IN RE: IRVING TANNING COMPANY; PRIME TANNING CO., INC.; PRIME TANNING CORP.; CUDAHY TANNING CO., INC.; WISMO CHEMICAL CORP.; PRIME TANNING COMPANY, INC. Debtors.
MICHAEL W. KAPLAN; M. STEPHEN KAPLAN; MARJORY A. KAPLAN; GLENYCE S. KAPLAN LIFETIME TRUST - 1994; PRIME TANNING CO INC VOTING TRUST - 1994; ESTATE OF LEONARD D. KAPLAN; STEVEN A. GOLDBERG; GLENYCE KAPLAN; ELISEO POMBO; ROBERT B. MOORE, Appellees. DEVELOPMENT SPECIALISTS, INC., as Trustee of the Irving/Prime Creditors' Trust, Appellant,
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MAINE [Hon. D. Brock Hornby, U.S. District Judge]
J. Keach, with whom Paul McDonald, Lindsay K. Zahradka, and
Bernstein, Shur, Sawyer & Nelson, P.A. were on brief, for
Lawrence G. Green, with whom Tal Unrad, Laura Lee Mittelman,
and Burns & Levinson LLP were on brief, for appellees.
Lynch, Stahl, and Barron, Circuit Judges.
Specialists, Inc. ("DSI"), in its capacity as
trustee of a trust established to benefit the creditors of
several related insolvent entities, appeals from the
bankruptcy court's ruling that the transaction here --
the largely debt-financed purchase of a family-owned leather
manufacturer -- was not a fraudulent conveyance and did not
amount to a violation of the fiduciary duties of the
company's directors. The district court, acting as an
intermediate appellate court, affirmed the bankruptcy
court's ruling. Development Specialists, Inc.
v. Kaplan, 574 B.R. 1, 2 (D. Me. 2017). We
affirm because the bankruptcy court's factual
determinations are not clearly erroneous, and the bankruptcy
court found sufficient facts to support its conclusions.
only briefly recount the facts. For a more detailed
treatment, see the bankruptcy court opinion. Development
Specialists, Inc. v. Kaplan (In re
Irving Tanning Co.), 555 B.R. 70, 72-79 (Bankr. D. Me.
Tanning, Inc. ("Prime Maine"), a leather
manufacturer, was facing financial difficulties in 2006.
Founded over 100 years ago and owned by the Kaplan family
ever since, Prime Maine, at its peak, had been one of the
largest leather producers in the United States. Id.
at 73. After years of success, Prime Maine had run a
relatively small deficit in 2005 and was projected to run a
deficit again in 2006. Id. at 74. While in the
process of evaluating paths forward, Prime Maine was
approached by Meriturn Capital, a private equity firm that
had recently purchased another leather manufacturer, Irving
Tanning Company ("Irving"). Id. at 75.
was interested in purchasing Prime Maine because it believed
there was over-capacity in the United States leather market,
and consolidating Prime Maine and Irving could lower the cost
of leather production and allow the surviving entity's
products to reach new markets. Id. Meriturn
initially offered "$26 million in cash, a $7.5 million
seller note, assumption of existing debt of $9.4 million, and
exclusion of cash proceeds and equity of certain life
insurance policies valued at $9 million" in exchange for
all of Prime Maine's stock. Id. That offer was
rebuffed; according to the defendants, they rejected the
offer because they wanted to have an ongoing stake in the
surviving entity. Id. Several draft letters of
intent were exchanged over the following months. Id.
and Prime Maine eventually reached an agreement. Meriturn
would create Prime Tanning Company, Inc. ("Prime
Delaware"), and transfer Meriturn's stake in Irving
to it. Prime Delaware would then acquire all of the shares of
Prime Maine from that company's shareholders, in exchange
for: (1) $10, 629, 459 in cash; (2) a promissory note in the
principal amount of $3, 817, 000; (3) forty percent of Prime
Delaware's shares; and (4) Prime Delaware's
assumption of Prime Maine's liabilities at the time of
closing, estimated at $7.2 million. Id. at 78.
Pursuant to the deal, Michael and Stephen Kaplan (who were
co-chairmen of the Board of Prime Maine at all relevant
times) would receive $4 million as part of non-competition
agreements with Prime Maine, and Prime Delaware would enter
into employment agreements with them. Id. Prime
Maine would provide the cash value of certain life insurance
policies, worth about $9 million, "to Michael Kaplan,
Stephen Kaplan, Marjory Kaplan, and the Estate of Leonard
Kaplan." Id. Prime Maine had retained earnings
of over $44 million at the time. Id. at 85.
Maine's board considered the transaction carefully. The
board received financial advice from Mitchell Arden of
Phoenix Management Services, a management consulting firm;
accounting advice from an outside public accountant; and
legal advice from attorney Norman Spector, counsel to Prime
Maine. Id. at 76. There was evidence that the
transaction would create a stronger entity long-term.
Financial projections produced by Meriturn indicated that the
transaction was likely to succeed, though Prime Maine
recognized that the transaction involved risk. Id.
Maine's board eventually approved the transaction, and
the deal closed on November 20, 2007. Id. at 77. Prime
Delaware financed this transaction with over $30 million in
debt from its primary lender, Wells Fargo. Id. at
78. The Wells Fargo loans were secured by interests in the
assets of Irving, Prime Maine, Prime Missouri, Prime
Delaware, and Cudahy. Id.
months immediately following the transaction, Prime Delaware
was able to pay its bills, but had some financial issues.
Id. In January 2008, its accounts were overdrawn
(after, but not before, the sale) by at least $1 million,
resulting in Wells Fargo covering this shortfall and charging
a $50, 000 accommodation fee. Id. As of January 1,
2008, "Prime Delaware was in violation of its earnings
covenant under the Wells Fargo Loans" and, as a result,
Wells Fargo increased the loans' interest rate to a
predetermined "default rate." Id. The
global financial crisis reached its peak shortly thereafter.
Delaware was insolvent by early 2010. Id. In
February of 2010, Prime Maine and Prime Missouri released the
former Prime Maine shareholders from certain claims that
Prime Maine and Prime Missouri may have had against them as a
result of the sale of Prime Maine and Prime Missouri, in
exchange for Prime Delaware stock and the forgiveness of
certain debt obligations payable by Prime Delaware to the
sellers. Id. at 78-79.
Prime Maine, and Prime Missouri filed for bankruptcy under
Chapter 11 on November 16, 2010. Id. at 79. Prime
Delaware, Cudahy, and Wismo Chemical Corp., a subsidiary of
Prime Missouri, did the same on December 30, 2010.
Id. The cases were jointly administered.
bankruptcy court confirmed the debtors' Chapter 11 plan
on October 18, 2012. The court's confirmation order
provided for the establishment of a trust, to which the
debtors would transfer, along with certain residual assets,
"the Post-Confirmation Causes of Action" belonging
to the debtors. It also provided that the "Trustee [of
the trust] shall assume the Debtors' and the Estate's
right to conduct any litigation with respect to
Post-Confirmation Causes of Action." DSI was appointed
trustee, effective November 1, 2012.
November 15, 2012, DSI filed a complaint pursuant to its role
as trustee, alleging that the transaction was a fraudulent
conveyance and that Prime Maine's directors were in
breach of their fiduciary duties by approving it. DSI sought
to void the transfer and recover compensatory damages from
the defendants. DSI also alleged that the 2010 release
transaction was a fraudulent conveyance that should be
on August 31, 2015, the bankruptcy court held a five-day
trial, during which it heard testimony from several
witnesses. Based on this testimony and a voluminous record,
the bankruptcy court ruled in the defendants' favor on
every count. Id. at 83, 86. The bankruptcy
court's opinion lacked specific findings with respect to
Prime Maine and Prime Missouri, the subsidiaries of Prime
Delaware, when explaining its determination that the sale of
Prime Maine was not a fraudulent conveyance and that the
Prime Maine directors did not breach ...