Fox v. Koplik et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: :
: Chapter 11
PERRY H. KOPLIK & SONS, INC., :
: Case No. 02-B-40648 (REG)
Debtor. :
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MICHAEL S. FOX, as Litigation Trustee of :
PERRY H. KOPLIK & SONS, INC., :
: Adv. Pro. 04-02490 (REG)
Plaintiff, :
:
-against- :
:
MICHAEL KOPLIK and ALVIN SIEGEL, :
:
Defendants. :
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DECISION ON REQUESTS TO MODIFY
PROPOSED FINDINGS
APPEARANCES:
SATTERLEE STEPHENS BURKE & BURKE LLP
Attorneys for Plaintiff
230 Park Avenue
New York, New York 10169
By: Christopher R. Belmonte, Esq. (argued)
Pamela A. Bosswick, Esq.
SEWARD & KISSEL LLP
Attorneys for Defendant
One Battery Park Plaza
New York, New York 10004
By: Ronald L. Cohen, Esq.
SANFORD P. ROSEN & ASSOCIATES, PC
Attorneys for Defendants
747 Third Avenue
New York, New York 10017
By: Sanford P. Rosen, Esq. (argued)
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ROBERT E. GERBER
UNITED STATES BANKRUPTCY JUDGE:
By letter, the Officers, in reliance upon Fed.R.Civ.P. 60(a) and Fed.R.Bankr.P.
9024, ask this Court to modify its Proposed Findings of Fact and Conclusions of Law
After Trial to reduce the recommended award of damages on the breach of fiduciary duty
claims—from $5.4 million to $2.15 million. They contend that the Court made a clerical
mistake, or a mistake resulting from oversight or omission, in computing the damages by
failing to take into account the deductible under the Trade Credit Insurance Policy1 and
the fact that the policy had a covered percentage of only 85% of the Debtor’s receivables.
In response, the Trustee acknowledges the Officers’ points. But he contends that
the Court failed also to consider evidence in the record that likewise was relevant to the
computation of damages flowing from the breaches of fiduciary duty that the Court
found—and that would have increased the resulting damages. The Trustee asserts that if
the Court is going to reexamine the damages, it should reconsider its determination not to
award damages for the knowing breaches of the Fleet Revolver, as the Court overlooked
costs associated with the Forbearance Agreement that was executed after the Debtor was
in default on the Fleet Revolver.2
1 Familiarity with the matters discussed in the Proposed Findings of Fact and Conclusions of Law
After Trial is presumed.
2 The Trustee also contends that the Officers are inappropriately invoking Rule 60(a). He contends
that matters they identify are not the types of clerical or other mistakes that Rule 60(a) covers—
and that it is Rule 60(b), if any part of Rule 60, that is applicable. The Court agrees that the errors
identified by the Officers are not of the character Rule 60(a) is intended to address, but believes
that oversights discussed above and below that were identified by the Officers and the Trustee are
of the type covered under Fed.R.Bankr.P. 9024 and Local Bankruptcy Rule 9023-1. In any event,
the Court believes that it owes it to the parties, and to any court that might be considering this
Court’s findings on de novo review, to give them the best analysis possible, and is not of a mind to
close its eyes to any matter which, upon further consideration, this Court now believes to have
been in error.
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The Trustee contends further that the Court erred when it failed to take into
account that “it was highly improbable for the Debtor to have a complete victory with
respect to all of the other [Lumbermen’s] defenses.” The Trustee states, accordingly, that
it is “respectfully submitted that the Court’s damage calculations with respect to the
Trade Credit Insurance claims should be increased to reflect the realistic likelihood that
the Debtor would not recover 100% on the remainder of its claims.”3
After considering the parties’ submissions and related oral argument, the Court
agrees that there was evidence in the record that could fairly be said to have been
overlooked by the Court that would have decreased the resulting damages to the extent
argued by the Officers, and that would have increased the resulting damages to the extent
argued by the Trustee. Thus the adjustments to the recommended damages urged by each
will be made.
But two other matters remain, each of which presents more difficult issues. The
first flows from the Trustee point just noted: whether the damages should be increased
because the Court erroneously gave the Officers the benefit of the very top of the range of
potential recoveries estimated by K&L (and thus total success) if the Estate were to have
litigated with Lumbermen’s on the latter’s defenses to the Trade Credit Insurance Policy.4
There the Trustee is right. The Court should have made an express finding that
the chances were remote that the Estate would have prevailed on every issue if it had
litigated against Lumbermen’s—though the exact amount of the actual recovery that
3 Trustee Ltr. at 2.
4 It will be recalled that K&L predicted a range of from $2 million to $9.6 million—with the latter
figure being $2.15 million less than the total otherwise collectible under the policy, taking into
account that no reasonable argument could be made for full recovery under the policy. To be
conservative, the Court fixed the damages based on the $9.6 million high end of the
$2 million/$9.6 million range. But even the $9.6 million would require victory for the estate on
every single other issue.
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might then have been obtained (on a litigation that ultimately was settled and never
decided, and which would have involved a number of discrete issues) would still be
speculative. In particular, on one of those issues (the so-called “Approved Debtors
Defense,”) discussed below, it is probable that the Estate would have lost on that issue,
and that probability should not have been ignored.
The problem, however, is that the failures on the part of Koplik and Siegel that
likely would have caused the Estate to lose on the Approved Debtors Defense were not
anywhere near as egregious as their other failures. Though they might have avoided that
particular loss with more care, the need to deal more carefully in this respect was not as
obvious. On balance, the Court does not believe that it should be tacking on between
$2.53 million and $4.36 million5 on a matter where the propriety of Koplik’s and Siegel’s
conduct could be subject to greater debate. The Court will enter more detailed findings in
this area, but it will not change the amount of its recommended judgment in this respect.
The second of the difficult additional issues flows from the Court’s erroneous
understanding that $15 million of receivables were insured—or, to be more exact, its
earlier failure to understand that while $15 million of receivables were insured, the most
that could be recovered with respect to those receivables was $11.75 million. Thus the
Court must consider the extent to which the damages award should be increased by
reason of the Court’s previous failure to have considered the lesser amount of Trade
Credit Insurance protection that the Officers actually obtained.6 On this issue, the Court
5 See n.11 infra, for the bases for the figures used here.
6 It will be recalled that the Officers obtained Trade Credit Insurance coverage for $15 million in
trade credit accounts receivable, causing the Court to believe that the Estate was protected to that
extent. The Officers’ reargument motion pointed out that by reason of the fact that Lumbermen’s
would pay for only 85% of uncollected trade receivables, the estate could recover no more than
$12.75 million, and that this amount would then have to be reduced by a $1 million deductible.
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concludes that, while the matter is even closer than before, the factors that caused the
Court not to award damages for the portion of the trade credit not covered by the Trade
Credit Insurance Policy still sufficiently apply, even though the amount of trade credit
that was not insured for markedly increased.
Thus the proposed damages will be adjusted as a consequence of each of the first
two matters discussed above. With respect to the third matter, the Court will make
supplemental factual findings, but will not change the amount of its recommended
judgment. The Court’s decision and recommendation to the district court will be
modified accordingly.
1. Change Requested by the Officers
(Insurance Coverage for Receivables)
In their letter, the Officers correctly assume that the Court calculated damages
based on its assumption that securing coverage for $15 million in receivables meant that
$15 million in receivables was protected, and that the maximum recovery under the Trade
Credit Insurance Policy thus was $15 million. They also correctly assume that the Court
subtracted K&L’s highest recovery estimate of $9.6 million from $15 million to arrive at
damages of $5.4 million. They then note that in fact, the Court’s reliance on the
$15 million failed to consider that the Debtors could only recover 85% of the $15 million,
and that there was a $1 million deductible on the policy.
Though the Court’s review of the record indicates that there were repeated
references during the trial and its associated briefing to coverage for $15 million (and the
Court can find no instances in which the distinction made now was ever called to the
Thus the most the estate could recover from Lumbermen’s would be $11.75 million (as contrasted
to the $15 million that the Court had assumed), leaving an additional $3.25 million uninsured.
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attention of the Court at the time), the Officers are right in this regard. The damages thus
must be reduced by the extent of the uninsured amount—i.e., by reason of the coverage
of only 85%, and the $1 million deductible. This requires reducing the damages
premised on the Court’s earlier calculation by $3.25 million, from $5.4 million to
$2.15 million.
2. Change Requested by the Trustee
(Damages Resulting from Revolver Default)
In his responsive letter, the Trustee contends that even if the Court overlooked the
$1 million deductible on the Trade Credit Insurance Policy, and the policy’s coverage to
the extent of only 85% of losses up to $15 million, the Court erred in another respect as
well. The Trustee says that when the Court found knowing and intentional violations of
the Revolver, but could find no damages resulting from those, it overlooked evidence in
one of the exhibits showing how the Debtors were injured by those knowing violations by
means other than Lumbermen’s termination of liquidity under the Revolver.
The Trustee is correct in this regard. The Court did indeed overlook evidence in
Pl. Exh. 50 establishing out of pocket losses on the part of the Debtors arising from the
breaches of the Revolver apart from the potentially much more extensive injury upon
which the Court had focused.
Pl. Exh. 50 shows that securing a forbearance from Fleet, on behalf of the
Revolver lenders, cost the Debtors $2,311,613, principally in the form of fees for
securing the Revolver lenders’ forbearance, and in legal fees. While these are not as
great in amount as the damages that would have been incurred if Fleet had instantly
terminated lending under the Revolver and had refused to forbear, the Court has little
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doubt, now that the Trustee has called the Court’s attention to this exhibit, that they are
nevertheless recoverable.
In response to this, the Officers contend (having especially made the point in oral
argument) that Fleet was going to decline to extend the Revolver anyway, and thus that
these charges do not relate to the loss. They further contend that there were many
breaches of the Revolver that led to the need for forbearance, of which the knowing
breaches by Koplik and Siegel were only part. The first point is unpersuasive; the
Forbearance Agreement expressly contained acknowledgements by the Debtors (signed
by Koplik), acknowledging the defaults, and confirming that the Forbearance Agreement
resulted from them.7 The second is unpersuasive as well. At least eight of the defaults
acknowledged in the Forbearance Agreement (though with some overlap, since use of
proceeds restrictions were repeatedly violated by unauthorized advances of funds)8
related directly to the knowing acts Koplik and Siegel had taken that had led to the
defaults, any one of which would have been sufficient to put the Revolver into default.
Costs incurred under the Forbearance Agreement totaled $2,311,613. The Court
overlooked this showing of damages, to the extent of $2,311,613, and the Trustee’s
damages must be increased by this amount.
7 See Pl. Exh. 7.
8 They resulted from breaches of sections 4.11 (no material misstatements); 4.15 (use of proceeds);
and 7.03 (incurring indebtedness in violation of limits on the Debtor’s borrowing ability). They
also resulted from advances to American Tissue in connection with transactions with Kimberly
Clark; in connection with American Tissue’s acquisition of Ponderosa’s facility; in connection
with American Tissue’s acquisition of the Keiffer facilities; and in connection with American
Tissue’s acquisition of Shelby Mills facility. They also resulted from causing Asia Pulp and Paper
to advance funds to American Tissue to facilitate the latter in making the $10.5 million interest
payment.
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3. Change Requested by the Trustee
(Unlikelihood that Debtors Would Win on Every Issue
Litigated That Might Be Litigated with Lumbermen’s)
Then, the Trustee asks the Court to reconsider its determination to give the
Officers the benefit of the doubt and to assume victory by the Estate on every single one
of the issues that the Estate might have litigated with Lumbermen’s, by reason of the
Court’s view, when it issued its original decision, that a prediction of the outcome of any
litigation with Lumbermen’s would be too speculative. This issue, in contrast to the first
two issues discussed above, does not relate to a matter the Court overlooked. It is in
substance a request that since the Court is adjusting the damages to get them right, it can
and should see whether, upon further reflection, an adjustment is needed in this respect as
well.
Upon further consideration of the matter, the Court is of the view that it can fix
error of this character too, and that it should.9 Just as appellate courts can correct errors
of law or findings of fact that are clearly erroneous, a court whose decisions are subject to
such review is free to fix them itself, when and if it is of the view that it erred. And that
is no less true (and arguably more true) here, where the Court’s decision is a
recommendation to the district court that would be subjecting these findings to de novo
review anyway. Finally, as a matter of judicial responsibility, the Court believes it owes
a responsibility to its colleagues at the district court to provide the best recommendation
possible. That requires fixing any errors of which this Court becomes aware.
9 See, e.g., Marsden v. Select Medical Corp., 2007 U.S. Dist. LEXIS 9893, at *3-*5, *20, 2007 WL
518556, at *1, *5 (E.D. Pa. Feb. 12, 2007) (reconsidering decision on its own motion; “Justice
Frankfurter once remarked that, ‘Wisdom too often never comes, and so one ought not to reject it
merely because it comes late.’ Henslee v. Union Planters Nat’l Bank & Trust Co., 355 U.S. 595,
600 (1949) (Frankfurter, J., dissenting). This is one of those moments.”).
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On the merits, the Court believes that it made one, though ultimately only one,
material error in analyzing the potential outcome of litigation with Lumbermen’s if that
litigation had ensued. That is with respect to the Approved Debtors Defense—relating to
receivables from American Tissue affiliate account debtors that Lumbermen’s contended
were not covered under the policy. Specific American Tissue affiliates were named
under the policy (referred to as “Approved Debtors”), and without doubt receivables
from such Approved Debtors were covered (subject, of course, to any other applicable
defenses). But other American Tissue affiliates were not named under the policy.
To recover insurance on receivables from Unnamed Subsidiaries, the Estate
would need to secure reformation of the policy, presumably on the basis of mutual
mistake. But K&L observed that “[v]arious facts weigh against [the Estate’s] argument
that the Policy should be reformed to include the Unnamed Subsidiaries.”10 These
included, most significantly, facts that language specifically requested by the Debtor that
would have covered all American Tissue affiliates did not find its way into the final
policy, and that instead the Debtor was asked to specify the American Tissue affiliates
that would be covered.
In the Court’s view, it is at least probable, and possibly even nearly certain, that
the Estate would have lost on the Approved Debtors Defense if it had litigated with
Lumbermen’s over this issue. Those qualitative judgments translate roughly into
probabilities of a loss as to this issue of from 55% to 95%. If Lumbermen’s were to
prevail on this issue, the Estate’s claim against Lumbermen’s would be reduced by
$5.4 million, and the Estate would have suffered to the extent of 85% of that amount.
10 Pl. Exh. 35 at 86.
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When the Court issued its original decision, it effectively gave the Officers credit
for a scenario under which the Estate, in litigating with Lumbermen’s, would prevail on
every issue, other than the Overdue Debtors provision (as to which K&L concluded that
the Estate would certainly lose). But especially with the Trustee have expressed his
concerns in that regard, the Court is constrained now to agree with the Trustee that the
Court erred in this respect, and to conclude that the likelihood that the Estate would win
on every issue is remote. The Court’s analysis should have taken into account the
probability that the Estate would lose on the Approved Debtors Defense, with a
probability of from about 55% to 95% that it would be unable to recover with respect to
another $5.4 million of American Tissue affiliate receivables.
But whether to impose additional damages on the Officers of the $2.53 million to
$4.36 million11 that would otherwise be recoverable by reason of sales to unnamed
American Tissue subsidiaries is a different question. If the Officers had taken the time to
understand policy details—as contrasted to the basics of what the Trade Credit Insurance
Policy said—they might have noticed that the policy covered only American Tissue and
certain named American Tissue affiliates (and that others generating receivables were not
on the list), but it is not clear to the Court that even more careful executives would have
picked this up. The deficiency that would have led to this loss—selling to American
Tissue affiliates that were not listed on the policy—is not at all as obvious or egregious as
re-aging receivables, or failing to familiarize oneself with the requirements of the policy.
The Court cannot find the Officers’ overlooking the fact that some American Tissue
11 Presumably, the Estate, even if successful, could collect for only 85% of the covered receivables.
These figures are the product of multiplication of the $5.4 million that would be lost as a
consequence of the Approved Debtors Defense, the probabilities of an Estate loss as to these
issues (55% to 95%), and the 85% insured amount for the receivables in question.
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subsidiaries were not listed to be sufficiently negligent to constitute an actionable breach
of the duty of care.
As it did with the American Tissue affiliates, the Court has considered the
remaining issues on a prospective litigation with Lumbermen’s, and considers the
outcome on the rest to be too uncertain to conclude that they are anything but speculative.
Thus no further adjustments will be made.
4. Lesser Amount Insured
When the Court read the Officers’ letter and concluded that the Officers were
right in their contention that the Court had misunderstood the maximum level of
insurance coverage, it asked the parties to discuss an additional issue. While the Court
had considered the uninsured portion to be an acceptable risk when the Court thought that
receivables up to $15 million had been insured, would it have to reexamine this finding if
it were to find (as the Court now thinks it must) that Koplik and Siegel had left their trade
receivables uninsured to the additional extent of another $3.25 million?
This too is a difficult question, but on balance the Court believes it should not
adjust the damages as a consequence of this matter. The added exposure is not
dramatically different than the original exposure. As importantly, adding this as damages
would effectively undo the correction that the Court firmly feels that it must make as a
consequence of the Officers’ original point.
Conclusion
For the foregoing reasons:
(a) the damages will be decreased by $3,250,000 to account for the
deductible and coverage to the extent of only 85% of losses; and
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(b) the damages will be increased by $2,311,613 to account for the
costs associated with the Forbearance Agreement.
Amended Proposed Findings of Fact and Conclusions of Law after Trial, consistent with
these conclusions, are being filed with this Decision.
Dated: New York, New York s/Robert E. Gerber
July 11, 2012 United States Bankruptcy Judge
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