In re Irving Tanning Co.

         APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MAINE [Hon. D. Brock Hornby, U.S. District Judge]

          Robert J. Keach, with whom Paul McDonald, Lindsay K. Zahradka, and Bernstein, Shur, Sawyer & Nelson, P.A. were on brief, for appellant.

          Lawrence G. Green, with whom Tal Unrad, Laura Lee Mittelman, and Burns & Levinson LLP were on brief, for appellees.

          Before Lynch, Stahl, and Barron, Circuit Judges.

          LYNCH, CIRCUIT JUDGE

         Development 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.

         I.

         Background

         A. Facts

         We will 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. 2016).

         Prime 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.

         Meriturn 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.

         Meriturn 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.^[1] Id. at 85.

         Prime 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.

         Prime Maine's board eventually approved the transaction, and the deal closed on November 20, 2007.^[2] 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.

         In the 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.

         Prime 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.

         Irving, 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.

         The 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.

         B. Procedural Background

         On 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.^[3] DSI also alleged that the 2010 release transaction was a fraudulent conveyance that should be voided.

         Starting 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 ...