LAMONICA et al v. Tilton et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
: 	Chapter 7
TRANSCARE CORP., et al., 	: 	Case No. 16-10407 (SMB)
: 	(Jointly Administered)
Debtor. 	:
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SALVATORE LAMONICA, as Trustee 	:
for the Estates of TransCare Corp., et al. 	: 	Adv. Proc. No. 18-01021 (SMB)
:
Plaintiff, 	:
:
v. 	:
:
LYNN TILTON, et al., 	:
:
Defendants. 	:
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MEMORANDUM DECISION GRANTING IN PART
AND DENYING IN PART MOTION TO DISMISS
A P P E A R A N C E S:
STORCH AMINI PC
Attorneys for Plaintiff
2 Grand Central Tower
140 East 45th Street, 25th Floor
New York, NY 10017
Bijan Amini, Esq.
Steven G. Storch, Esq.
Avery Samet, Esq.
Jaime B. Leggett, Esq.
Of Counsel
PROSKAUER ROSE LLP
Attorneys for Defendants
Eleven Times Square
New York, NY 10036-8299
Michael T. Mervis, Esq.
Timothy Q. Karcher, Esq.
Nicole A. Eichberger, Esq. (pro hac vice)
Of Counsel
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STUART M. BERNSTEIN
United States Bankruptcy Judge:
Following the dismissal of his original complaint, see LaMonica v. Tilton (In re
TransCare Corp.), 592 B.R. 272, 287-92 (Bankr. S.D.N.Y. 2018), the Plaintiff, Salvatore
LaMonica (“Trustee”), trustee of the administratively consolidated estates of TransCare
Corporation and numerous debtor-affiliates (collectively, “TransCare” or the “Estate”),
filed an Amended Complaint seeking to recover damages from the Defendants 1 under
multiple theories. (See Amended Complaint, dated Nov. 28, 2018 (“Amended
Complaint”) (ECF Doc. #53).) 2 Certain Defendants named in Count IV
(Recharacterization of Debt as Equity against Ark II), Count VI (Lender Liability,
Common Law Breach of Fiduciary Duty, and Common Law Assumption of Control
against all Defendants other than Tilton), and Count XI (Constructive Fraudulent
Transfer; Recovery of Same; Claim Disallowance against PPAS) moved to dismiss those
Counts. 3 (See Defendants’ Motion to Dismiss Certain Claims Asserted in the Chapter 7
Trustee’s Amended Adversary Complaint, dated January 14, 2019 (“Motion to
Dismiss”) (ECF Doc. # 60); see also Defendants’ Reply in Further Support of Their
Motion to Dismiss Certain Claims Asserted in the Chapter 7 Trustee’s Amended
Adversary Complaint, dated March 15, 2019 (“Reply”) (ECF Doc. # 68).) The Trustee
1 	The Defendants include Lynn Tilton, Patriarch Partners Agency Services, LLC (“PPAS”), Patriarch
Partners, LLC (“Patriarch Partners”), Patriarch Partners Management Group, LLC (“PPMG”), Ark II CLO
2001-1, Limited (“Ark II”), Transcendence Transit, Inc. (“Transcendence”), and Transcendence Transit II,
Inc. (“Transcendence II”). The Defendants other than Tilton are referred to collectively as the “Entity
Defendants.”
2 	“ECF” refers to the electronic docket in this adversary proceeding.
3 	Count IV is asserted against both PPAS and Ark II. The Trustee withdrew the claim against PPAS
in response to the Motion to Dismiss. Count XI is also asserted against both PPAS and Ark II but only
PPAS seeks to dismiss the Count.
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opposed the motion. (See Plaintiff’s Opposition to Defendants’ Partial Motion to
Dismiss, dated March 1, 2019 (“Opposition”) (ECF Doc. # 63.))
At the March 28, 2019 hearing, the Court granted the motion to dismiss the
constructive fraudulent transfer claim asserted in Count XI against PPAS and reserved
decision on the balance of the Motion to Dismiss. For the reasons that follow, the
Motion to Dismiss is granted as to Count VI and denied as to Count IV.
BACKGROUND4
Prior to bankruptcy, TransCare provided emergency medical transportation
services, including 911 ambulance services, to hospitals and municipalities in New York,
Pennsylvania and Maryland, and disability transportation services for municipal
authorities, including the New York City Transit Authority (“MTA”). (¶¶ 1, 8.) Tilton
indirectly owned the majority of TransCare’s equity and was the sole member of
TransCare’s Board of Directors. (¶¶ 2, 9, 22.) She also managed and directly or
indirectly owned the Entity Defendants, all part of the “Patriarch” family of companies.
(¶ 9; see ¶¶ 10-14.) The Entity Defendants operated from the same headquarters in New
York City, their employees worked together in the same office space, they shared the
same email domain, documents and information (including information about
TransCare), worked on matters without regard to which entity was their specific
employer and held themselves out to the world as “Patriarch Partners.” (¶ 29.) Tilton
also controlled non-defendants Zohar CDO 2003-1, Ltd., Zohar II 2005-1, Ltd., Zohar
III, Ltd. (collectively, the “Zohar Entities”) as their collateral managers. (¶ 30.) Finally,
4 	Unless otherwise stated, the facts are derived from the allegations in the Amended Complaint. The
parenthetical “(¶)” followed by a number refers to paragraphs in the Amended Complaint.
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Tilton owned 99% of and controlled non-Defendant Ark Investment Partners II, L.P.
(“Ark Investment”). (Id.)
A. 	The 2003 Credit Agreement
TransCare had previously filed pre-negotiated chapter 11 cases in 2002. (¶ 20.)
Prior to the 2002 case, Ark II had purchased approximately 51% of TransCare’s
outstanding senior secured debt, and it acquired approximately 51% of the shares of the
reorganized TransCare under the confirmed plan in July 2003. (¶ 22.) The 2003
chapter 11 plan also provided for a $33.5 million credit facility for Reorganized
TransCare that was memorialized in a Credit Agreement, dated Aug. 4, 2003 (“Credit
Agreement”). (¶ 23.) 5 PPAS served as administrative agent under the Credit
Agreement, and approximately 51% of the loans under the Credit Agreement were held
by two Tilton-controlled entities, Ark II and Ark Investment. (Id.)6 Zohar III, Ltd. took
over Ark II’s loan in 2007 and Ark II ceased to be a lender under the Credit Agreement.
(¶ 27 n. 3.)
From at least 2014 through the filing of TransCare’s bankruptcy, the lenders
under the Credit Agreement included two third party lenders, Credit Suisse Alternative
Capital LLC and First Dominion Funding I, the three Zohar Entities and Ark
5 	Excerpts from the Credit Agreement are attached as Exhibit 1 to the Declaration of Michael T.
Mervis in Support of Defendants’ Motion to Dismiss Certain Claims Asserted in the Chapter 7 Trustee’s
Amended Adversary Complaint, filed Jan. 14, 2019. (ECF Doc. #61.)
6 	In 2006, TransCare entered into a revolving credit agreement with Wells Fargo, N.A. (“Wells
Fargo”), dated October 13, 2006 (“Wells Fargo Facility”). (¶ 25.) Wells Fargo received a senior lien on
certain of TransCare’s assets and accounts receivables, including the right to receive payments from
TransCare’s valuable paratransit contract with the MTA (“MTA Contract”). (¶ 26.) PPAS retained a
senior lien on TransCare’s vehicles and miscellaneous physical assets and agreed not to seek to foreclose
on any assets subject to Wells Fargo’s senior lien. (¶ 26.)
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Investment. (¶ 27.) At the time the Credit Agreement was executed and at the time each
amendment was executed, Tilton controlled PPAS (the administrative agent), the
“Required Lenders” (as defined in the Credit Agreement) and TransCare. (¶¶ 25, 28.)
B. 	Tilton’s Control of TransCare and the Entity Defendants
The gravamen of the Amended Complaint is that Tilton used her control over
TransCare and the Entity Defendants to breach her fiduciary duties and self-deal, all to
the detriment of TransCare. For example, she prohibited TransCare from refinancing
the debt owed under the Credit Agreement, (¶ 31), and caused TransCare to pay over $11
million to PPAS on account of the loans under the Credit Agreement between 2012 and
2014. (¶ 38.) In a July 2012 written consent of the sole director, Tilton prohibited any
TransCare officer from conducting various activities, including disclosing financial or
shareholder information to any third party, entering into any contract not contemplated
by the annual plan or engaging legal counsel, and restricted certain functions to a
designated executive. (¶ 34.) As of 2015, however, Tilton had not approved an annual
plan or selected a designated executive as contemplated in the 2012 written consent.
(Id.) Therefore, all powers remained in the board of directors, with Tilton as the sole
director. (Id.) Brian Stephen, in-house counsel at Patriarch Partners who claimed to
represent TransCare’s board, explained to TransCare’s CEO, Glenn Leland, that Leland
was prohibited from taking even preliminary steps to any actions requiring board
approval. (¶ 35.) 	This effectively prohibited any independent action by TransCare’s
executives. (Id.)
Although Tilton retained complete control of TransCare, she rarely
communicated directly with its executives, instead directing them to communicate
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through, and take orders from, her employees at various Patriarch entities. (¶ 36.)
These employees included Stephen, Jean-Luc Pelissier (Executive Managing Director at
PPMG), Michael Greenberg (Analyst at Patriarch Partners), Randy Jones (Managing
Director at Patriarch Partners), Brad Schneider (Analyst at Patriarch Partners), and
Scott Whalen (Tilton’s son-in-law, Credit Analyst at Patriarch Partners until 2014/2015,
and thereafter Director at PPMG). (¶¶ 35-36, 41.) Their orders to TransCare included
the hiring and firing of TransCare’s employees and the payment or non-payment of
TransCare’s vendors. (¶ 37.) In transactions between PPAS or Ark II and TransCare,
Tilton would execute the agreements on behalf of PPAS or Ark II, and direct TransCare
executives or employees of other Patriarch entities to execute the agreements on behalf
of TransCare. (Id.) For example, Greenberg executed amendments to the Credit
Agreement on behalf of TransCare. (Id.) TransCare lacked independent counsel in any
transaction entered into with any of Tilton’s companies. (Id.)
C. 	TransCare’s Financial Decline and Potential Purchasers
From 2012 through 2014, TransCare operated profitably with revenues of
approximately $130 million and positive EBITDA. (¶ 38.) The MTA Contract was
TransCare’s most lucrative business segment, historically generating $22 million in
revenue and $3.7 million in EBITDA. (¶ 39.) By 2015, however, TransCare’s costs grew
and it began losing clients because it was not investing in new vehicles. (¶ 38.) Years of
under-investment left TransCare without the financial ability to fund payroll, pay
vendors, or obtain insurance in the ordinary course. (¶ 3.) TransCare’s accounts
payable grew and its critical vendors went unpaid. (¶ 38.) TransCare’s executives were
told that “not paying bills on time and in full was the ‘Patriarch way.’” (Id.) TransCare’s
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business was in such distress that the MTA indicated that it might not renew the MTA
Contract, which was set to expire in mid-2015, due to TransCare’s deteriorating
financial condition. (¶ 39.) TransCare had such poor credit that suppliers were refusing
to supply parts for the MTA vehicles even though the MTA reimbursed TransCare for
the parts. (Id.)
Throughout 2015, TransCare’s financial distress resulted in nearly missing or
actually missing critical payments such as payroll and payroll taxes, failing to pay
essential vendors, such as EZ-Pass, and lacking sufficient cash on hand to pay necessary
expenses like gasoline, uniforms, and replacement engine parts. (¶¶ 3, 40, 45-46, 48-53
& 61-65.) Regulators threatened to shut down the MTA business, (¶ 52), and key
suppliers were refusing to continue doing business. (¶¶ 39, 61.) TransCare employees
were forced to pay for tolls and gas out of pocket. (¶ 53.) On February 4, 2015,
TransCare executives warned Tilton that the company lacked cash to make payroll the
following day and faced a projected $6.7 million shortfall by the end of March. (¶ 40.)
By the end of the year, employees were leaving in frustration, including the head of the
MTA paratransit division. (¶ 63, 66.)
In 2015, the CEO of TransCare received multiple offers from competitors to
purchase TransCare or portions of TransCare’s business. (¶¶ 41-44, 53-55, 66, 68.)
These offers were rebuffed. For example, on February 5, 2015, Glenn Leland,
TransCare’s CEO, advised Pelissier and Schneider that National Express offered to
purchase TransCare’s MTA Contract for approximately $15-18 million and to
immediately deliver a non-refundable deposit in the amount of $1.7 million to begin
negotiations. (¶¶ 42-42.) 	Around the same time, RCA Ambulance Service expressed
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an interest in purchasing TransCare to Tilton and TransCare. (¶ 44.) On February 18,
2015, Leland sent a draft stabilization plan for TransCare to Pelissier, Schneider and
Greenberg noting that TransCare was “not a viable on-going concern without
immediate investment and assertive course correction” (emphasis in original). (¶ 45.)
He presented the sale of the MTA Contract as an alternative to the complete collapse of
TransCare’s business. (Id.)
National Express approached TransCare again in July 2015, along with two other
national ambulance companies interested in purchasing all or parts of TransCare. (¶¶
53-54.) National Express delivered a signed letter of intent to TransCare on July 10,
2015, offering to purchase the MTA Contract for $6-7 million, plus the assumption of $2
million in related liabilities. (¶ 55.) Leland sent the offer on to Pelissier, Greenberg and
Whalen. (Id.) Whalen responded to Leland immediately, denying him permission to
engage the offer and stating that a letter of intent was “way premature.” (¶ 56.)
National Express reached out again in December 2015, offering to purchase the MTA
Contract for approximately $6-8 million. (¶ 66.) Leland again relayed the offer to
Pelissier, Greenberg and Stephen recommending that TransCare immediately begin
negotiations of the sale of the MTA Contract to avoid a complete shutdown. (¶¶ 66-69).
Tilton and her employees refused to let TransCare’s executives consider any of
these offers, and instead, provided cash infusions to the company throughout the year.
(¶¶ 43-44, 47, 56-59, 67-69.) The only time Tilton spoke with Leland directly was to
berate TransCare’s CEO “for daring to explore a sale option.” (¶ 43.) Stephen told
Leland that he “had no authority to even discuss sale options of any assets with any
company,” and “claimed that TransCare would not receive any of the potential sale
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proceeds because ‘Lynn has other debts.’” (Id.) Pelissier told Leland “that under no
circumstances could he attempt to raise funds by exploring potential sales.” (Id.)
Whalen told Leland to make clear “that the business is not for sale at this time.” (¶ 56.)
Leland confirmed that despite TransCare’s desperate financial situation, he was being
instructed to tell National Express that “per Patriarch Partners,” TransCare was not for
sale. (¶ 58.)
A complicating factor in TransCare’s financial situation occurred in July 2015,
when Wells Fargo discovered a $1.5 million discrepancy in TransCare’s reported
receivables and promptly suspended TransCare’s credit line. (¶ 52.) This suspension
caused a bounced insurance check and missed payroll. (Id.) In mid-December 2015,
Tilton began exploring sale options for TransCare. (¶ 71.) Greenberg delivered research
on comparable sales of ambulance companies to Tilton in December 2015, which
implied a valuation for the MTA Contract of $22-36 million. (¶ 72.) In late December
2015, Tilton sent a proposal to Wells Fargo to sell TransCare’s assets by September
2016. (¶ 73.)
On or about January 15, 2016 and January 29, 2016, PPAS paid approximately
$810,000 and $690,000 (the “January Advances”) to insurance companies on behalf of
TransCare. (¶ 76.)
D. 	Events Surrounding the Filing
According to the Amended Complaint, February 9, 2016 marks the date that
Tilton began to execute her plan to acquire TransCare’s most valuable assets and scuttle
TransCare. On February 9, 2016, Pelissier informed the MTA that the owner of
TransCare wished to transfer the MTA Contract to a different entity, (¶ 79), Tilton’s
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personal lawyers at Skadden, Arps, Slate, Meagher & Flom LLP contacted attorneys at
Curtis Mallet-Prevost, Colt & Mosle LLP about the need to file chapter 11 cases for
TransCare immediately, and TransCare signed an engagement letter the following day.
(¶ 80.) On February 10, 2016, Tilton also incorporated Transcendence and its wholly-
owned subsidiary Transcendence II. (¶ 81.) The same day, Greenberg told TransCare’s
vice president, Glen Youngblood, that Transcendence II would be taking over
TransCare’s MTA Contract, which then had an estimated $25 million in revenue, and its
paratransit operations, which had an estimated $31 million in revenue. (¶ 83.)
Also on February 10, 2016, nearly four weeks after the initial January Advance,
Tilton sought to convert the January Advances into a new loan. At her direction,
Greenberg provided documents to TransCare related to a new credit facility between
TransCare and Ark II, including a loan agreement (“Ark II Credit Agreement”), dated
“as of January 15, 2016,” a security agreement, a guaranty, and an intercreditor
agreement between Ark II and PPAS. The latter subordinated the lenders lien and right
to payment under the Credit Agreement to the lien and right to payment granted to Ark
II under the Ark II Credit Agreement. (¶ 84.) The intercreditor agreement was signed
by Tilton on behalf of both Ark II and PPAS. (Id.) The Ark II Credit Agreement
contemplated loans of up to $6.5 million, but this amount was never made available to
TransCare.7 (¶ 85.)
7 	In February 2016, TransCare failed to pay payroll taxes, and it owed approximately $1.148 million
in back payroll taxes by February 24, plus $172,000 in penalties and interest. (¶ 92.) In addition,
TransCare lacked the funds to make payroll, pay 401(k) obligations and other critical expenses, and Tilton
refused to allow additional draws on the Ark II Credit Agreement to cover these payments. (¶¶ 92-93.)
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For the Transcendence plan to succeed, Tilton needed to convince employees,
vendors, insurers, and governmental agencies to accept the substitution of
Transcendence for TransCare. (¶ 88.) Tilton held meetings with TransCare’s executives
in Patriarch’s offices to model out which business units would be transferred to
Transcendence and estimate the amount of revenue they could be expected to bring to
the new company. (¶ 88.) On February 11, 2016, Randy Jones told TransCare
executives who were working on the plan and being offered positions in the new
Transcendence company that they “cannot breath[e] a word until we have the overall
deal finalized.” (¶ 89.)
On February 24, 2016, PPAS purported to effectuate a strict foreclosure under
Article 9 on certain of TransCare’s assets, including its ambulances and paratransit
division. (¶¶ 94-95 & n. 6 & 7.) Apparently, PPAS accepted the MTA Contract, the stock
of three TransCare subsidiaries, two vendor contracts, and certain of TransCare’s
personal property in exchange for the satisfaction of $10,000,000 under the Credit
Agreement. (¶ 95.) The documentation did not provide notice to Wells Fargo or explain
the basis for the $10 million figure. (¶ 96.) Tilton signed a written consent as the sole
director of Transcendence II to authorize it to enter into an assignment agreement for
the MTA Contract. (¶ 98.) In addition, pursuant to a bill of sale and other documents
dated February 24, 2016, Transcendence received other foreclosed assets of TransCare,
including the equity of debtors TransCare Pennsylvania, Inc., TC Hudson Valley
Ambulance Corp. and TC Ambulance Corporation. (¶ 99.) Although PPAS executed the
foreclosure, Tilton took the position that Ark II was the senior secured lender and
distributed the proceeds to Ark II rather than PPAS. (¶ 100.)
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E. 	The Unraveling of the Strict Foreclosure and the Bankruptcy
On February 24, 2016, Tilton directed TransCare and ten subsidiaries to file for
chapter 7 relief. (¶ 103.) Late in the evening on February 25, 2016, individuals at
Patriarch realized that the Transcendence plan would not succeed. (¶ 105.) At 10:53
p.m., Stephen sent an email directing TransCare executives to “secure” as many assets
as possible, targeting the most valuable, portable assets first, including TransCare’s
accounts receivable server. (¶¶ 105-06.) TransCare’s vice president refused and
contacted the Trustee. (¶ 106.) On February 25, 2016, PPAS advised the Trustee that it
had conducted a strict foreclosure of certain assets that were not part of the Estate. (¶
107.) On April 25, 2016, the three TransCare entities whose assets were part of the strict
foreclosure filed chapter 7 petitions. (¶ 107.)
F. 	This Adversary Proceeding
The Trustee filed the original complaint on February 22, 2018, (ECF Doc. # 1),
and the Defendants moved to dismiss several counts. (ECF Doc. # 10.) The Court
partially granted and partially denied the motion and granted the Trustee leave to file
the Amended Complaint. See TransCare, 592 B.R. at 292.
The Amended Complaint includes fourteen counts but the Motion to Dismiss
only targets Counts IV (Recharacterization), Count VI (Lender Liability and Breach of
Fiduciary Duty) and Count XI (Constructive Fraudulent Transfer). As noted, the Court
dismissed Count XI as to PPAS from the bench and reserved decision on the balance of
the motion.
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DISCUSSION
“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (citations omitted); accord Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007); Ideal Steel Supply Corp. v. Anza, 652 F.3d 310,
323-24 (2d Cir. 2011), cert. denied, 565 U.S. 1241 (2012). “A claim has facial plausibility
when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Ideal Steel Supply
Corp., 652 F.3d at 324 (quoting Ashcroft v. Iqbal, 556 U.S. at 678. In deciding the
motion, “courts must consider the complaint in its entirety, as well as other sources
courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in
particular, documents incorporated into the complaint by reference, and matters of
which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 322 (2007). A complaint is deemed to include any written instrument
attached to it as an exhibit, documents incorporated in it by reference, and other
documents “integral” to the complaint. Chambers v. Time Warner, Inc., 282 F.3d 147,
152-53 (2d Cir. 2002); accord Int’l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62
F.3d 69, 72 (2d Cir. 1995); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48
(2d Cir. 1991), cert. denied, 503 U.S. 960 (1992).
A. 	Count IV: Recharacterization
Count IV seeks to recharacterize as equity all claims asserted against the Estate
by Ark II for funds “purportedly loaned” to the Debtors. (¶ 121.) Ark II maintains that
the Trustee has failed to plead facts sufficient to trigger the so-called ‘AutoStyle factors’
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or ‘a meaningful subset of them.’” (Motion to Dismiss ¶ 4 (citing Weisfelner v. Blavatnik
(In re Lyondell Chem. Co.), 544 B.R. 75, 94 (Bankr. S.D.N.Y. 2016).) In essence, Ark II
contends that the January 2016 loan looks, walks and talks like a loan, not an equity
infusion. (See Motion to Dismiss ¶¶ 53-65.) The Trustee responds, primarily pointing
out that at the time the funds were actually advanced, there was no loan documentation.
(Opposition at 26-28.)
Bankruptcy courts are courts of equity, and as such, they have the equitable
power to recharacterize claims asserted against a debtor so that “substance will not give
way to form.” Pepper v. Litton, 308 U.S. 295, 305 (1939); see also Lyondell, 544 B.R. at
92-92. Recharacterization of a claim from debt to equity “is appropriate where the
circumstances show that a debt transaction was actually an equity contribution ab
initio.” Bayer Corp. v. MascoTech, Inc. (In re AutoStyle Plastics, Inc.), 269 F.3d 726,
747-48 (6th Cir. 2001) (citing In re Cold Harbor Assoc., L.P., 204 B.R. 904, 915 (Bankr.
E.D. Va. 1997) (internal quotes omitted)). Courts have adopted a variety of multi-factor
tests, borrowed from non-bankruptcy law, to help give shape to a recharacterization
analysis. Cohen v. KB Mezzanine Fund II, LP (In re SubMicron Sys. Corp.), 432 F.3d
448, 455-56 (3d Cir. 2006).
The test adopted by courts in this District is the eleven-factor analysis set forth in
Auto-Style. See, e.g., In re Aéropostale, Inc., 555 B.R. 369, 420-21 (Bankr. S.D.N.Y.
2016); In re Sabine Oil & Gas Corp., 547 B.R. 503, 566 (Bankr. S.D.N.Y. 2016), aff’d,
562 B.R. 211 (S.D.N.Y. 2016), appeal dismissed, No. 16-2187 (2d Cir. Nov 22, 2016);
Lyondell, 544 B.R. at 93-94; Official Comm. of Unsecured Creditors v. Bay Harbour
Master Ltd. (In re BH S & B Holdings LLC), 420 B.R. 112, 157-58 (Bankr S.D.N.Y.
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2009); Adelphia Commc’ns Corp. v. Bank of Am., N.A. (In re Adelphia Commc’ns
Corp.), 365 B.R. 24, 74 (Bankr. S.D.N.Y. 2007). Under this test, the Court considers: (1)
the names given to the instruments, if any, evidencing the indebtedness; (2) the
presence or absence of a fixed maturity date and schedule of payments; (3) the presence
or absence of a fixed rate of interest and interest payments; (4) the source of
repayments; (5) the adequacy or inadequacy of capitalization; (6) the identity of interest
between the creditor and the stockholder; (7) the security, if any, for the advances; (8)
the corporation’s ability to obtain financing from outside lending institutions; (9) the
extent to which the advances were subordinated to the claims of outside creditors; (10)
the extent to which the advances were used to acquire capital assets; and (11) the
presence or absence of a sinking fund to provide repayments. AutoStyle, 269 F.3d at
749-50.
“No one factor is controlling or decisive [and] [t]he factors must be considered
within the particular circumstances of each case.” Id.; accord In re Aéropostale, 555
B.R. at 423; In re BH S & B Holdings, 420 B.R. at 157. A bankruptcy court can
recharacterize a claim as equity even if fewer than all of the factors weigh in favor of
recharacterization. Lyondell, 544 B.R. at 94. The ultimate question for the court is
“whether the parties called an instrument one thing when in fact they intended it as
something else. . . . Answers lie in facts that confer context case-by-case.” In re
SubMicron, 432 F.3d at 456.
Here, the factual issues cannot be resolved on the Motion to Dismiss. On the one
hand, the Ark II Credit Agreement looks like a loan. It described itself as a loan (Factor
#1), it contained a fixed maturity date and schedule of quarterly payments (Factor #2),
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it included a fixed rate of interest and interest payments (Factor #3), and it was secured
by a lien on certain assets (Factor #7). In addition, the loan was not subordinated to
creditors; rather, the Ark II lien primed the existing lien of the lenders under the 2003
Credit Agreement (Factor # 9), and the funds were used to pay ongoing, insurance
expenses and not to acquire capital assets (Factor # 10).
On the other hand, the January Advances were made by a different entity several
weeks before the Ark II Credit Agreement was executed, and viewed in that light, the
same factors line up in favor of an equity infusion. In other words, the Amended
Complaint implies that at the time of the January Advances, the parties did not intend
the funds to be a loan from Ark II to TransCare: there was no loan agreement (Factor
#1), no repayment terms, maturity date, or regular payments, (Factor #2), no agreed
rate of interest or interest payments, (Factor #3), and no documentation of a security
interest or lien (Factor # 7). 8
Other AutoStyle factors also weigh in favor of recharacterization. At the time of
the January Advances and even when they were documented, there is no indication that
the parties had any expectation that the loan would be repaid or the source of that
repayment (Factor # 4). The Ark II Credit Agreement moved in lock step with Tilton’s
plan under which PPAS would foreclose on TransCare’s assets, assign them to one of the
Transcendence defendants and place TransCare into a liquidating chapter 7 bankruptcy.
Tilton could not have reasonably expected that TransCare could ever repay the Ark II
8 	The Amended Complaint alleges that Ark II filed a UCC-1 Financing Statement on January 29,
2016. (¶ 78.) At that time, however, there was no security agreement granting Ark II a lien. Furthermore,
the filing occurred two weeks after the initial January Advance.
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loan. Furthermore, the Amended Complaint alleges that by 2015, TransCare lacked the
funds to pay its bills or fix its vehicles and in July, Wells Fargo suspended TransCare’s
line of credit. These allegations imply that TransCare was undercapitalized (Factor # 5)
and unable to obtain third party financing (Factor # 8). If there is no outside financing,
and no reasonable creditor would have acted in the same manner, 9 this is strong
evidence that the advances were capital contributions rather than loans. AutoStyle, 269
F.3d at 752.
Under the facts and circumstances as pled by the Trustee, the Ark II loan looks
like part of a corporate reorganization. Ark II owned 55.7% of insolvent TransCare’s
stock, (¶ 13), and approximately 55% of Transcendence’s stock. (¶ 81.) Through the
strict foreclosure and related transactions, Tilton swapped Ark II’s valueless equity in
TransCare for the same interest in Transcendence’s more valuable equity. While Wells
Fargo’s liens still encumbered some of the TransCare assets that would ultimately be
transferred to Transcendence, Ark II jumped ahead of the secured lenders under the
Credit Agreement and primed them. Furthermore, Ark II was not liable for any of
TransCare’s unsecured debt. The allegations suggest that the January Advances used to
pay insurance were intended to keep the TransCare vehicles operating long enough to
effectuate this reorganization.
9 	Moreover, it is more plausible that a prospective lender in these circumstances would require
TransCare to enter bankruptcy first, make a post-petition loan and obtain the liens and administrative
priorities that typically accompany post-petition financing.
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In conclusion, the recharacterization question is intensely factual, and the
Amended Complaint plausibly alleges that the Ark II “loan” was part of a corporate
reorganization pursuant to which Ark II would exchange its worthless interest in
TransCare for a more valuable interest in Transcendence. Moreover, the timing of the
January Advances, which were made by a different entity and preceded the Ark II Credit
Agreement by up to nearly four weeks, imply that the Ark II Credit Agreement was
intended to paper over a transaction that was not a loan at the time of the January
Advances. Accordingly, the motion to dismiss Count IV is denied.
B. 	Count VI: Assumption of Control
Count VI asserts claims against “Patriarch” on the theory that “Patriarch”
dominated and controlled TransCare to such an extent that “Patriarch” undertook
fiduciary duties to TransCare and breached those and other duties all to TransCare’s
disadvantage. (¶¶ 126-30.) The Amended Complaint does not define “Patriarch,” a
name shared by several defendants, and the only identification of the defendants
targeted by Count VI is to the Entity Defendants listed in the heading. The parties have
operated under this belief and I will too.
The Entity Defendants have moved to dismiss Count VI in its entirety on two
separate grounds. First, the Trustee continues to violate the group pleading rules that
resulted in the dismissal of portions of the original complaint. (Motion to Dismiss ¶¶
74-76.) Second, a claim for “lender liability” can only be asserted against a lender and
since the only lender included in Count VI is Ark II, this claim must be dismissed as to
the other Entity Defendants. (Id. ¶¶ 77-78.)
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The Trustee’s Opposition shifted gears. He contends that each Entity Defendant
owed fiduciary duties to TransCare (regardless of whether it was a lender) under the
same domination and control theory and breached those duties. (Opposition at 31-32.)
While the Entity Defendants concede “the general proposition that fiduciary duties may
be imposed on one who ‘exercises control over the business and affairs of the
corporation,’” (Reply ¶ 31 (citation omitted)), they argue that the Trustee’s Amended
Complaint “does not allege facts sufficient to show that any of the Entity Defendants
assumed the requisite level of control over TransCare to find the existence of a fiduciary
relationship.” (Id.) 	Instead, the Amended Complaint pleads only that “control of
TransCare was always with Lynn Tilton.” (Id.)
Claims for breach of fiduciary duty may be brought against any persons “who
exercise de facto control of the corporation during the relevant times.” Banco De
Desarrollo Agropecuario, S.A. v. Gibbs, 709 F. Supp. 1302, 1306 (S.D.N.Y. 1989)
(citation omitted); see also Quadrant Structured Prod. Co., Ltd. v. Vertin, 102 A.3d 155,
183-84 (Del. Ch. 2014) (“Delaware law imposes fiduciary duties on those who effectively
control a corporation.”). 10 Such control persons “owe exacting fiduciary duties to the
controlled corporation.” Banco De Desarrollo, 709 F. Supp. at 1306 (citing Pepper v.
Litton, 308 U.S. at 305-07). “If a defendant wields control over a corporation, then the
defendant takes on fiduciary duties . . . .” Basho Techs. Holdco B, LLC v. Georgetown
Basho Inv’rs, LLC, No. 11802-VCL, 2018 WL 3326693, at *25 (Del. Ch. July 6, 2018);
10 	The parties cite to both New York and Delaware case law in their pleadings. Since New York and
Delaware courts have adopted similar standards, there is no conflict and the Court need not decide which
law applies. See Limor v. Buerger (In re Del-Met Corp.), 322 B.R. 781, 809 (Bankr. M.D. Tenn. 2005)
(noting that under both New York and Delaware law, a fiduciary relationship arises upon the exercise of
control over a corporation).
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see also Harriman v. E. I. DuPont De Nemours & Co., 372 F. Supp. 101, 106 (D. Del.
1974) (“It is only when a person affirmatively undertakes to dictate the destiny of the
corporation that he assumes such a fiduciary duty.”); Official Comm. of Unsecured
Creditors v. McConnell (In re Grumman Olson Indus., Inc.), 329 B.R. 411, 427 (Bankr.
S.D.N.Y. 2005) (“A fiduciary duty relationship arises under New York law when . . . one
assumes control and responsibility over another.”) (citation omitted). The requisite
degree of control required for a claim for breach of fiduciary duty “can be shown to exist
generally or ‘with regard to the particular transaction that is being challenged.’”
Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 659 (Del. Ch. 2013) (citation
omitted), abrogated on other grounds by El Paso Pipeline GP Co. v. Brinckerhoff, 152
A.3d 1248, 1264 (Del. 2016). “To show that the requisite degree of control exists
generally, a plaintiff may establish that a defendant or group of defendants exercised
sufficient influence ‘that they, as a practical matter, are no differently situated than if
they had majority voting control’” of the corporation. Basho Techs., 2018 WL 3326693,
at *25 (citation omitted).
As the Entity Defendants contend, Count VI suffers from the same group
pleading deficiencies that led to the dismissal of several claims alleged in the original
complaint. See TransCare, 592 B.R. at 287-90. Count VI alleges that “Patriarch”
dominated and controlled TransCare and exploited its domination and control to the
detriment of TransCare. (¶¶ 127-30; see also ¶ 4 (“While TransCare’s executives were
pleading for funds to make payroll, Patriarch executives under her direction were
advising her on plans to seize the same TransCare assets that Tilton would not let
TransCare sell.”); ¶ 37 (“In short, Tilton and Patriarch exercised complete dominion and
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control over TransCare.”).) “Patriarch” refers to all of the Entity Defendants without
distinction. In addition, the contention that the Entity Defendants dominated and
controlled TransCare ignores the Trustee’s fundamental contention that Tilton, not the
Entity Defendants, dominated and controlled TransCare. (¶ 29 (“PPAS, Patriarch
Partners, PPMG, and Ark II operated wholly under Tilton’s control and pursuant to her
directives.”); (¶ 33 (“Tilton exercised an extraordinarily high level of control and
domination over the operations of TransCare.”)
Count VI does incorporate by reference allegations describing how certain
employees of Patriarch Partners (e.g., Stephen, Greenberg, Schneider and Jones) and
PPMG (e.g., Pelissier and Whalen) prohibited TransCare from negotiating a sale with
third parties, (e.g., ¶¶ 35-36, 41-44, 56-58, 67), facilitated the transfer of TransCare’s
assets to Transcendence and Transcendence II and initiated TransCare’s bankruptcy.
(E.g., ¶¶ 80, 83-84, 87, 89-91, 95, 98, 105-06.) However, the Amended Complaint also
alleges that “Patriarch executives did not typically differentiate between the various
Patriarch entities when dealing with TransCare.” (¶ 50, n. 4.; ¶ 5 (“Patriarch employees
under Tilton’s command continued to plot to steal TransCare’s assets under cover of
night.”) Read in its entirety, the gravamen of the Amended Complaint is that Tilton
dominated and controlled TransCare, the Entity Defendants and their employees and
used the Entity Defendants’ employees as her own agents without regard to their duties
as employees of any particular Entity Defendant. 11 Although an employee of a particular
Entity Defendant may have been an agent of that entity and also directed TransCare’s
11 	The Trustee has not asserted an alter ego theory of liability against the Entity Defendants.
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affairs, the Amended Complaint does not imply that he acted as an agent of the Entity
Defendant, as opposed to Tilton, when he exercised control over TransCare.
Even assuming that the Amended Complaint alleged the necessary domination
and control to support breach of fiduciary duty claims against Patriarch Partners and
PPMG, it does not allege that the other Entity Defendants dominated or controlled
TransCare. PPAS served as an administrative agent for a group of lenders under the
2003 Credit Agreement and Ark II was a purported lender under the Ark II Credit
Agreement. The Trustee has proposed a separate theory of lender liability to hold them
liable for TransCare’s various injuries. 12 To impose liability against a lender under this
theory, the plaintiff must allege facts showing that “the lender was: (1) in complete
domination of finances, policy, and business practices of the borrower in respect to the
attacked transaction; (2) the control was used by the lender to commit fraud or
perpetuate the violation of a statutory or other positive legal duty; and (3) the control
and breach of duty must have proximately caused the injury or unjust loss.” Post-
Effective Date Comm. of the Estate of East End Dev., LLC v. Amalgamated Bank (In re
East End Dev., LLC), Adv. Proc. No. 13-8081-reg, 2017 WL 1277443, at * 4 (Bankr.
E.D.N.Y. Apr. 4, 2017); accord Indus. Tech. Ventures LP v. Pleasant T. Rowland
Revocable Tr., No. 08-CV-6227T, 2015 WL 1924924, at *10 (W.D.N.Y. Apr. 28, 2015);
Official Comm. of Unsecured Creditors v. Austin Fin. Servs., Inc. (In re KDI Holdings,
Inc.), 277 B.R. 493, 515-16 (Bankr. S.D.N.Y. 1999) (citing Fisser v. Int’l Bank, 282 F.2d
12 	The Trustee had initially argued that all of the Entity Defendants were liable under a lender
liability theory, but the claims against the non-lenders are now limited to claims based on breach of
fiduciary duty. PPAS was an administrative agent for lenders, not a lender itself. Nevertheless, the Court
will treat it as a lender for purposes of analysis.
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231, 238 (2d Cir. 1960)). “Actual, participatory and total control over the debtor is the
level of control necessary under the instrumentality theory or the alter ego theory.” East
End Dev., 2017 WL 1277443, at *5 (citing KDI Holdings, 277 B.R. at 516). “The level of
control required is often characterized as total or complete domination.” Id. (citing
Nat’l Westminster Bank USA v. Century Healthcare Corp., 885 F. Supp. 601, 603
(S.D.N.Y. 1995)).
Whatever else it alleges they did, the Amended Complaint does not allege facts
suggesting that either PPAS or Ark II dominated or controlled TransCare’s policies or
decision-making. Throughout the Amended Complaint, PPAS acted as administrative
agent for a group of lenders, including with respect to the collection of interest and the
exercise of remedies under the Credit Agreement. Ark II made a purported loan in
January or February 2016. While PPAS may have enjoyed the leverage over TransCare
that comes with its status as administrative agent for secured lenders owed an amount
north of $40 million, and Ark II may have enjoyed similar though lesser leverage, the
exercise of remedies under a loan agreement to foreclose or collect the debt, without
more, does not render either in control under theories of lender liability or breach of
fiduciary duty. East End Dev., 2017 WL 1277443, at *5 (“A lender exercising its rights
under the parties’ loan agreements, without more, does not rise to the level of
dominance necessary to impose lender liability.”)
Finally, the contention that either of the Transcendence entities dominated and
controlled TransCare is also without merit. The Amended Complaint alleges that
Transcendence and Transcendence II were formed by Tilton as part of her plan to strip
TransCare of its assets and reorganize the business around Transcendence. Again,
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whatever else the Amended Complaint alleges they did, it does not allege that they
dominated or controlled TransCare’s business or policies.
Accordingly, Count VI is dismissed.
C. 	Leave to Amend
Lastly, the Court denies the Trustee’s request for leave to amend (again) inserted
at the very end of the Opposition without legal discussion or any effort to justify the
request. While leave to amend should be freely granted, any amendment would be
futile. For the reasons stated at the hearing, PPAS was not a transferee of the transfers
alleged in Count XI and Count XI cannot be amended to make PPAS something it was
not. Furthermore, the Trustee cannot assert a plausible claim that the Entity
Defendants dominated and controlled TransCare in light of his theory that Tilton
directly dominated and controlled everyone.
In addition, any further amendments will unduly delay the resolution of this case.
The joint pre-trial order is due May 3, 2019 and the final pre-trial conference is
scheduled for May 14, 2019. (Order, dated Apr. 2, 2019 (ECF Doc. # 73).) The case is
on target to be tried this summer.
The Court has considered the parties’ remaining arguments and concludes that
they lack merit. The parties are directed to submit a consensual order, or in the absence
of consent, to settle an order consistent with this opinion.
Dated: 	New York, New York
April 30, 2019 	/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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