DEVELOPMENT SPECIALISTS INC v. KAPLAN et al
DECISION AND ORDER ON BANKRUPTCY APPEAL re: 1 Bankruptcy Appeal; and 6 Bankruptcy Cross Appeal By JUDGE D. BROCK HORNBY. (jib)
UNITED STATES DISTRICT COURT
DISTRICT OF MAINE
DEVELOPMENT SPECIALISTS, INC.,
MICHAEL W. KAPLAN,
CIVIL NO. 1:16-CV-421-DBH
DECISION AND ORDER ON BANKRUPTCY APPEAL
This is an appeal under 28 U.S.C. § 158(a)(1) from the bankruptcy court’s
final judgment in an adversary proceeding.
That court found no fraudulent
debtor transfers and no breach of corporate directors’ duties.
argument on April 12, 2017, I now AFFIRM the bankruptcy court, although my
reasoning differs somewhat.
STANDARD OF REVIEW
The parties agree on the standard of review. Appellant’s Br. 6 (ECF No.
11); Appellees’ Br. 2 (ECF No. 15).
I accept the bankruptcy court’s factual
findings unless they are clearly erroneous.
I review the bankruptcy court’s
conclusions of law de novo. Fed. R. Bankr. P. 7052; Fed. R. Civ. P. 52; In re
Furlong, 660 F.3d 81, 86 (1st Cir. 2011).
FACTUAL AND PROCEDURAL BACKGROUND1
The plaintiff/appellant Development Specialists, Inc. is the liquidating
trustee for six related debtors in the leather business that entered chapter 11.2
The trustee seeks to avoid certain transfers by some of the debtors and to recover
damages from the former shareholders3 and directors4 of one of those debtors,
The trustee’s focus is a complex transaction that closed on
November 20, 2007 and a later 2010 release related to that transaction.
In 2007, like other U.S. companies in the leather tanning and finishing
industry, Prime Maine experienced profitability challenges.
Decision (Mem. of Dec.) 4 [App. 1329]. Meriturn Partners, LLC (Meriturn), a
private equity firm that specializes in restructurings and that had recently
acquired Irving Tanning, expressed an interested in Prime Maine, seeing an
opportunity to merge Prime Maine with Irving Tanning and gain access to
additional customers and markets. Id. at 6 [App. 1331]. Meriturn and Prime
I do not recount the record evidence in detail. The First Circuit’s analysis of any appeal will
focus directly on the bankruptcy court, not this court’s ruling. 28 U.S.C. § 158(d); In re
Simmons, 810 F.3d 852, 856–57 (1st Cir. 2016) (“We accord no special deference to
determinations made by the first-tier appellate tribunal but, rather, train the lens of our inquiry
directly on the bankruptcy court's decision.” (quoting Wheeling & Lake Erie Ry. Co. v. Keach (In
re Montreal, Me. & Atl. Ry., Ltd.), 799 F.3d 1, 5 (1st Cir.2015)).
2 The trustee was appointed in accordance with the Debtors’ First Amended Plan of
Reorganization Dated September 25, 2012, in the jointly administered chapter 11 case of six
related debtors: Irving Tanning Company (Irving Tanning), Prime Tanning Co., Inc. (Prime
Maine), Prime Tanning Corp. (Prime Missouri), Cudahy Tanning Company, Inc. (Cudahy), Wismo
Chemical Corp. (Wismo), and Prime Tanning Company, Inc. (Prime Delaware). The Plan was
confirmed on October 18, 2012. [App. 0102–113].
3 Michael W. Kaplan, M. Stephen Kaplan, Marjory A. Kaplan, the Glenyce S. Kaplan Lifetime
Trust-1994, the Prime Tanning Co., Inc. Voting Trust-1994, and the Estate of Leonard D. Kaplan.
4 Steven A. Goldberg, Glenyce S. Kaplan, Eliseo Pombo, Robert B. Moore, Michael Kaplan, and
5 Prime Maine operated a leather finishing operation in Berwick, Maine, and, through its wholly
owned subsidiary Prime Missouri, a leather tanning operation in St. Joseph, Missouri.
Memorandum of Decision (Mem. of Dec.) 3 [App. 1328].
Maine began negotiations and exchanged multiple letters of interest, culminating
in a May 31, 2007 letter that outlined a series of steps whereby Irving Tanning
and Prime Maine would come under the common ownership of a new holding
company, Prime Delaware.6 Am. Joint Stipulation of Undisputed Facts ¶¶ 27–
29 [App. 1143]. Prime Maine, Irving Tanning, and Prime Delaware then entered
into an August 15, 2007 Contribution Agreement, which was subsequently
amended on the closing date, November 20, 2007. Id. ¶¶ 30–34 [App. 1143–44].
In the end Meriturn contributed about $3 million while Irving Tanning, Prime
Delaware, Prime Maine, Prime Missouri, and Cudahy entered into substantial
lien-secured loan agreements with Wells Fargo, N.A. (Wells Fargo) to complete
the financing.7 At the closing, Irving Tanning, Prime Maine, and Cudahy all came
under the common ownership of Prime Delaware, and Prime Missouri remained
a wholly owned subsidiary of Prime Maine.8
At the closing, (1) Irving Tanning, Prime Delaware, Cudahy, Prime Maine,
and Prime Missouri executed a $1,860,000 term note, a $40,000,000 revolving
note, and a $25,000,000 revolving note, all payable to Wells Fargo,9 Mem. of Dec.
10 [App. 1335]; (2) the debtors actually borrowed from Wells Fargo $1,656,785
under the term note and $28,165,000 under the revolving notes, Am. Joint
6 Meriturn later chose to include the acquisition of Cudahy, a Wisconsin corporation, in the
transaction, so that Irving Tanning, Prime Maine, and Cudahy would all come under the common
ownership of Prime Delaware. Mem. of Dec. 9 [App. 1334].
7 Although the bankruptcy court did not make any findings as to Meriturn’s ultimate
contributions, its principal Mark Kehaya testified that Meriturn ended up investing $3 million in
the November 2007 transaction. Trial Tr. 862:1–7 [App. 2247].
8 Wismo seems to have remained a partly-owned subsidiary of Prime Missouri. See Mem. of Dec.
1–2 [App. 1326–27]; Am. Joint Stipulation of Undisputed Facts ¶ 7 [App. 1139].
9 The same companies also entered into an amended and restated credit and security agreement
with Wells Fargo, creating liens on their assets. Mem. of Dec. 10 [App. 1335].
Stipulation of Undisputed Facts ¶¶ 35–36 [App. 1141]; (3) Irving Tanning, Prime
Delaware, Prime Maine, Cudahy, and Prime Missouri directed Wells Fargo to pay
$10,629,459 in cash proceeds to Prime Maine’s shareholders (the shareholder
defendants) and $4 million in non-competition payments to Michael and Stephen
Kaplan10 (previously co-chairs of the Prime Maine and Prime Missouri boards);
(4) Prime Delaware delivered a $3,817,000 promissory note to the Prime Maine
shareholders; (5) Prime Delaware issued 40% of its shares to the Prime Maine
shareholders; (6) Prime Maine delivered the $9 million cash value of life
insurance policies to certain Prime Maine shareholders; and (7) Prime Delaware
entered into employment and non-competition agreements with Michael and
Stephen Kaplan. Mem. of Dec. 10–11 [App. 1335–36]; see supra note 10. Prime
Maine’s shareholders transferred all their shares, i.e., complete ownership of
Prime Maine and its subsidiary Prime Missouri, to Prime Delaware. Mem. of Dec.
8–9 [App. 1333–34]; Am. Joint Stipulation of Undisputed Facts ¶ 51 [App. 1147].
As a result, the Prime Maine shareholders collectively received in excess of
$23.6 million in exchange for their stock and agreements. Mem. of Dec. 14 [App.
1339]. The trustee claims that the November 20 transaction amounted to a
leveraged buyout (LBO), that the Prime Maine shareholders are responsible for
fraudulent transfers by Prime Delaware, Prime Maine, and Prime Missouri, and
that the directors of Prime Maine11 breached duties of loyalty and care to that
The $4 million in non-competition payments were owed to Michael and Stephen Kaplan as
part of the non-competition agreements, dated November 20, 2007. Am. Joint Stipulation of
Undisputed Facts ¶¶ 38, 51 [App. 1145, 1147].
11 The amended joint stipulation of undisputed facts notes that Michael Kaplan, Stephen Kaplan,
Steven Goldberg, and Robert Moore were directors of Prime Missouri as well as Prime Maine, but
the stipulation does not say that the trustee sued them in their capacity as directors of Prime
corporation.12 The shareholders and directors dispute the LBO characterization,
preferring to call the transaction a merger or roll-up,13 and assert that there were
no fraudulent transfers and no breaches of directors’ duties. After a 5-day bench
trial, the bankruptcy court filed a written opinion in favor of the shareholders
and directors, finding that the trustee had not met its burden on any of the
claims,14 and entered final judgment accordingly. The trustee has appealed.15
Maine has adopted the Uniform Fraudulent Transfer Act (UFTA), 14
M.R.S.A. § 3571.16 It permits a creditor to challenge transfers where there was
either actual or constructive intent to defraud. 14 M.R.S.A. § 3575.
Missouri. See Am. Joint Stipulation of Undisputed Facts ¶¶ 17, 18, 23, 26 [App. 1141–43]. The
adversary complaint names as the director defendants Steven Goldberg, Glenyce Kaplan, Eliseo
Pombo, Robert Moore, Michael Kaplan, and Stephen Kaplan, “in their capacity as the former
directors of Prime Maine.” Compl. 3 [App. 0116]. The bankruptcy court’s decision also refers to
the “director defendants” as “the former directors of Prime Maine: Michael Kaplan, Stephen
Kaplan, Glenyce Kaplan, Steven Goldberg, Eliseo Pombo, and Robert Moore.” Mem. of Dec. 2
12 The trustee also brings claims for actual and constructive fraudulent transfer regarding the
2010 Release, where the shareholder defendants were discharged from the types of claims
brought by the trustee in this adversary proceeding. Compl., Counts VII, VIII, IX, X, XI, XII [App.
0146–56]. For that release, the shareholder defendants relinquished all their shares of Prime
Delaware, cancelled Prime Delaware’s $3,817,000 promissory note, and released Prime Delaware
from its obligations under the non-competition and employment agreements with Michael and
Stephen Kaplan. Mem. of Dec. 11–12 [App. 1336–37].
13 Appellees’ Br. 22 n.12 (ECF No. 15).
14 In re Irving Tanning Co., 555 B.R. 70 (Bankr. D. Me. 2016); Mem. of Dec. [App. 1326–49].
15 The shareholders and directors cross-appealed the bankruptcy court’s post-trial ruling that
allowed the trustee to amend the complaint to conform to the evidence, thereby including the
cash value of certain life insurance policies in what Prime Maine transferred. Mem. of Dec. 13
n.5 [App. 1338]. Because I affirm the bankruptcy court’s decision on liability, I do not find it
necessary to address the cross-appeal. The bankruptcy court’s ruling would be reviewed for
abuse of discretion, Fed. R. Bankr. P. 7015; Fed. R. Civ. P. 15(b); Antilles Cement Corp. v.
Fortuno, 670 F.3d 310, 319 (1st Cir. 2012), a deferential standard of review.
16 The adversary complaint also seeks relief under 11 U.S.C. § 544(b), Compl. ¶ 5 [App. 0117],
but the parties have confined their arguments in the bankruptcy court and this court to Maine
Actual Fraud in November 2007 Transaction17
The trustee asserts actual fraud in the transfers made by Prime Maine and
Prime Missouri on November 20, 2007.18 According to Maine’s UFTA, a transfer
is fraudulent if the debtor “made the transfer or incurred the obligation . . . [w]ith
actual intent to . . . defraud any creditor of the debtor.”
The statute also lists eleven factors that “may be given”
consideration (along with other unidentified factors) in determining actual intent.
Id. § 3575(2).19 Maine’s Law Court has stated: “The court may consider factors
other than the [listed factors], and any combination of factors may support a
determination of actual intent.” FDIC v. Proia, 663 A.2d 1252, 1254 (Me. 1995).
The bankruptcy court in this case found that the shareholder defendants
did not engage in actual fraud. Mem. of Dec. 13–18 [App. 1338–43]. The trustee
correctly observes that the UFTA focuses not on the shareholders but on the
debtors, the corporations that made the transfers. But it was the trustee that,
in the relevant counts of the adversary complaint, focused on the noncorporate
defendants to make the case for actual fraud.20 That is understandable, because
the individuals’ intent could be attributed to the corporations. It would be a
Compl., Counts I, IV [App. 0138, 0142].
In its brief in this court, the trustee referred to Prime Delaware in place of Prime Missouri in
one of this argument’s subheadings, Appellant’s Br. 47 (ECF No. 11), but I confirmed at oral
argument that its argument of actual fraud applies to Prime Maine and Prime Missouri, and that
was the sole focus of the text of its brief, see id. at 43–50.
19 The bankruptcy court found that the trustee proved only two of these factors: that transfers
were made to insiders (the cash transfers and the life insurance proceeds were transferred to the
shareholder defendants), and the 2007 transaction involved the transfer of substantially all of
Prime Maine’s assets. Mem. of Dec. 16 [App. 1341].
20 See Compl. ¶ 126 (what shareholder defendants allegedly foresaw), ¶ 153 (same, but speaking
of the individual defendants generally), ¶ 122 (defendants were “insiders of Prime Maine”), ¶ 149
(same) [App. 0139, 0142–43].
pointless exercise to send the case back to the bankruptcy court now to ask for
findings about these two debtors (Prime Maine and Prime Missouri) as distinct
from the shareholders on this issue.21 And certainly on this record, an appellate
court is not in a position to find the contrary, i.e., actual intent on the part of the
debtors: that is for the factfinder.
According to Maine law, actual fraud under the UFTA must be proven by
clear and convincing evidence. Proia, 663 A.2d at 1254 n.2. I have read the trial
transcript and the relevant exhibits. Although there is room for a difference of
opinion over whose version of value in the transaction to believe, the bankruptcy
court’s factual findings that there was no actual fraud are not clearly erroneous.
Therefore its conclusions on those counts must stand.
Constructive Fraud in November 2007 Transaction22
The trustee asserts constructive fraud in the November 20 transfers made
by Prime Delaware, Prime Maine, and Prime Missouri. According to the statute,
a transfer is fraudulent under this prong of the UFTA if the debtor:
Neither side moved for additional findings under Federal Rule of Bankruptcy Procedure 7052
(applying Fed. R. Civ. P. 52 to adversary proceedings). “[W]hen a party fails to make a Rule 52(b)
motion [for additional findings], that party should not be precluded altogether from appeal, but
that party cannot challenge the specificity of the findings.” 9C Charles Alan Wright & Arthur R.
Miller, Federal Practice and Procedure § 2582 (4th ed. 2013). “Rule 52(b) represents the
principal, and preferred, mechanism for challenging the district court’s failure to find facts, as it
allows a court that has recently tried the case, rather than an appellate tribunal perusing a cold
record, to determine the propriety of considering those additional facts. . . . When a party
complains of incomplete findings of fact after neglecting to file a Rule 52(b) motion, remand is
appropriate only in cases where (1) the district court failed to make findings as to a certain fact
and (2) that fact is essential to the resolution of a material issue.” Ne. Drillling, Inc. v. Inner
Space Servs., Inc., 243 F.3d 25, 35 (1st Cir. 2001). In this case, the bankruptcy court is the trial
court, and I am serving as an intermediate appellate court.
22 Compl., Counts II, III, V, VI [App. 0140–41, 0143–45]. The trustee’s brief and its counsel’s
statement at oral argument confirm that the constructive fraud assertion lies against Prime
Delaware, Prime Maine, and Prime Missouri. See Appellant’s Br. 32–43 (ECF No. 11).
made the transfer or incurred the obligation . . . [w]ithout
receiving a reasonably equivalent value in exchange for the
transfer or obligation and the debtor:
(1) Was engaged or was about to engage in a business or
a transaction for which the remaining assets of the debtor
were unreasonably small in relation to the business or
(2) Intended to incur, or believed or reasonably should
have believed that he would incur, debts beyond his ability
to pay as the debts became due.
Id. § 3575(1)(B). The cases and the commentators call this constructive fraud.
Applying a preponderance of the evidence standard,23 the bankruptcy
court found that the trustee did not satisfy the first, underlying, element
(“without receiving a reasonably equivalent value in exchange for the transfer”)
because Prime Delaware did receive reasonably equivalent value in exchange for
the transaction with Prime Maine’s shareholders.24 This finding lies at the heart
shareholders/directors resist the LBO label because it generally intensifies the
scrutiny of a transaction.25
The trustee argues that once the LBO label is
applied, the “reasonably equivalent value in exchange” element of the fraudulent
transfer statute can almost never be satisfied.26 In its decision, the bankruptcy
The burden of proof for constructive fraudulent transfer under Maine’s UFTA is in doubt. In
a case raising issues of both actual and constructive fraudulent transfers, the Maine Law Court
declared that “[o]ne who challenges the validity of a transfer must prove that the conveyance was
fraudulent by clear and convincing evidence.” Morin v. Dubois, 1998 ME 160, ¶ 3, 713 A.2d 956
(citing FDIC v. Proia, 663 A.2d 1252, 1254 n.2 (Me.1995)). The Law Court did not suggest that
constructive fraud involves a different burden of proof. Morin, 1998 ME 160, ¶ 8, 713 A.2d 956.
The First Circuit has used the preponderance of the evidence standard for constructive fraud
under New Hampshire’s UFTA, but there were no New Hampshire cases interpreting the statute.
In re Jackson, 459 F.3d 117, 122–23 (1st Cir. 2006). (The stricter standard of clear and
convincing evidence would be even less favorable to the trustee.).
24 Mem. of Dec. 19–23 [App. 1344–48].
25 “[F]ailed leveraged buyouts merit close scrutiny under the fraudulent conveyance laws.”
Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056, 1073 (3d Cir. 1992).
26 Appellant’s Br. 33–34 (ECF No. 11); accord 4 William L. Norton, Norton Bankruptcy Law and
Practice § 68:8 (3d ed. 2008) (because “courts have almost uniformly held that it is generally
appropriate to collapse the separate, preplanned steps (loan—use of proceeds to pay
court did not refer to the 2007 transaction as an LBO, calling it a “merger” and
calling Prime Delaware “the resulting business” in light of testimony from
Stephen Kaplan, Michael Kaplan, Moore, Goldberg, and Pombo. Mem. of Dec.
17 [App. 1342]. I respect the bankruptcy court’s decision not to accept or reject
the LBO label. Labelling too often is a substitute for analysis.27 In the end, the
bankruptcy court gave the transaction the scrutiny it deserved. Once again,
there is room for a difference of opinion on whether fair value was exchanged
between the shareholders and Prime Delaware, but the bankruptcy court’s
factual finding28 that the exchange was fair is not clearly erroneous.29
shareholders—commitment of target’s credit and/or pledge of its assets) . . . . almost
invariably . . . an LBO does not result in fair consideration to the target (from the standpoint of
the target's creditors) with respect to the loan proceeds paid to its shareholders in an LBO”);
Angelo Guisado, Revisiting the Leveraged Buyout: Is Constructive Fraud Going Too Far?, 46 J.
Marshall L. Rev. 429, 441 (2013) (“It is doubtful, however, that any LBO can meet the fair
consideration standard.”); Laura Femino, Note, Ex Ante Review of Leveraged Buyouts, 123 Yale
L.J. 1830, 1837–38 (2014) (“While some courts have recognized that an LBO may give the target
reasonably equivalent value in the form of indirect benefits, such as ‘the ability to obtain
substantial credit’ or ‘the synergy expected to result from the combination,’ such a finding is the
exception and not the rule; courts generally agree that the transfer of a lien in an LBO gives the
target no reasonably equivalent value. For this reason, an LBO will nearly always satisfy this
first prong of the constructive fraudulent transfer definition.”).
27 So far as labels go, the transaction here seems to have been both an LBO and a roll-up. All
the companies ended up owned by the new holding company Prime Delaware, evidence of a rollup. As for the LBO characterization, “[t]he effect of an LBO is that a corporation’s shareholders
are replaced by secured creditors. Put simply, stockholders’ equity is supplanted by corporate
debt.” Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 645 (3d Cir. 1991). That
is what happened here as a result of the shareholder payout with proceeds from the Wells Fargo
28 “Whether fair consideration has been provided is a question of fact.” 4 William L. Norton,
Norton Bankruptcy Law and Practice § 68:4 (3d ed. 2008); see also 5-548 Collier on Bankruptcy
¶ 548.05 (16th ed. 2010) (“Once a court determines value given and received, what remains is a
comparison of the two. ‘The test used to determine reasonably equivalent value in the context
of a fraudulent conveyance requires the court to determine the value of what was transferred
and to compare it to what was received.’ The exchange need not be strictly equivalent.” (quoting
Barber v. Golden Seed Co., 129 F.3d 382, 387 (7th Cir. 1997))).
29 The trustee does not dispute the bankruptcy court’s calculation of the cash transfers, i.e.,
(i) $10,629,459 cash consideration to the Shareholder Defendants, (ii) $4 million in noncompetition payments to Michael and Stephen Kaplan, and (iii) $9 million in life insurance value
to Michael, Stephen, and Marjory Kaplan and the Estate of Leonard Kaplan. The trustee does,
however, claim that the bankruptcy court failed to include: (a) the $3,817,000 shareholder note
issued by Prime Delaware, and (b) the 40,000 shares of Prime Delaware stock, which Carl
Jenkins, the appellees’ expert witness, valued at $251.49 per share, for a total of $10,059,600.
The trustee correctly points out that the bankruptcy court’s opinion
focuses on the value of what the shareholders received, and what they
transferred in exchange for it, Mem. of Dec. 19–23 [App. 1344–48], not on the
value of what any or all of the debtors transferred, the focus of the statutory
language. If Prime Delaware is the debtor in question, however, the bankruptcy
court’s findings certainly suffice to show a fair value exchange.30
But the bankruptcy court did not separately address what Prime Maine
and Prime Missouri each transferred or gave up and what, if anything, each of
them received in exchange.31
Instead, the bankruptcy court addressed the
transfers in their entirety:
But even with these additions, the value of Prime Maine stock as found by the bankruptcy court
exceeded the total transferred to the shareholders. See Mem. of Dec. 20–22 [App. 1345–47].
Based upon his review of Prime Maine’s closing balance sheet, which showed a total equity of
$44.2 million (total assets of $67.4 million minus total liabilities of $23.2 million), Jenkins
concluded that the shareholder defendants were not overpaid for their shares of Prime Maine.
Expert Report of Carl F. Jenkins ¶¶ 43–45 [App. 3716–17]. Thus, the trustee has not
demonstrated that the bankruptcy court clearly erred in finding that the shareholder defendants
exchanged reasonably equivalent value with Prime Delaware.
30 The trustee also argues that the bankruptcy court clearly erred in finding reasonably
equivalent value by relying on the post-closing consolidated tax returns for Prime Delaware and
its subsidiaries. Appellant’s Reply Br. 14–15 (ECF No. 18). The bankruptcy court determined
that Grover Elliott, the debtors’ Responsible Officer and former Vice President of Finance and
CFO, “conceded” that the $46 million on Prime Delaware’s tax return “was accurate and
represented the retained earnings figure for Prime Maine and Prime Missouri and did not include
any values for the retained earnings for Irving Tanning or Cudahy.” Mem. of Dec. 21–22 [App.
1346–47]. Elliott’s testimony, however, was that the $46 million included Prime Maine, Prime
Missouri, Irving Tanning, and Cudahy. Trial Tr. 1040:2–17 [App. 2427]. But even if the
bankruptcy court erred in its interpretation of Elliott’s testimony regarding the $46 million figure
on the tax return, the court still properly credited the consolidated balance sheets for Prime
Maine and Prime Missouri, see Defs.’ Trial Ex. 40, 41 [Supp. App. 5927–29], that reported total
equity greater than $44 million as of the closing date, see Mem. of Dec. 22 [App. 1347]; see also
Expert Report of Carl F. Jenkins ¶¶ 43–45 [App. 3716–17]. These figures support the bankruptcy
court’s finding that the value of Prime Maine was reasonably equivalent to the consideration the
shareholder defendants received. Mem. of Dec. 22–23 [App. 1347–48].
31 The trustee’s post-trial brief in the bankruptcy court demanded such a focus. Pl.’s Post-Trial
Br. 3, 4, 11–13 [App. 1152, 1153, 1160–62]. The trustee also argued that in this case there were
no indirect benefits or synergies for the debtors. Pl.’s Post-Trial Br. 11-13 [App. 1160–62]. The
shareholder defendants, on the other hand, argued that the bankruptcy court should consider
indirect benefits, namely the “benefit of synergistic efforts” and Stephen Kaplan’s testimony
There is no dispute that in consideration of the transfer of
100% of the shares of Prime Maine, the Shareholder
Defendants received approximately $23.6 million at the
closing in the form of the Cash Proceeds ($14.6 million) and
the Insurance Proceeds [actually cash value] (approximately
$9 million), and 40% of Prime Delaware.
Mem. of Dec. 20 [App. 1345].
The shareholders argue that it was sufficient for the bankruptcy court to
focus on Prime Delaware because these transfers collectively amounted to a “rollup.”32
But the trustee argues that the bankruptcy court had to assess the
transfers from each debtor separately.33
As part of the November 20, 2007
closing, Prime Delaware, Prime Maine, and Prime Missouri all signed notes to
Wells Fargo, and each gave the bank a security interest in its respective assets.34
Then all three directed Wells Fargo to pay the shareholder defendants
$10,629,459 and Michael and Stephen Kaplan $4 million in non-competition
payments under the line of credit. Mem. of Dec. 10–11 [App. 1335–36]. But the
“exchange” from the shareholders—all their stock in Prime Maine—went only to
discussing “the intangible assets and goodwill” of Prime Maine. Defs.’ Post-Trial Br. 7–8 [App.
32 They contend that the 2007 transaction “was not a leveraged buyout but instead a merger or
roll-up of companies.” Appellees’ Br. 22 n.12 (ECF No. 15). The bankruptcy court treated the
2007 transaction as a “merger.” Mem. of Dec. 17 [App. 1342].
33 See supra note 31.
34 The Maine UFTA defines “transfer” as including “creation of a lien or other encumbrance.” 14
M.R.S.A. § 3572(12). The UFTA defines “lien” as “a charge against or an interest in property to
secure payment of a debt or performance of an obligation, and includes a security interest created
by agreement, a judicial lien obtained by legal or equitable process or proceedings, a common
law lien or a statutory lien.” Id. § 3572(8).
35 Previous Maine bankruptcy court cases have discussed how the analysis applies when there
are parents and subsidiaries and issues of indirect benefit and/or synergies. E.g., In re Marquis
Prods, Inc., 150 B.R. 487, 491 (D. Me. 1993); see also 4 William L. Norton, Norton Bankruptcy
Law and Practice § 68:4 (3d ed. 2008) (“Indirect economic benefits or intangibles may be
considered in determining value. For instance, LBO targets may be able to argue that as a result
of an LBO with another strategic corporate entity, the target’s new consolidated corporate group
creates synergies that arguably provide reasonably equivalent value if the LBO is challenged as
Appellate review might have been more straightforward if the bankruptcy
court, in the precise context of assessing reasonably equivalent value for
constructive fraud purposes, had focused on the individual debtors, their
transfers, and the resulting benefits (direct, indirect, and/or synergy) expressly;
or, alternatively, had explained why it concluded that such individual attention
to each debtor was not required. Since I am not the factfinder, I cannot decide
the factual issue of whether these two companies, Prime Maine and Prime
Missouri, each received a fair return in exchange36 as, for example, by access to
a new and different line of credit37 or other indirect benefits, or whether that
individual attention was unnecessary. What I do observe is that the bankruptcy
a fraudulent conveyance.”); Irina Fox, “Reasonably Equivalent Value” in § 548 Avoidance Actions:
An Analytical Framework Post-In re Tousa, Inc., 20 J. Bankr. L. & Prac. 4 art. 2, at 20–21 (2011)
(“Even indirect benefits to the debtor-transferor may constitute reasonably equivalent value if
direct benefits accrue to ‘the transferor’s solvent subsidiary, the transferor’s alter ego, an entity
with which the transferor shares “community of interests,” an entity upon which the transferor’s
business relies, and in a situation where the indirect effect of the transfer enables the transferor
to accomplish a specific objective.’” (quoting 4 William L. Norton, Norton Bankruptcy Law and
Practice § 67:4 (3d ed. 2008))).
36 The treatises acknowledge that the precise value of debtor obligations is difficult to measure
in determining “reasonably equivalent value,” and, particularly in the LBO context, refer to the
inclusion of indirect benefits. Norton states:
Value for fraudulent conveyance purposes is not the proverbial “peppercorn” that
may suffice under contract law. Rather, value for purposes of determining fair
consideration under fraudulent conveyance laws is measured in terms of
economic value from the perspective of third-party creditors. Since the proceeds
of an LBO debt are used to pay off the selling owners and do not flow into the
target or pay off legitimate debts of the target, other creditors of the target may
contend that the target has not received fair consideration for the LBO debt
incurred to finance the transaction. Indirect economic benefits or intangibles may
be considered in determining value.
4 William L. Norton, Norton Bankruptcy Law and Practice § 68:4 (3d ed. 2008). Collier states
that “transfers, either in the nature of liens or of funds, among subsidiaries of a common parent
may be lacking reasonably equivalent value if there is no pre-existing debt owed by the transferor
to the transferee.” 5-548 Collier on Bankruptcy ¶ 548.05 (16th ed. 2010). Collier adds that in
LBOs, the “value typically isn’t direct,” and the inquiry focuses “on the indirect benefits of the
37 Earlier in its opinion, the bankruptcy court referred to a pre-closing finding by Prime Maine’s
management advisory and financial services firm that Prime Maine “should be cautious regarding
the fragility of its banking relationship with” its then lender. Mem. of Dec. 5 [App. 1330].
court did find synergy and indirect benefits in the transaction, albeit in a
different portion of its decision, when it assessed reasonably equivalent value
while dealing with actual fraud.38 There, it rejected the trustee’s argument that
the trustee had established that “the value of the consideration received by the
debtor was [not] reasonably equivalent to the value of the asset transferred or
the amount of the obligation incurred,” 14 M.R.S.A. § 3575(2)(H) (a statutorily
listed indicium of fraud). The bankruptcy court pointed first to the analysis of
exchange value that came in its later Section IV.B of the decision involving
constructive fraud, Mem. of Dec. 19–23 [App. 1344–48], but then proceeded to
recount the evidence showing that the participants all expected success from the
As I have said before, see supra note 21, no party asked for additional findings under Rule
7052. Assessing indirect benefits can be a complex determination. 5-548 Collier on Bankruptcy
¶ 548.05 n.50 (16th ed. 2010) (“The benefits of such transactions are notoriously difficult to
quantify.”). Here, for example, looking at each debtor separately for what each transferred, how
was the bankruptcy court to allocate the obligation and the security interest that all three
Debtors joined in favor of Wells Fargo, or the joint drawdown on the line of credit at the closing?
The bankruptcy court noted the loan agreements between the debtors and Wells Fargo and found
that at the time of the 2007 transaction, the debtors actually borrowed $1,656,785 under the
term note and $28,165,000 under the revolving notes. Mem. of Dec. 10 [App. 1335]. But the
bankruptcy court did not specifically consider the value of the liens themselves in determining
reasonably equivalent value. And in looking at the other side of the equation, the value each
received, the bankruptcy court of this District recognized in 1993 that
value may arrive in the transferor’s hand indirectly, via the original recipient.
Alternatively, circumstances may exist that require the court to ignore formal
distinctions between the transferor and the third party, so that, despite the labels
employed, the consideration for the transfer has been bestowed “directly” on the
transferor. . . . Particularly in transactions that involve affiliated corporations, it
may be the case that consideration given to one of the affiliates in return for the
transfer of an interest of another, redounds sufficiently to the benefit of the
transferor as to constitute reasonably equivalent value. . . . Or, in the classic
case, a subsidiary receives an indirect benefit where its upstream guarantee
enables its parent to procure a loan and, thus, to provide funds to the subsidiary.
In re Marquis Products, Inc., 150 B.R. 487, 491 (D. Me. 1993) (citing among other sources,
Telefest, Inc. v. VU-TV, Inc., 591 F. Supp. 1368, 1379 (D.N.J. 1984) (“Where there are indicia of
a bona fide financing arrangement, not designed as a shield against other creditors, the lack of
perceptible ‘direct’ benefit to a subsidiary guaranteeing the loan of its parent should not be
viewed as tantamount to a lack of ‘fair consideration’ under the UFCA. Indirect benefit provides
the necessary ‘fair consideration’.”)). Thus, it may have been defensible here to treat the three
debtors together, not separately, in evaluating the transfers.
November 2007 transaction.
The bankruptcy court found that “[directors]
Stephen Kaplan, Michael Kaplan, Mr. Moore, Mr. Goldberg, and Mr. Pombo all
testified that the merger had the potential to create efficiencies, expand markets,
lessen costs and allow the Kaplan family to continue its connection with the
Prime brand into another generation.”
Mem. of Dec. 17 [App. 1342].
apparent that the bankruptcy court believed that this “synergy” was important39
because, in a footnote to its statement in text that the parties expected success
in the resulting business, it quoted a Third Circuit case for the proposition that:
[T]he mere expectation that the fusion of two companies
would produce a strong synergy (an expectation that turned
out to be inaccurate in hindsight) would suffice to confer
“value” so long as the expectation was “legitimate and
reasonable.” . . . Thus, so long as there is some chance that
a contemplated investment will generate a positive return at
the time of the disputed transfer, we will find that value has
Mem. of Dec. 17 n.6 (quoting Mellon Bank, N.A. v. Official Comm. of Unsecured
Creditors of R.M.L., Inc. (In re R.M.L., Inc.), 92 F.3d 139, 152 (3d Cir. 1996))
[App. 1342].40 Thus, I conclude that the bankruptcy court, although it did not
look at each debtor individually, did consider synergy and indirect benefits in its
assessment of value exchanged.
In any event, the bankruptcy court made other findings that lead me to
affirm its decision that constructive fraud did not occur even if the focus is on
transfers from Prime Maine and Prime Missouri. The bankruptcy court found
The trustee contended at oral argument before this Court that under the Maine statute,
projected synergy is not a factor, but there are no Law Court cases that so hold.
40 The bankruptcy court also quoted in text a portion of a Massachusetts bankruptcy case that
considered “both direct and indirect benefits.” Mem. of Dec. 20 (quoting In re Tri-Star Techs.
Co., Inc., 260 B.R. 319, 325–26 (Bankr. D. Mass. 2001)) [App. 1345].
that the trustee did not establish either of the other two elements of constructive
fraud, i.e., either unreasonably small resulting capitalization or inability to pay
debts as they came due.41 See 14 M.R.S.A. § 3575(1)(B)(1) & (2). In this instance
too, the bankruptcy court focused on Prime Delaware.
But as to these two
findings, the bankruptcy court’s ruling ineluctably flows over to Prime Maine and
Prime Missouri because, whatever label applies to the transaction, after the
closing Prime Delaware was the sole shareholder of Prime Maine, which was in
turn the sole shareholder of Prime Missouri; Prime Delaware was not an
operating company.42 There is no evidence in the record that would support a
finding of unreasonably small capitalization or inability to pay debts as to either
Prime Maine or Prime Missouri if in fact their corporate parent/grandparent
The bankruptcy court stated that the evidence:
support[ed] a finding that the Trustee was not able to satisfy the other elements
of constructive fraud claims because at the time of the closing, Prime Delaware
had sufficient assets in relation to the business [in which] it was engaged and the
Defendants were reasonable in their belief that following the closing Prime
Delaware would be able to pay its bills as they came due. Although at closing
there were deferred payments of $1 million and $4 million of outstanding checks,
the former occurred as Prime Delaware switched banks to Wells Fargo and the
latter was, as Mr. Arden testified, not unusual for a company of Prime Delaware’s
size. Further, Prime Delaware was able to pay its creditors as the bills came due
up through early to mid-2008 and for some courts, this alone would be sufficient
to conclude that the Trustee’s constructive fraud claims must fail. Although by
2009, Prime Delaware was unable to pay its vendors on a current basis and was
forced to convert $8.7 million in accounts payable to vendor notes payable, the
Trustee was not able to convincingly link those facts with the 2007 payments to
the Shareholder Defendants.
A more likely culprit was the unforeseen,
intervening, and devastating impact of the recession of late 2007 through 2009,
about which several Defendants testified and of which I can take judicial notice.
In re Irving Tanning Co., 555 B.R. 70, 85 n.11 (Bankr. D. Me. 2016) (citations omitted); Mem. of
Dec. 23 n.11 [App. 1348]. At oral argument, the trustee treated this footnote as not “actual
findings of fact,” but as I pointed out earlier, see supra note 21, the trustee did not request
additional findings, and I am satisfied that despite its location in a footnote and the language
“supports a finding,” it is in the end a finding of fact.
42 The parties stipulated that Prime Delaware was a holding company. Am. Joint Stipulation of
Undisputed Facts ¶ 5 [App. 1139]. The trustee also refers to it that way in its brief. Appellant’s
Br. 3 n.2 (ECF No. 11).
Prime Delaware was not subject to either of those taints as the bankruptcy court
Given my affirmance of the bankruptcy court’s rulings that the trustee has
no viable fraudulent transfer claims against the shareholders because it failed
to prove either actual or constructive fraud in the November 20, 2007
transaction, I find it unnecessary to assess the validity of the February 4, 2010
release of such claims against the shareholders.
The bankruptcy court ruled that because there were no fraudulent
transfers, the directors of Prime Maine breached no duty of loyalty or care in the
2007 transaction. Mem. of Dec. 24 [App. 1349]. I disagree with that reasoning.
The measure of a director’s duties of loyalty and care under the Maine Business
Corporation Act is not co-extensive with the measure of whether a transaction
the director approved amounts to a fraudulent transfer under Maine’s UFTA.46
The trustee points to evidence that the directors did not understand their duties
Again, I observe that the trustee did not request additional findings under Bankruptcy Rule
7052. See supra note 21. Moreover, the trustee’s lawyer at oral argument contended that “the
driver post-LBO transaction was Prime Maine and Prime Delaware,” that while the court must
look at each debtor individually, “the fortunes of one were the fortunes of all,” and that Prime
Delaware was “a holding company which essentially had no assets other than the stock of the
companies whose stock it owned.”
44 Compl., Counts VII, VIII, IX, X, XI, XII [App. 0146–56].
45 Compl., Counts XIII (duty of care) & XIV (duty of loyalty) [App. 0156–59].
46 The Maine Business Corporation Act (MBCA) imposes a fiduciary duty of care, providing that
a corporation’s directors, “when becoming informed in connection with their decision-making
function or devoting attention to their oversight function, shall discharge their duties with the
care that a person in a like position would reasonably believe appropriate under similar
circumstances.” 13-C M.R.S.A. § 831(2). The MBCA also imposes a fiduciary duty of good faith
and loyalty on members of a corporation’s board of directors, namely that the directors must act
“[i]n good faith,” 13-C M.R.S.A. § 831(1)(A), and “[i]n a manner the director reasonably believes
to be in the best interests of the corporation.” Id. § 831(1)(B).
under Maine corporate law, and that they relied almost entirely on the acquirer’s
due diligence for its side of the November 20, 2007 transaction and very little of
their own on the Prime Maine side.
But the trustee’s claims against the Prime Maine directors fail for a
different reason. At least while a corporation remains solvent, Maine law has
not recognized any directors’ duty to creditors. Tiernan v. Barresi, 944 F. Supp.
35, 37 (D. Me. 1996) (“It is clear under Maine law that a party who is not a
shareholder has no standing to litigate a breach of fiduciary duty claim against
The bankruptcy court found that Prime Maine was
solvent on November 20, 2007.48 That factual finding is not clearly erroneous,
and it disposes of the trustee’s claims on behalf of creditors. See James B.
Zimpritch, Maine Corporation Law and Practice § 8.7(b)(vi) (3d ed. 2015) (“As a
general rule, persons who are not shareholders of a solvent corporation,
including creditors, are owed no fiduciary duty by the corporation’s officers and
directors. . . . Cases from around the country are in accord that the directors of
a solvent corporation generally have no fiduciary duties to the corporation’s
Accord Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate
Directors 2068–81 (6th ed. 2009). There is also no Maine case holding that the directors of even
an insolvent corporation have a duty that creditors can reach, but other courts have so held.
E.g., N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007)
(when corporation is insolvent, creditors can assert derivative claims against directors but not
direct claims); Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 790–91 (Del. Ch. 2004)
(“uncontroversial” that directors of an insolvent corporation owe fiduciary duties to creditors).
See generally 1 R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corporations &
Business Organizations § 4.16[E] (3d ed. 1998); Radin, supra note 47, at 2081–91.
48 “[A]t the time of the closing, Prime Delaware had sufficient assets in relation to the business it
was engaged and the Defendants were reasonable in their belief that following the closing Prime
Delaware would be able to pay its bills as they came due.” Mem. of Dec. 23 n.11 [App. 1348].
See my reasoning above, supra 12–16, as to why the bankruptcy court’s finding on this element
as to Prime Delaware extends to Prime Maine and Prime Missouri.
It is true that directors of even a solvent corporation owe duties of loyalty
and care to the corporation itself and its shareholders, Tiernan, 944 F. Supp. at
37, duties that can be enforced through a derivative action49 and therefore by
the trustee for the debtors.50 But here all the shareholders approved what the
directors did (it was to the shareholders’ benefit51) and authorized the
transaction,52 and there can therefore be no derivative action. “It is settled law
that: ‘A corporation may ratify the unauthorized acts of its officers and directors,
if they are within the powers of the corporation. . . . This may be done by a vote
of the stockholders . . . .” Bates Street Shirt Co. v. Waite, 156 A. 293, 297 (Me.
1931) (quoting Camden Land Co. v. Lewis, 101 Me. 78, 63 A. 523, 532 (1905)).53
Zimpritch says that the reference to a director’s duty to “the corporation” in section 831(1)
uses “corporation as ‘a surrogate for the business enterprise as well as a frame of reference
encompassing the shareholder body,’” and that “[t]he duties may, in an appropriate case, be
enforced not only by shareholders directly (if the conduct challenged gives rise to a direct claim),
but also in the name of the corporation through a derivative action, or by a bankruptcy trustee
in the name of and on behalf of the corporate entity.” James B. Zimpritch, Maine Corporation
Law and Practice § 8.7(b)(vi) (3d ed. 2015) (quoting 2 Model Bus. Corp. Act Ann. § 8.30, Official
Comment, at 8-197).
50 The trustee here brings claims both as assignee of creditors and on behalf of the debtors and
their estates. Am. Joint Stipulation of Undisputed Facts ¶ 15 [App. 1141]; Compl. ¶ 24 [App.
51 The adversary complaint asserted that the shareholders were “insiders” and “negotiated [the]
transaction.” Compl. ¶ 2 [App. 0116]. The trustee’s post-trial brief asserted that “the
Shareholder Defendants went ahead with the deal solely to extract the cash consideration
payable to them.” Pl.’s Post-Trial Br. 2 [App. 1151].
52 All of Prime Maine’s shareholders approved the August 15, 2007 Contribution Agreement and
the November 20, 2007 amendment, which authorized the shareholder defendants to receive, in
exchange for the shares of Prime Maine, $10,629,459 in cash proceeds (plus $4 million in noncompetition payments to Michael and Stephen Kaplan); the $9 million cash value of life insurance
policies; the $3,817,000 promissory note; and 40% of Prime Delaware shares. Mem. of Dec. 8–
11 [App. 1333–36]; Pl.’s Trial Ex. 53 [App. 2791–3018]; Pl.’s Trial Ex. 124 [App. 3396–401].
53 The trustee argues from In re Healthco International, Inc., 208 B.R. 288 (Bankr. D. Mass.
1997), that the directors had a duty to Prime Maine that the trustee inherited notwithstanding
the unanimous shareholder approval of the November 20, 2007 transaction. See Appellant’s Br.
51 (ECF No. 11). Healthco involved Delaware, not Maine, law. In denying summary judgment
to the directors in Healthco, the bankruptcy court said:
Normally, what is good for a corporation’s stockholders is good for the corporation.
But that was hardly true here if the Trustee establishes the LBO left Healthco
insolvent or with unreasonably small capital. When a transaction renders a
corporation insolvent, or brings it to the brink of insolvency, the rights of creditors
Bankruptcy Code Section 546(e)
Like the bankruptcy court, I find it unnecessary to resolve the 11 U.S.C.
§ 546(e) safe harbor provisions,54 given the outcome of no liability.
I therefore AFFIRM the judgment of the bankruptcy court.55
DATED THIS 26TH DAY OF APRIL, 2017
/S/D. BROCK HORNBY
D. BROCK HORNBY
UNITED STATES DISTRICT JUDGE
become paramount. In those circumstances, notwithstanding shareholder consent,
a representative of the corporation may recover damage from the defaulting
208 B.R. at 300 (emphasis added) (citations omitted). In the case before me, however, the
bankruptcy court found that the trustee did not establish that the November 20, 2007
transaction left the debtors insolvent or well on their way to insolvency. Mem. of Dec. 16 [App.
1341]. For an extensive description of Healthco, including the ultimate jury verdict in favor of
the directors, see Radin, supra note 47, at 2136–49.
54 Mem. of Dec. 13 n.4 [App. 1338].
55 If the First Circuit disagrees, presumably the result will be a remand to the bankruptcy court
for additional findings of fact. The existing findings are not clearly erroneous, although they may
be insufficient. But given the factfinder’s role in determining the credibility and persuasiveness
of witnesses (for example, the transcript and the written decision both demonstrate the
bankruptcy judge’s skepticism of the trustee’s primary witness, Grover Elliott), a reviewing court
cannot determine that this record requires judgment for the trustee. See Morin v. Dubois, 1998
ME 160, ¶ 3, 713 A.2d 956 (Me. 1998) (in a Maine UFTA case, “[w]e will not overturn a finding
for the defendant unless the evidence also compels a finding in the plaintiff’s favor”).
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