credit agreement must be in writing, express consideration, set forth the relevant terms and conditions, and be signed by both the creditor and the debtor in order to be enforceable. See
Based on the testimony of the witnesses at Trial regarding this transaction, primarily Jorge Salas, the CFO of America CVSG, and Marcel Felipe, corporate counsel for the Broadcast Businesses as well as to Carlos Vasallo, the Court finds that at the time the Transfer was made, there was no clear idea how to describe the Transfer and no intent, even by America CVSG, to make a loan to any entity (making loans was not something America CVSG “did“). The loan
“idea” was described by Mr. Felipe in his testimony as a “placeholder” “until it got sorted out.” Ultimately, when the books and records of America CVSG were audited, and at the direction of the auditors, the so-called loan was recharacterized as a distribution. When questioned about whether the “loan” was expected to be paid, twice, Mr. Salas testified: “[n]obody told me they would not be paid, but nobody told me it will be collected.”
There was no evidence presented at the Trial that Pegaso ever agreed to be indebted to America CVSG for the $10,000,000.00 journal entry. As the court wrote in Nat‘l Bank of Paulding v. Fid. & Cas. Co., 131 F. Supp. 121, 123-24 (S.D. Ohio 1954): “[i]n order to have a loan, there must be an agreement, either expressed or implied, whereby one person advances money to the other and the other agrees to repay it upon such terms as to time and rate of interest, or without interest, as the parties may agree. In order to have a contract, there must be a meeting of minds.” But there was no “meeting of the minds“; Pegaso never received $10,000,000.00 from America CVSG or from Caribevision. Mediaset‘s expert, Mr. Feltman, testified that he never saw a document where Pegaso obligated itself to pay America CVSG $10,000,000.00. There was no evidence that either Pegaso or America CVSG benefitted from the purchase of Mediaset‘s shares by Grupo Colte. The accountant for the Broadcast Businesses and Pegaso, Jose Iglesias, testified that there was no loan listed on the Pegaso
Based on the evidence, and absence thereof, the Court finds that at the time of the Transfer, there was no loan or any intent to create a loan; the journal entry had no legally cognizable value. The Court therefore holds that America
CVSG did not receive reasonably equivalent value or, in fact, any value, in exchange for the Transfer.
B. America CVSG was not insolvent at the time of the Transfer.
The Adversary Complaint alleges that the Transfer caused America CVSG to become insolvent, left America CVSG with inadequate capital, and caused America CVSG to be unable to pay its debts as they came due.
The Bankruptcy Code defines “insolvent” as—
(A) with reference to an entity other a partnership and a municipality, financial condition such that the sum such entity‘s debts is greater than all of such entity‘s property, at a fair valuation, exclusive of—
- property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity‘s creditors; and
- property that may be exempted from property of the estate under section 522 of this title;
With respect to the insolvency analysis in this case, the value of two assets, or asset groups, are at issue, while the calculation of one debt is at issue. The two asset values at issue are first, the value of the $10,000,000.00 “loan” to Pegaso; and second, the value of the broadcast licenses that America CVSG continued to own at the time of the Transfer. The debt at issue is the value of the
then contingent liability owed to the Romay Parties in connection with the Second Romay State Court Litigation.
The Court has already addressed the value to American CVSG of the $10,000,000.00 Pegaso “loan“. That value is zero.
1. Valuation of the Broadcast Licenses
The other asset valuation at issue is the value of the broadcast licenses at the time of the Transfer. At the time of the Transfer, and after the Auction, America CVSG continued to own at least five broadcast licenses, however for purposes of the insolvency analysis the parties focused on the value of three broadcast licenses – two in Puerto Rico, WJPX and WJWN13, and one in Miami – WJAN14.
Four experts testified as to the value of the television broadcast licenses – Mr. Kapila, Mr. Feltman, Dr. Harold Furchtgott-Roth, and in rebuttal to Dr. Furchtgott-Roth, Ms. Lauren Ross. Mr. Feltman‘s
For purposes of making its decision on the value of the broadcast licenses,
the Court will focus primarily on the testimony of Dr. Furchtgott-Roth and of Ms. Ross, both of whom the Court ruled are experts qualified to provide expert testimony on the value of the broadcast licenses. Each of them has a very different methodology on how to value the licenses. The Court found issues with the methodology of both experts. However, rather than disregard all testimony, the Court, as more fully detailed below, has chosen to reach valuation based on Ms. Ross’ valuation as modified by Dr. Furchtgott-Roth‘s methodology.
Dr. Furchtgott-Roth has an impressive history with broadcast licenses, even serving, at one point in his career, as a Commissioner of the Federal Communications Commission (the “FCC“). Prior to that Dr. Furchtgott-Roth was a significant contributor to the drafting of the Telecommunications Act of 1996. Dr. Furchtgott-Roth has, over a period of more than twenty years, advised at least a dozen companies on the value of FCC licenses.
Ms. Ross is the Vice President of Media Valuations at BIA Advisory Services, LLC and has been with that company for more than 35 years. Her specialty, as an Accredited Senior Appraiser in Business Valuation, is in appraising broadcasting and media properties. Ms. Ross testified that she had “been retained to perform valuations of thousands of broadcasting properties and companies.”
Dr. Furchtgott-Roth testified that FCC licenses are, with one exception, always valued in connection with the broadcast station to which the license is attached. The only exception is the reverse auction conducted from time to time by the FCC. However, according to Dr. Furchtgott-Roth, in reaching his valuation of the FCC licenses, he did not alter his valuation to reflect any hard assets of a broadcast station associated with the purchase of any FCC license,
notwithstanding that he acknowledged that America CVSG only held the broadcast licenses, not the hard assets. Dr. Furchtgott-Roth‘s testimony regarding the value of WJAN was based on the price paid at the FCC Auction for what he testified was a comparable station15, as well as a sale that took place four years after the Transfer Date. Dr. Furchtgott-Roth‘s valuation of the two Puerto Rico stations was based, first, on sales of comparable stations (or their spectrum) at the FCC Auction, and then on “price per population” figures and values that he took from the Hoffman Schutz Media Capital appraisal that had been commissioned by Romay in the Second Romay State Court Litigation, as well as an appraisal prepared in the same litigation by a company called SNL Kagan Consulting. Dr. Furchtgott-Roth testified that he valued the two Puerto Rico stations separately, although he recognized the stations were subject to a channel sharing agreement and, he accordingly, discounted the value included in the Hoffman Schutz appraisal of one of the stations by 50%. Dr. Furchtgott-Roth testified
range of $5.627 million to $6.305 million.
While Ms. Ross used the comparable sales approach as well, she used a completely different methodology in challenging Dr. Furchtgott-Roth‘s valuations. Using the comparable sales approach, Ms. Ross testified, she valued the station with the license using the “price per population” or “price per pop” using comparable transactions to the extent available, and then using that formula, and the population figures for the service area for the stations using the Debtor‘s licenses, came to a valuation, from which, then, Ms. Ross deducted costs of “building” the station (not including land and building, which she assumed would be leased) as if the station were being built brand new. In determining comparable sales, Ms. Ross did not use any transactions that took place after the Transfer Date. For her valuation of WJAN, Ms. Ross’ comparable transactions were from 2014 and 2015, discounted for decreases in value of FCC licenses after the FCC Auction.16 Based on Ms. Ross’ application of her methodology, she testified the value of the WJAN station as of the Transfer Date was $2,063,000.00, reduced by $512,000.00 in estimated costs associated with buying everything necessary to start a new station (other than land and building).
For her valuation of the Puerto Rico stations, Ms. Ross testified that the stations had to be valued together because that was the only way service could be “full island,” disagreeing with Dr. Furchtgott-Roth‘s testimony that the stations could each be sold as stand alone. Ms. Ross testified that as of the Transfer Date,
the value of the two Puerto Rico stations, using what comparables (off-island) were available, was $4,314,000.00, reduced by start-up and equipment costs of $2,422,000.00.
Ms. Ross testified that she did not believe the values in the FCC Auction were reflective of fair market value since the FCC reverse spectrum auctions are unique, and only happen infrequently. Indeed, the FCC Auction that is the subject of the Second Romay State Court Litigation had been in the planning stages for 20 years, and there is no indication when the next auction will occur.
There were problems with both methodologies. While Dr. Furchtgott-Roth clearly has an impressive history with the FCC and the broadcast industry in general, his experience in advising companies regarding the purchase and value of FCC licenses and broadcast stations is very limited, as compared to Ms. Ross’ extensive experience in this precise area. Moreover, the Court agrees with Ms. Ross that in valuing the licenses, less weight should be given to the prices paid in the FCC Auction, since those auctions are few and far between. A
While the Court finds that Ms. Ross’ methodology for valuing the licenses was more reliable, insofar as the comparables she used, the calculation of value
using price per pop, and assumptions regarding the value of the two Puerto Rico stations together, the Court is not comfortable with the reductions that Ms. Ross applied. The Court accepts Ms. Ross’ testimony that, to value a license, there must be some adjustment for the value of tangible assets associated with the license. The Court notes that Ms. Ross failed to explain how she came up with the construction cost reductions, and those calculations were barely challenged on cross-examination. Moreover, there was no testimony to counter Ms. Ross’ calculation of start-up costs. However Ms. Ross never explained why it would be appropriate to use “new station” valuations, when she acknowledged that all three stations had been around and operating for quite some time. The Court cannot accept, without some explanation, which was not provided, that it is appropriate to reduce the value of the stations by a hypothetical value that has no relationship to the reality of the licenses being valued – the opposite problem with Dr. Furchtgott-Roth‘s valuation, that ignored hard assets completely.
The Court has two choices. One is to completely disregard both experts and assume the licenses have no value (or require another expert), or the Court can adjust Ms. Ross’ testimony using only objective simple adjustments. The Court finds it appropriate to use Ms. Ross’ valuation without reducing the value of the stations by the construction costs, which is the approach Dr. Furchtgott-Roth advocated for in any case. Based on this adjustment, the Court finds as of the Transfer Date the value of WJAN was $2,063,000.00 and the value of the Puerto Rico stations was $4,314,000.00.
2. Valuation of the Contingent Liability
The last issue of contention related to balance sheet insolvency is how the
contingent liability of the Second Romay State Court Litigation (the “Romay Contingency“) should have been valued. While both sides agree that the Romay Contingency was, in fact, a contingent liability at the time of the Transfer, the two experts had widely different views on its value at that time. The expert for the Plaintiff, Mr. Kapila, testified that the Romay Contingency should be valued at $9,320,609.00, which is the highest range of the amount set forth in an April 2019 non-final order entered by the state court a year after the Transfer. The expert for Mediaset, Mr. Feltman, testified that the Romay Contingency should be valued at a range between $3.15 million and $4.05 million.
The Eleventh Circuit has set out a framework pursuant to which a contingent liability is to be valued in determining a debtor‘s insolvency. Advanced Telecomm., 490 F.3d at 1335. The Court is required to estimate “the expected value of a judgment against [the debtor]” and then multiply “that value by the chance that [the
It is well established that “a contingent liability cannot be valued at its potential face amount . . . .” Nordberg v. Arab Banking Corp. (In re Chase &
Sanborn Corp.), 904 F.2d 588, 594 (11th Cir. 1990); see also Oakes v. Spalding (In re Oakes), 7 F.3d 234 at *3 (6th Cir. 1993); Xonics, 841 F.2d at 200 (contingent liabilities not valued at face amounts, even if no uncertainty about what firm will owe if the contingency materializes). If an expert treats contingent liabilities as certainties, his expert opinion will be invalidated. Baldi v. Samuel Son & Co., Ltd., 548 F.3d 579, 582 (7th Cir. 2008); see also Bachrach Clothing, Inc. v. Bachrach (In re Bachrach Clothing, Inc.), 480 B.R. 820, 862 (Bankr. N.D. Ill. 2012) (failure to discount contingent liability discredits expert‘s valuation). Moreover, the contingent liability must be valued as of the time of the Transfer, based on information available at that time, and not by using improper hindsight. See Paloian v. LaSalle Bank, N.A., 619 F.3d 688, 693 (7th Cir. 2010) (“Hindsight is wonderfully clear, but. . . . Hindsight bias is to be fought rather than embraced.“).
Thus, the Court must review the expert testimony through the lens dictated by the Eleventh Circuit. At the time of the Transfer, the Second Romay State Court Litigation had been pending about five months. Procedurally, the Caribevision Defendants had filed an answer, along with affirmative defenses and counterclaims. The issues raised by these pleadings were substantial, and the counterclaims significant. As of the Transfer Date, the Romay Parties’ motion to dismiss the counterclaims (which included claims for breach of contract, negligent representation, and intentional misrepresentation) had been rejected by the state trial court and those counterclaims remained pending. The Romay Parties had filed their answer to the counterclaims; the defenses pending as of the Transfer Date included equitable estoppel, laches, failure to mitigate, waiver, use of best efforts, and the business judgment rule, all relating to the Auction and withdrawal from the Auction of the Puerto Rico stations, as well as frustration of purpose as to the CSA. As of the Transfer Date, there remained substantial judicial and legal labor required before any trial and final determination of the Second Romay State Court Litigation.
During the Second Romay State Court Litigation, and throughout the time when the Second Romay State Court Litigation complaint was filed and the date of Transfer, management of the Broadcast Businesses, and their shareholders, held extensive discussions about the value of the Second Romay State Court Litigation. Marcell Felipe wrote many memos analyzing the possible ranges of recovery, from a likely low of about $3 million to a possible high number of around $9 million. On January 29, 2018, three months before the Transfer Date, Omar Ortega (the Caribevision Defendants’ outside litigation attorney) provided the Caribevision Defendants with an initial evaluation of the Second Romay State Court Litigation. Mr. Ortega identified several issues with Romay‘s claims and alleged damages and expressed
The range of values is consistent with other evidence, including the amounts referenced in various emails between and among Mr. Braun, Mr. Calles, and individuals associated with Pegaso in October 2017 ($4 million settlement), February 2018 ($4 million settlement) and May 2018 ($2.7 million reserve plus payment of one Puerto Rico station). There was evidence that Romay‘s representatives (Granda and Cainzos) gave the impression that Romay would settle in the range of $3 to $5 million or $4 to $6 million. See Advanced Telecomm., 490 F.3d at 1339 (Trager, J., concurring) (proffered settlement is best evidence for what liability was worth); Polis v. Getaways, Inc. (In re Polis), 217 F.3d 899, 903 (7th Cir. 2000) (refused settlement normally good evidence of minimum fair value).18
Mr. Kapila testified that he did not consult with counsel, did not review the state court docket, and is not familiar with the status of the litigation at the time of the Transfer. Rather, using the $21 million demanded in the Second Romay State Court Litigation complaint as a starting point, and based on communications and internal analysis of insiders, as well as the legal analysis of outside counsel, Mr. Kapila determined that the high range of the state court‘s April 2019 non-final order was an appropriate reflection of the value of the Romay Contingency on the Transfer Date. Conversely, Mr. Feltman testified that in addition to reviewing the same communications, internal analysis of insiders, as well as the legal analysis of outside counsel, he also reviewed the entire state court docket at the time of the Transfer.
The Court considered the expert opinions and methodology of both experts and finds that only Mr. Feltman applied the appropriate framework to value the Romay Contingency. Mr. Feltman testified as to his substantial experience as a financial advisor to debtors and fiduciaries settling litigation claims and the correct formula for settling or valuing such claims by considering the likelihood of success, the
Conversely, Mr. Kapila, although also an experienced bankruptcy trustee, did not use the methodology prescribed by Advanced Telecomm., 490 F.3d at 1335, but rather assumed a 100% likelihood of success as of the Transfer Date based, in part, on the non-final order that was ultimately entered in April 2019, with an amount of $9.3 million, as well as the agreed final judgment of June 2020 (based on the Romay Settlement reached in the bankruptcy case). Mr. Kapila did not consider the possibility of a trial at the time of the Transfer, the remaining affirmative defenses, the counterclaims, and the risks of appeal. In addition, Mr. Kapila did not provide any explanation why, in the face of a complete disregard by all insiders and outside litigation counsel of the $21,000,000.00 figure, he, nonetheless, used the $21,000,000.00 as a starting point. See Chase & Sanborn, 904 F.2d at 594 (contingent liability cannot be valued at potential face amount). Thus, Mr. Kapila applied his discount without factoring in the status of the litigation at the time of the Transfer, and using an improper initial figure.
Further, placing significant reliance on a non-final order entered one year after the Transfer Date, or upon an agreed final judgment entered more than two years after the Transfer Date, is improperly applying hindsight. See Paloian, 619 F.3d at 693. A non-final order, only entered after more than a year of hard-fought litigation, is not an appropriate indicator of value and is not proper evidence of the value of the contingent liability as of a date nearly one year prior to the order. Moreover, a negotiated final judgment, entered two years after the Transfer Date, as part of the Romay Settlement focused on preserving an alleged fraudulent conveyance action arising from the Transfer, bears no weight whatsoever.
A contested lawsuit, in its early stages, should be more heavily discounted. The case of Grigsby v. Carmell (In re Apex Automotive Warehouse, L.P.), 238 B.R. 758, 771–72 (Bankr. N.D. Ill. 1999) is instructive. Apex Automotive involved the valuation of a lawsuit as a contingent asset. Id. There, the defendant was contesting a fraudulent transfer claim by arguing the debtor was solvent because the debtor‘s lawsuit against a third party should be valued as a $12 million asset. The trustee, arguing that the debtor was insolvent, asserted that the contingent asset should be valued at only $2.7 million. The trustee presented evidence that “the lawsuit was only a few weeks old” and “the claims were contested.” Id. at 772. The lawsuit in Apex Automotive also involved a crossclaim. Id. There was evidence of a $3 million dollar settlement offer and the trustee‘s expert testified to a present value of $2.7 million. Id. The court noted that, on
Just as in Apex Automotive, the Second Romay State Court Litigation was at its very early stages and the claims were highly contested. The counterclaims against the Romay Parties also increased the likelihood that the Romay Parties would not prevail. Indeed, Mr. Ortega testified that he believed, right up to the April 2019 order, that his valuation would prevail.
The Court finds that Mr. Feltman‘s expert opinion is the more persuasive, and the only opinion that complies with the Eleventh Circuit criteria set forth in Advanced Telecommunication. Therefore, the Court holds that the appropriate value of the Romay Contingency on the Transfer Date was $3,600,000.00.
Based on the foregoing, the Court concludes that as of the Transfer Date, the total value of America CVSG‘s assets at issue in this case (the broadcast licenses and Pegaso “loan“) was at least $6,377,000.00 and the total value of liabilities at issue (the Romay Contingency) was $3,600,000.00.19 The parties agree that as of the Transfer Date, America CVSG also had $2.9 million in cash. Therefore, America CVSG was solvent with assets exceeding liabilities by at least $5.7 million as of the Transfer Date.20
C. America CVSG was not left with unreasonably small capital after the Transfer.
The Plaintiff argues that at the time of the Transfer, America CVSG was engaged in a business or transaction for which it was left with unreasonably small capital pursuant to
Whether a transfer or obligation leaves a debtor undercapitalized is a question of fact to be determined on a case-by-case basis. Smith v. Litchford & Christopher, P.A. (In re Bay Vista of Va., Inc.), 428 B.R. 197, 225-26 (Bankr. E.D. Va. 2010). Unreasonably small capital refers to the inability to generate sufficient profits to sustain operations. Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056, 1070 (3d Cir. 1992). “Because an inability to generate enough cash flow to sustain operations must precede an inability to pay obligations as they become due, unreasonably small capital would seem to encompass financial difficulties short of equitable [in]solvency.” Id. “[T]he ‘unreasonably small capital’ test of financial condition is ‘aimed at transferees that leave the transferor technically solvent but doomed to fail.‘” Kipperman v. Onex Corp., 411 B.R. 805, 836 (N.D. Ga. 2009) (citations omitted). In determining whether a debtor was left with unreasonably small assets, the Court often is called upon to review a
debtor‘s historic and contemporaneous business activities, relevant market data, the ebb and flow of income and expense over time, the availability of additional capital or lines of credit, the prospect for new business, and a variety of inter-related issues that affect whether the enterprise will continue.
The Court finds that America CVSG was not left with unreasonably small capital, but remained viable for a full year after the Transfer Date. America CVSG was a holding company, not an operating company. Its function was to hold the broadcast licenses and receive payment for their use. America CVSG had more than sufficient capital and cash to engage in its normal business operations. America CVSG had no debt owed to unaffiliated, unrelated entities. It had no lines of credit, no mortgage loans, and no business loans to be paid. Its normal “operating” expenses were minimal, and it carried sufficient cash to actually pay all expenses as they became due, and it did so. There was no evidence at Trial of any debts that were unpaid, during the year after the Transfer Date. Where a company, like America CVSG, survives for an extended period of time after the subject transaction, courts will not find that the company had unreasonably low capital. See Burtch v. Opus LLC (In re Opus E. LLC), 698 Fed. Appx. 711, 715 (3d Cir. 2017).
D. The Plaintiff did not meet his burden of proving that America CVSG intended, or believed, that it would incur debts beyond its ability to repay.
The Plaintiff argues that even if America CVSG was not actually insolvent or rendered insolvent as a result of the Transfer, it was equitably insolvent for fraudulent transfer purposes pursuant to
There was no evidence of any intent or belief that America CVSG would incur debts beyond its ability to repay. America CVSG did not take on any new debt as part of the Transfer and did not purposely intend to take on new debt. America CVSG had no debt and no plan nor need for debt to carry on its business as a license holding company, as part of the overall Broadcast Businesses. The Plaintiff argues that America CVSG could not have reasonably believed it would be able to pay its debts as they matured when, at the time of the Transfer, the claims against America CVSG in the Second Romay State Court Litigation were pending. However, as discussed above, the Second Romay State Court Litigation was highly disputed and not certain, and certainly not imminent. In fact, America CVSG‘s accountants specifically determined there was no need for a disclosure of the potential claim.
As to intent, America CVSG took a number of steps to provide for the repayment of potential future debts, including the Romay Contingency. Although there was no formal reserve in America CVSG‘s books, America CVSG established and held an
The Court concludes that while America CVSG did not receive reasonably equivalent value for the Transfer, because America CVSG was solvent, was not left with unreasonably small capital, and was not unable to pay debts as they became due as of the Transfer Date, the Plaintiff failed to meet his burden to prove by a preponderance of the evidence that the Transfer was constructively fraudulent.
Actual Fraud
Notwithstanding that America CVSG is solvent, the Plaintiff also argues that the Transfer is recoverable because he has established all the elements of his claim that the Transfer was made with actual fraudulent intent, that is, that the Transfer was made with actual intent to hinder, delay, or defraud creditors.
It is the Plaintiff‘s burden to prove, by a preponderance of the evidence, that “the Debtor made the transfer or incurred the obligation with the actual intent of hindering, delaying, or defrauding a creditor.” Whitaker v. Volvo Commercial Finance, LLC (In re Gulf Northern Transport, Inc.), 323 B.R. 786, 791 (Bankr. M.D. Fla. 2005). The focus is on the fraudulent intent of the Debtor, not the fraudulent intent of the recipient. See Silverman v. Actrade Capital, Inc. (In re Actrade Fin. Techs. Ltd.), 337 B.R. 791, 808 (Bankr. S.D.N.Y. 2005).21
Because determining actual intent can be difficult, the party seeking to establish actual fraudulent intent can rely on badges of fraud. See Dionne v. Keating (In re XYZ Options, Inc.), 154 F.3d 1262, 1271 (11th Cir. 1998). The Eleventh Circuit‘s non-exclusive list of badges of fraud include:
- The transfer was to an insider;
- The debtor retained possession or control of the property transferred after the transfer;
- The transfer was disclosed or concealed;
- Before the transfer was made the debtor had been sued or threatened with suit;
- The transfer was of substantially all the debtor‘s assets;
- The debtor absconded;
- The debtor removed or concealed assets;
- The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred;
- The debtor was insolvent or became insolvent shortly after the transfer was made;
- The transfer occurred shortly before or shortly after a substantial debt was incurred; and
- The debtor transferred the essential assets of the business to a lienor who
transferred the assets to an insider of the debtor.
The Eleventh Circuit noted that, “[a]lthough the presence of one specific ‘badge’ will not be sufficient to establish fraudulent intent, the ‘confluence of several can constitute conclusive evidence of an actual intent to defraud.‘” Id. at 1271 n.17 (internal citations omitted).
Acknowledging that there is no direct proof of actual fraudulent intent, the Plaintiff points to several badges of fraud, only two of which give the Court pause – a WhatsApp conversation that took place on April 4, 2018 between Marcell Felipe and Fernando Calles, and testimony regarding discussions about using the America CVSG money to pay Grupo Colte‘s obligation to Mediaset that occurred about three weeks later, at the time of the Transfer.
On April 4, 2018, Mr. Felipe and Mr. Calles had an extensive WhatsApp discussion about how to protect the assets of, it appears, America CVSG from any creditors who, based on the WhatsApp conversation, would be seeking to collect a judgment.22 In a lengthy exchange, Mr. Felipe explains how the transfer of funds, which would be used to purchase the assets of America-CV Network, would be “asset protection” and “we get protection against creditors in general“.23 This discussion clearly contemplates that the funds invested in America-CV Network could then be used by America-CV Network to send to Pegaso for the purchase of the Mediaset Shares. When Mr. Calles questioned the proposed structure – “if an act similar to the one you point out is done, it would be considered what is called an Act in Creditor Fraud, since it is an act that places you in insolvency“, Mr. Felipe responded “In this case, the fraudulent conveyance doesn‘t apply because you will not become insolvent. You have an asset that is the ownership percentage in the LLC.”
Of course, ultimately there was no “purchase” or “investment” by America CVSG in America-CV Network. Mr. Salas testified that Mr. Vasallo instructed him to wire the funds from America CVSG to Mediaset, and he did so. Mr. Salas testified that Mr. Vasallo told Mr. Salas it was a loan and so that is how it was listed. However, Mr. Salas also acknowledged an email from the accountant for the Broadcast Businesses, Mr. Pastor, in which Mr. Pastor advised that, for tax purposes, his tax department advised that the $10,000,000.00 should be treated as a loan to Pegaso from Caribevision rather than a dividend, because any dividend would require a distribution to the Romay Parties as well (since at the time the Romay Parties still held interests in America CVSG). Mr. Felipe testified at Trial that the booking of the Transfer as a loan was used as a placeholder while negotiations between the shareholders of Caribevision on how to allocate their interests were ongoing.
Although after the Transfer America CVSG continued in its business until the bankruptcy cases were filed, Mr. Felipe acknowledged that once the Transfer occurred, America CVSG did not have enough money to pay the Romay Parties a $5 million settlement. Mr. Felipe also acknowledged
Mediaset argues that the evidence at Trial makes clear that America CVSG and its agents believed that there were sufficient assets to pay the Romay Contingency (at least in the amount they estimated was at risk) after the Transfer, including approximately $2.9 million in cash, the value of the Puerto Rico stations (albeit subject to the acknowledged claims to the latter by the Romay Parties), as well as the assets of other defendants in the Second Romay State Court Litigation.24 Indeed, when questioned about the WhatsApp conversation and in connection with his question in that conversation about a fraudulent transfer, Mr. Calles testified “to be a fraudulent transfer is when you become insolvent, and here clearly the company was not insolvent, in the sense that it had the licenses, the building, equipment, et cetera, et cetera, et cetera, all of those assets right there. So just because of that reason the company had value. . . So none of these transactions, even if you take out all of the, all of the money or cash, which was not taken out of it, but if you take out the cash of the company, you still had in the company all of these other assets, which had a lot of value.”
Mediaset also argues that there is no evidence that the Transfer was made for the purpose of making it more difficult for the Romay Parties to collect any ultimate judgment they might obtain, even though that might be the effect. But Mr. Felipe‘s statement in the WhatsApp conversation directly contradicts that argument; there is no question that Mr. Felipe recognized, and shared with Mr. Calles, that transferring the cash in America CVSG into another type of tangible asset would make it more difficult to collect by a creditor.25
In reviewing the totality of the circumstances surrounding the Transfer, including consideration of the non-exclusive list of the badges of fraud outlined by the Eleventh Circuit in XYZ Options, the Court finds that the Plaintiff has not satisfied his burden of proof to demonstrate there was an actual intent to defraud creditors at the time of the Transfer.
There is no question that at the time of the Transfer America CVSG had been threatened with a lawsuit, indeed, it (along with other defendants) had already been sued and the Second Romay State Court Litigation was pending. There is also no question that, while Mediaset‘s sale of its Shares in Pegaso pre-dated the Transfer, the Transfer was being considered in connection with that sale. Finally, there is no question that the intent of the Transfer was to make it harder for creditors to collect any judgment against America CVSG. However, there is also no question that the Transfer was not the only source of payment for any potential judgment that the Romay Parties might obtain in the Second Romay State Court Litigation, at least in the amount that the Caribevision Defendants estimated at that time. The Second Romay State Court Litigation, as well as the Romay Claim filed by the Romay Parties in the bankruptcy cases, asserted claims, jointly and severally,
While the Court has already found that America CVSG did not receive reasonably equivalent value for the Transfer, the Court has also determined America CVSG was solvent at the time of the Transfer, that America CVSG did not become insolvent shortly after the Transfer was made, and that the Transfer did not leave America CVSG with unreasonably small capital to pay its obligations. The Transfer was not a transfer of substantially all of America CVSG‘s assets – it still owned five broadcast stations at the time of the Transfer, the values of which have already been addressed in this opinion, and held $2.9 million in cash. Moreover, the Court finds that the Transfer was not to an insider of America CVSG. The Bankruptcy Code defines “insider” in
The other “badges” on which the Plaintiff relies all occurred at or near the time of the bankruptcy petitions being filed, a time in which all potential fraudulent transfers are being considered. Regardless of this Court‘s ruling, there is no question that the Transfer is one that the Debtor‘s and Affiliated Debtors’ attorneys would have looked at at the time of filing. Moreover, the evidence (letters, billing entries, and emails) is, at best, ambiguous with respect to whether the Transfer was the focus of the discussions or emails, or was just one of several possible sources of Chapter V recoveries considered with counsel.
The evidence does not support a finding of actual intent to hinder, delay or defraud a creditor. The only “badge” of fraud this Court finds to be present is that the movement of cash out of America CVSG, however it was accomplished, was being considered as a way to make collection of any debt of America CVSG more challenging. But the presence of that one “badge” does not satisfy the Eleventh Circuit test for finding actual intent. Accordingly, Plaintiff did not meet his burden of demonstrating the Transfer was actually fraudulent by a preponderance of the evidence.
Recovery of Transfer
Because the Plaintiff has failed to show that the Transfer was avoidable, the Plaintiff cannot recover the Transfer from Mediaset under
CONCLUSION
Based on the foregoing Findings of Fact and Conclusions of Law, it is
ORDERED and ADJUDGED as follows:
- Defendant Mediaset is entitled to judgment in its favor as to all three counts of the Adversary Complaint (ECF #1).
- Defendant‘s counsel shall upload for entry a separate final judgment consistent with this memorandum opinion pursuant to
Rule 9021 of the Federal Rules of Bankruptcy Procedure . -
The Court reserves jurisdiction to consider an application for attorneys’ fees and costs, if any.
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Copies to:
Patricia A. Redmond, Esq.
Monique D. Hayes, Esq.
Attorney Redmond is directed to serve a copy of this Order on interested parties who do not receive service by CM/ECF, and file a proof of such service within two (2) business days from entry of the Order.