United States Court of Appeals For the First Circuit
No. 17-1489
IN RE: IRVING TANNING COMPANY; PRIME TANNING CO., INC.; PRIME TANNING CORP.; CUDAHY TANNING CO., INC.; WISMO CHEMICAL CORP.; PRIME TANNING COMPANY, INC.
Debtors.
DEVELOPMENT SPECIALISTS, INC., as Trustee of the Irving/Prime Creditors' Trust,
Appellant,
v.
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.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MAINE
[Hon. D. Brock Hornby, U.S. District Judge]
Before
Lynch, Stahl, and Barron, Circuit Judges.
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. December 4, 2017 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
- 3 - 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
- 4 - 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
1 The leather production process consists of two segments: tanning and finishing. Prime Maine operated its finishing operation in Berwick, Maine and operated its tanning operation through a subsidiary, Prime Tanning Corp. ("Prime Missouri"), in St. Joseph, Missouri. This sale included Prime Missouri. In re Irving Tanning Co., 555 B.R. at 73-74.
- 5 - 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.
2 Prime Delaware also acquired another leather producer, Cudahy Tanning Company, Inc. ("Cudahy"), from a different seller. In re Irving Tanning Co., 555 B.R. at 77.
- 6 - 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
- 7 - 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 their fiduciary
duties. Despite the lack of specific findings on these points,
DSI did not file a Rule 52(b) motion requesting additional
findings.
Instead, DSI appealed to the United States District
Court for the District of Maine, arguing that the bankruptcy
3 The complaint named two classes of defendants: the shareholder defendants and the director defendants. The shareholder defendants consist of the Kaplan family and various trusts established for their benefit. The director defendants are the former directors of Prime Maine: Michael Kaplan, Stephen Kaplan, Glenyce Kaplan, Steven Goldberg, Eliseo Pombo, and Robert Moore. In re Irving Tanning Co., 555 B.R. at 73.
- 8 - court's decision was insufficiently supported by findings of fact
and clearly erroneous. The district court affirmed the bankruptcy
court's decision. It held that, while the bankruptcy court's
findings of fact were lacking specificity in places, the bankruptcy
court's determinations were sufficiently supported by the facts
found and were not clearly erroneous. Development Specialists,
Inc., 574 B.R. at 6, 8, 11-14. As to any mistakes of law by the
bankruptcy court in its ruling on the fiduciary duty claim, the
district court found they were harmless and that DSI had not shown
any breach. Id. at 12-14. DSI filed this timely appeal.
II.
Standard of Review
We review the bankruptcy court's findings of fact for
clear error, and its conclusions of law de novo. NTA, LLC v.
Concourse Holding Co. (In re NTA, LLC), 380 F.3d 523, 527 (1st
Cir. 2004). The clear error standard "plainly does not entitle a
reviewing court to reverse the finding of the trier of fact simply
because it is convinced that it would have decided the case
differently." Anderson v. City of Bessemer City, N.C., 470 U.S.
564, 573 (1985). Instead, findings of fact are clearly erroneous
only when "the reviewing court on the entire evidence is left with
the definite and firm conviction that a mistake has been
committed." Id. (quoting United States v. U.S. Gypsum Co., 333
U.S. 364, 395 (1948)). Deference to the findings of the bankruptcy
- 9 - court is especially appropriate where a determination depends upon
an assessment of credibility, see Palmacci v. Umpierrez, 121 F.3d
781, 785 (1st Cir. 1997), as it does here.
Appellate review is "impracticable" if "the findings of
fact essential to a principled decision under the applicable law"
cannot be determined from the trial court's decision.
Supermercados Econo, Inc. v. Integrand Assurance Co., 375 F.3d 1,
4 (1st Cir. 2004) (quoting Touch v. Master Unit Die Prods., Inc.,
43 F.3d 754, 759 (1st Cir. 1995)); cf. Fed. R. Civ. P. 52(a); Fed.
R. Bankr. P. 7052 (stating Rule 52 of the Fed. R. Civ. P. generally
applies to adversarial bankruptcy proceedings). The level of
detail required under Rule 52 "depends on the importance of an
issue, its complexity, the depth and nature of evidence presented,
and similar elements that vary from case to case." Knapp Shoes,
Inc. v. Sylvania Shoe Mfg. Corp., 15 F.3d 1222, 1228 (1st Cir.
1994). Where the trial court's findings are insufficient, we may
"overlook the defect, if our own review of the record substantially
eliminates all reasonable doubt as to the basis of the district
court's decision." TEC Eng'g Corp. v. Budget Molders Supply, Inc.,
82 F.3d 542, 545 (1st Cir. 1996) (citations omitted). If a trial
court's findings are too meager to allow review, the decision has
run afoul of Rule 52(a), and the appropriate remedy is a remand
for further fact-finding. See Supermercados Econo, Inc., 375 F.3d
at 5.
- 10 - DSI failed to move for additional findings under Rule
52(b). "Rule 52(b) represents the principal, and preferred,
mechanism for challenging the [trial 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."
Ne. Drilling, Inc. v. Inner Space Servs., Inc., 243 F.3d 25, 35
(1st Cir. 2001). Failure to file a Rule 52(b) motion does not
preclude us from remanding for additional fact-finding. See
Supermercados Econo, Inc., 375 F.3d at 4-5. However, in the
absence of a Rule 52(b) motion, this Court will only remand for
additional findings when the trial court has failed to make a
finding as to a fact that "is essential to the resolution of a
material issue." Ne. Drilling, Inc. 243 F.3d at 35. A missing
finding is inessential if other findings of fact justify the
court's determination. When the appellant has failed to file a
Rule 52(b) motion, remand is unnecessary if the facts found provide
sufficient support for the trial court's determination, even if
those findings lack specificity. See Wright & Miller, Federal
Practice and Procedure § 2582, at 358-59 (3d ed. 2013) ("Rule 52(b)
is intended to reduce the frequency of appellate remands by
permitting the correction of errors in the district court;
therefore, when a party fails to make a Rule 52(b) motion, that
- 11 - party should not be precluded altogether from appeal, but that
party cannot challenge the specificity of the findings.").4
III.
Fraud Claims
A. The Bankruptcy Court's Findings of Fact
The bankruptcy court’s analysis of whether the sale of
Prime Maine was fraudulent focused on the value received by Prime
Delaware and that entity's likelihood of success. It did not
discuss whether that transaction was fraudulent with respect to
the individual debtors, Prime Maine and Prime Missouri, owned by
Prime Delaware. The trustee argues that each debtor should be
evaluated separately, while the defendants argue that the
bankruptcy court’s focus on Prime Delaware was correct because the
various debtors acted as “consolidated components” of Prime
Delaware.
The logic behind the Uniform Fraudulent Transfer Act
("UFTA") supports DSI's position that each entity needs to be
evaluated separately. The purpose of the UFTA is to "protect the
debtor's estate from being depleted to the prejudice of the
4 On appeal, the defendants argue that DSI cannot challenge the bankruptcy court's failure to make specific findings as to each individual debtor. The defendants claim that DSI waived this challenge because DSI, in its complaint and at trial, continually referred to the defendants as a unit and failed to distinguish between each of the entities. We do not reach this issue.
- 12 - debtor's unsecured creditors." Dahar v. Jackson (In re Jackson),
459 F.3d 117, 121 n.3 (1st Cir. 2006) (applying New Hampshire's
UFTA) (quoting Unif. Fraudulent Transfer Act § 3, cmt. 2); see
also Murphy v. Meritor Sav. Bank (In re O'Day Corp.), 126 B.R.
370, 393-94 (Bankr. D. Mass. 1991) (applying Massachusetts'
Uniform Fraudulent Conveyance Act). That purpose cannot be served
if fraud as to one party to a transaction is overlooked when the
transaction is fair to that entity's would-be parent. The
creditors of Prime Maine and Prime Missouri are interested in the
solvency of Prime Maine and Prime Missouri; determining whether
the transaction was fraudulent with respect to a separate entity
does not adequately protect those creditors' interests.
B. Constructive Fraud
In order to prove constructive fraud, DSI must show that
the debtor (1) did not "receiv[e] a reasonably equivalent value in
exchange for the transfer or obligations of the debtor" and, in
addition, that the debtor either (2) "[w]as 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 transaction," or (3) "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." 14 M.R.S.A.
§ 3575(1)(B); see also Turner v. JPB Enters., Inc. (In re Me.
Poly., Inc.), 317 B.R. 1, 8 (Bankr. D. Me. 2004) (stating that
- 13 - Maine's UFTA requires the debtor to show the required elements of
constructive fraud).
1. Prime Delaware
The bankruptcy court found that DSI failed to show any
of the three required factors. The bankruptcy court clearly stated
the evidence on which it was relying, it found the necessary facts,
and its determination was not clearly erroneous.5
There is a great deal of evidence that Prime Delaware
received reasonably equivalent value in the transaction. $23.6
million in cash (consisting of the cash payments to shareholders,
life insurance payments, and payments pursuant to the
noncompetition agreements) was paid in exchange for Prime Maine.6
The defendants produced balance sheets showing that Prime Maine
had retained earnings "in excess of $45 million."7 In re Irving
5 The bankruptcy court's determination that the 2010 release transaction was not constructively fraudulent was not clearly erroneous. Because the claims against the shareholder defendants are without merit, Prime Maine and Prime Missouri received reasonably equivalent value in the release transaction even if we assume the Prime Delaware stock and debt obligations were worthless at the time. See 14 M.R.S.A. § 3575(1)(B). 6 Before the district court, DSI argued that the bankruptcy court should have included the value of the $3.8 million seller's note and the Prime Delaware stock in its reasonably equivalent value analysis. DSI does not renew that argument here, likely because, as the district court pointed out, "even with these additions, the value of Prime Maine stock as found by the bankruptcy court exceeded the total transferred to the shareholders." Development Specialists, Inc., 574 B.R. at 8 n.29. 7 DSI argues that the bankruptcy court committed reversible error by admitting "unauthenticated, hearsay balance - 14 - Tanning Co., 555 B.R. at 76-77. An expert report prepared by Carl
Jenkins, an outside accountant, also supports the court's
conclusion. It found that Prime Maine had $44.2 million in total
equity at the time of closing, and Prime Delaware paid $27.4
million for it. The bankruptcy court had a reasonable basis for
its determination and, given that, we will not second guess its
decision. See Anderson, 470 U.S. at 573.
There is also sufficient support for the bankruptcy
court's finding that the other two components in the constructive
fraud analysis were not present with respect to Prime Delaware.
The court heard testimony from Jenkins and the head of Meriturn
explaining why Prime Delaware was not undercapitalized and there
was no reason to believe Prime Delaware would be unable to pay its
debts as they came due following the transaction. There is other
evidence in the record supporting this conclusion, such as a credit
report from Wells Fargo Credit Review explaining why Prime Delaware
should not fall into categories (2) or (3) of 14 M.R.S.A. §
3575(1)(B) post-merger. After the transaction, Prime Delaware had
a great deal of cash available to pay its bills, and had assets
well in excess of its liabilities. The court considered DSI's
witness, Prime Delaware's CFO post-closing, not credible because
sheets." DSI waived this argument by failing to develop it in its principal brief. Small Justice LLC v. Xcentric Ventures LLC, 873 F.3d 313, 323 n.11 (1st Cir. 2017) ("[A]rguments developed for the first time in a reply brief are waived.").
- 15 - his analysis was not done in accord with generally accepted
accounting principles (GAAP). In re Irving Tanning Co., 555 B.R.
at 84. That is surely an acceptable basis to discount his
testimony. Cf. Sierra Steel, Inc. v. Totten Tubes, Inc. (In re
Sierra Steel, Inc.), 96 B.R. 275, 278 (B.A.P. 9th Cir. 1989)
(holding that "GAAP are relevant," but "not controlling in
insolvency determinations").
court's holding that the debtors did not subjectively believe that
they would be unable to pay their bills as they became due. The
defendants testified that they did not believe that Prime Delaware
would be unable to pay its bills, and the court implicitly found
that testimony credible. There is some evidence in DSI's favor,
but it does not convince us that the bankruptcy court's view was
impermissible on the record before it. Anderson, 470 at 574
("Where there are two permissible views of the evidence, the
factfinder's choice between them cannot be clearly erroneous.").
2. Prime Maine and Prime Missouri
The findings of fact pertaining to the solvency of Prime
Delaware are sufficient on this record to affirm the bankruptcy
court's determination. Even if we assume arguendo that DSI
established at trial that Prime Maine and Prime Missouri did not
receive reasonably equivalent value, the evidence still shows that
- 16 - DSI did not prove either of the second and third factors in the
constructive fraud analysis as to Prime Maine and Prime Missouri.8
The bankruptcy court found that Prime Delaware was not
left with unreasonably small remaining assets; and that Prime
Delaware did not believe, and should not reasonably have believed,
that it would be unable to pay its debts as they became due. In
re Irving Tanning Co., 555 B.R. at 85 n.11. As the district court
stated, that finding with respect to Prime Delaware "ineluctably
flows over to Prime Maine and Prime Missouri because . . . 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." Development Specialists,
Inc., 574 B.R. at 12. Because Prime Delaware was a holding company
with no business operations of its own, "[t]here 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
8 DSI argues that the bankruptcy court never made a finding on this topic at all. That is an incorrect reading of the bankruptcy court's opinion. The court stated that "[j]udgment for the Defendants shall enter on [the constructive fraud counts]." In re Irving Tanning Co., 555 B.R. at 86. This means the bankruptcy court was finding the transaction was not constructively fraudulent with respect to all of the debtors. It is true that the court did not specifically address Prime Maine and Prime Missouri in the fraud discussion, but DSI failed to file a Rule 52(b) motion and therefore cannot challenge the specificity of the bankruptcy court's findings. See Wright & Miller, Federal Practice and Procedure § 2582, at 358-59 (3d ed. 2013).
- 17 - Prime Delaware was not subject to either of those taints as the
bankruptcy court found."9 Id.
The bankruptcy court's determination was not clearly
erroneous. As explained above, the court's conclusion with respect
to Prime Delaware had ample support in the record. That same
evidence supports the conclusion that neither of the last two
factors in the constructive fraud analysis were satisfied.
C. Actual Fraud
There are two methods for proving actual fraud under the
UFTA: (1) producing direct evidence of intent and (2) showing the
presence of certain badges indicating fraud. 14 M.R.S.A. § 3575.
The bankruptcy court found that DSI had failed to show actual fraud
using either method. Actual fraud must be proven by clear and
convincing evidence under the UFTA. FDIC v. Proia, 663 A.2d 1252,
1254 n.2 (Me. 1995). This determination is largely factual and
based on credibility. The bankruptcy court's findings were not
clearly erroneous.10
9 Prime Delaware owned Prime Maine, Irving, and Cudahy, so it was, in theory, possible for Prime Delaware to be solvent while Prime Maine was insolvent if the other two companies were sound enough financially. DSI never pursued this argument, perhaps because Irving was near collapse when Prime Maine entered into this transaction. Similarly, it was possible, in theory, for Prime Missouri to be insolvent while Prime Maine was solvent because Prime Maine had business operations of its own. However, DSI provided no evidence that this theoretical possibility was true. 10 The bankruptcy court's determination that the 2010 release transaction did not amount to actual fraud was not clearly erroneous. DSI did not produce any direct evidence of actual - 18 - The bankruptcy court determined that the defendants had
no fraudulent intent based on its assessment of testimony from the
defendants, testimony from other witnesses, and documents in the
record. This finding has more than ample support, including the
testimony of multiple director defendants indicating 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." In re Irving
Tanning Co., 555 B.R. at 82. DSI's primary evidence, an email
from Prime Maine's CEO to other defendants explaining the risks of
the transaction, does not show an intent to defraud creditors; it
merely shows that the transaction had risks.
DSI focused on two of the most important badges of fraud:
(1) whether the debtors received reasonably equivalent value and
(2) whether the debtors were insolvent before or shortly after the
transaction. Id. at 81. The bankruptcy court declined to find in
DSI's favor on either point, in light of the other evidence.11
The same evidence supporting the Prime Delaware analysis
supports the conclusion that the transaction was not actually
fraud, and the circumstantial evidence, such as the fact that Prime Maine and Prime Missouri received reasonably equivalent value, supports the bankruptcy court's conclusion. 11 The bankruptcy court found that only two badges of fraud were present: the sale was made to Prime Maine insiders and the transfer involved the sale of substantially all of Prime Maine's assets. In re Irving Tanning Co., 555 B.R. at 81.
- 19 - fraudulent with respect to Prime Maine and Prime Missouri. The
transaction could not "create efficiencies, expand markets, lessen
costs and allow the Kaplan family to continue its connection with
the Prime brand into another generation" without Prime Maine being
successful as well. The bankruptcy court did not make specific
findings about which badges of fraud apply to Prime Maine's and
Prime Missouri's roles in the transaction. The absence of specific
analysis on those points is insufficient to warrant a remand given
that the bankruptcy court explicitly found that the defendants --
who controlled Prime Maine and Prime Missouri -- did not act with
intent to defraud. Addamax Corp. v. Open Software Found., Inc.,
152 F.3d 48, 55 (1st Cir. 1998) (finding that the trial court "was
not required to make findings on every detail" under Rule 52).
IV.
Fiduciary Duty Claims
The bankruptcy court found that the director defendants
did not violate their fiduciary duties. It held that "because
[the court] ruled against the Trustee on all the other counts,
these [fiduciary duty counts] cannot prevail. If the Shareholder
Defendants' actions in connection with the 2007 Transaction did
not constitute actual or constructive fraudulent transfers, as
[the court] concluded above, the Director Defendants did not
violate the fiduciary duties imposed upon them . . . ." In re
Irving Tanning Co., 555 B.R. at 86.
- 20 - The district court read this as the bankruptcy court
concluding that there can be no breach of a fiduciary duty where
the transaction at issue was not a fraudulent conveyance.
Development Specialists, Inc., 574 B.R. at 12. We read the record
differently, and owe no deference to the district court's decision
here. See Brandt v. Repco Printers & Lithographics, Inc. (In re
HealthCo Int'l), 132 F.3d 104, 107 (1st Cir. 1997) (holding that
the panel should "exhibit no particular deference to the
conclusions of . . . the district court"). In context, the
bankruptcy court was not stating that the two analyses were
coextensive, which would have been error. Rather it held that, in
this particular case, the findings of fact supporting its
fraudulent conveyance analysis also foreclose the possibility of
fiduciary duty liability. This determination has sufficient
support in the bankruptcy court's findings of fact and is not
clearly erroneous, as we explain below.
DSI argues that the directors breached their duty of
care by failing to properly investigate the transaction and
violated their duty of loyalty by self-dealing and approving
prohibited distributions. In DSI's view, these breaches caused a
serious harm: the insolvency of Prime Maine. Prime Maine's
insolvency is the only specific harm that DSI alleges resulted
from the purported breach of fiduciary duties. In order to hold
the directors liable, DSI must be able to show that the harm
- 21 - alleged was proximately caused by the directors' breach. 13-C
M.R.S.A. § 832(2)(A)(2).
The bankruptcy court's findings of fact, which are not
clearly erroneous, foreclose us from finding that the purported
breach proximately caused the harm suffered. The bankruptcy court
found that DSI "was not able to convincingly link" Prime Delaware's
inability to pay its bills as they came due in 2009 with the "2007
payments to the Shareholder Defendants." In re Irving Tanning
Co., 555 B.R. at 85 n.11. This finding is supported by the record,
which includes testimony and an expert report from Jenkins
indicating that unforeseeable increases in chemical and energy
prices, along with the financial crisis, significantly contributed
to Prime Delaware's insolvency. There were also board meeting
minutes indicating that these factors played a major role in Prime
Delaware's insolvency.
The bankruptcy court's finding that the transaction did
not cause the insolvency of Prime Delaware flows to Prime Maine
because Prime Delaware was a holding company without any operations
of its own. If Prime Maine's failure cannot be attributed to the
transaction, then the directors' purported breaches did not cause
the harm charged.
The bankruptcy court could have been clearer about its
reasons for ruling in the defendants' favor on these counts. But,
given DSI's failure to file a Rule 52(b) motion, we will only
- 22 - remand if the trial court failed to find an essential fact. Ne.
Drilling, Inc., 243 F.3d at 35. The bankruptcy court's findings
of fact necessitate the conclusion that DSI cannot show that the
purported breach proximately caused the alleged harm to Prime
Maine, so the missing facts are not essential.
Conclusion
The bankruptcy court's decision is affirmed.
- 23 -