Official Comm. of Unsecured Creditors v. Calpers Corp.

OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Plaintiff, v. CALPERS CORPORATE PARTNERS LLC, et al., Defendants.

Docket No. 1:18-cv-68-NT

UNITED STATES DISTRICT COURT DISTRICT OF MAINE

October 30, 2020

ORDER ON DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

Plaintiff Official Committee of Unsecured Creditors ("Plaintiff" or "Committee") seeks to avoid and recover certain transfers made by Lincoln Paper and Tissue LLC ("LPT" or the "Debtor") to CalPERS Corporate Partners LLC ("Defendant" or "CCP").¹ Before me is the Defendant's motion for partial summary judgment (ECF No. 197), which asserts that the Debtor (1) was not left with unreasonably small capital or assets as a result of either transfer and (2) was paying its debts as they came due at the time of the transfers. For the reasons stated below, I DENY the Defendant's motion.

BACKGROUND

I. Statutory Background

Under 11 U.S.C. § 548, a bankruptcy trustee may void a transfer of any interest or obligation of the debtor if the debtor voluntarily or involuntarily "received less than a reasonably equivalent value in exchange for such transfer or obligation" and the debtor was in one of the financial conditions specified by the statute. 11 U.S.C. § 548(a)(1)(B). Relevant to this case,² the possible financial conditions that would establish a fraudulent transfer include that the debtor: (1) "was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation" ("Solvency Test"); (2) "was engaged in business or a transaction [or was about to], for which any property remaining with the debtor was an unreasonably small capital" ("Unreasonably Small Capital Test"); or (3) "intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured" ("Payment of Debts Test"). 11 U.S.C. § 548(a)(1)(B). The target of § 548(a)(1) is constructive fraud—transfers for which fraud is presumed, despite lack of actual intent to defraud. See Horwitt v. Sarroff, No. 3:17-cv-1902 (VAB), 2020 WL 5504471, at *24 (D. Conn. Sept. 11, 2020); 5 Collier on Bankruptcy ¶ 548.05 (16th ed.).

Federal law also affords a bankruptcy trustee the right to avoid a transfer that is voidable under applicable state law. 11 U.S.C. § 544(b). Maine has adopted theUniform Fraudulent Transfer Act ("UFTA" or "MUFTA" when referring to Maine statute specifically), which—like § 548—specifies certain conditions that can establish a fraudulent transfer claim. Under 14 M.R.S. § 3575,

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor . . . if the debtor made the transfer or incurred the obligation . . . Without receiving a reasonably equivalent value in exchange for the transfer or obligations and the debtor: (1) Was 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 (2) 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.³

Although the Maine conditions differ from the federal ones, they can likewise be grouped into the "Unreasonably Small Capital Test" and the "Payment of Debts Test." See In re Maine Poly, Inc., 317 B.R. 1, 8 (Bankr. D. Me. 2004) (explaining that the elements of constructive fraud under both statutes "are substantially similar, although not textually identical"). Under both statutes, the plaintiff bears the burden of proving each element. See In re Jackson, 459 F.3d 117, 122 (1st Cir. 2006) (stating that a preponderance of the evidence standard applies under both the Bankruptcy Code and New Hampshire's UFTA); Dev. Specialists, Inc. v. Kaplan, 574 B.R. 1, 7 n.23 (D. Me. 2017) (noting that burden of proof for constructive fraud under MUFTA is in doubt and citing Law Court case that suggested plaintiff must meet clear and convincing evidence standard) (citing Morin v. Dubois, 713 A.2d 956 (Me. 1998)).

II. Factual Background⁴

A. LPT

LPT operated a pulp, paper, and tissue manufacturing mill in Lincoln, Maine (the "Mill"). SOF ¶ 1. The sole member of LPT is LPT Holding, LLC, ("LPT Holding"). SOF ¶ 5. Until 2018, the Board of Managers for both LPT and LPT Holding consisted of Keith Van Scotter, the Chief Executive Officer of LPT; JohnWissmann, the Chief Financial Officer of LPT; Rodney N. Fisher; Douglas Meltzer; and Edward Dan Herring (collectively the "Board" or "LPT Board"). SOF ¶ 7. Both Mr. Meltzer and Mr. Herring were designated to the Board by CCP, which had obtained the right to designate two members from a 2005 loan to LPT. SOF ¶ 89. CCP, Mr. Van Scotter, Mr. Wissmann, and Mr. Fisher are also all members of LPT Holding. SOF ¶¶ 6-7.

B. LPT's Operations Before November of 2013

Until November of 2013, LPT operated as an integrated mill, utilizing a recovery boiler (the "Boiler") to produce its own pulp and fulfill certain energy and heating requirements. SOF ¶ 8. By doing so, LPT enjoyed cost savings relative to tissue-only mills.⁵ SOF ¶ 92.

In early 2013, LPT contracted with Sanabe & Associates, LLC ("Sanabe"), an investment firm that specializes in the paper industry. Sanabe analyzed four strategic scenarios in for LPT. According to a January 2013 e-mail, Doni Perl of Sanabe opined that operating LPT without the pulp mill and the paper machines as a tissue-only mill was "the worst case situation" and concluded that "the tissue machines would struggle to survive" on their own. SOF ¶ 95. On February 4, 2013,Sanabe concluded that, "on an unintegrated basis . . . the tissue machines are EBITDA⁶ negative." SOF ¶ 96.

The Sanabe report was discussed at a July 3, 2013 Board meeting. SOF ¶ 97. Minutes from that meeting state that Mr. Wissmann "moved the discussion to the issues posed by the decline in paper demand, and the concern of management that, without paper or another source of revenue, the mill's long term prospects [were] not good." SOF ¶ 97. Citing the Sanabe report, Mr. Wissmann also reiterated that LPT "need[ed] to make strategic decisions by acquisition, sale or restructuring that [would] change its operating profile to allow it to address market conditions and survive as a going concern." SOF ¶ 97.

C. The Explosion

On November 2, 2013, an explosion at the Mill resulted in significant damage to the Boiler, rendering it inoperable and eliminating LPT's ability to produce its own pulp unless the Boiler was repaired or replaced. SOF ¶¶ 9-10. Following the explosion, LPT filed a claim with its property and casualty insurer, Factory Mutual Insurance Company ("FM Global"). SOF ¶¶ 11-12. FM Global provided LPT with a $10 million advance on the insurance claim. SOF ¶ 13.

On December 9, 2013, the LPT Board held a meeting to consider whether to rebuild the Boiler or pursue an alternative business model focusing solely on the tissue operation, as well as to "discuss whether or not to authorize management to negotiate with FM Global on cash settlement for the recovery event." SOF ¶ 14. LPT's2014 tissue-only budget projected that LPT would have negative EBITDA of $5.15 million in 2014. SOF ¶ 98. According to the minutes from the December 9 meeting, Mr. Herring stated that "there may be significant risks with [LPT] remaining a going concern given the uncertainty regarding future operations, bank financing and FERC." SOF ¶ 100. Mr. Wissmann also reportedly "noted that he shared the concern, given the uncertainty regarding the amount of the business interruption insurance recovery (based upon paper pricing and projected profitability) and his concern with respect to [LPT's] ability to secure commercial financing for operations going forward." SOF ¶ 100. The package that accompanied the Board meeting also contained a slide on distributions to LPT Holding's members but the minutes do not indicate that it was reviewed. SOF ¶ 101.

The Board decided to authorize Mr. Van Scotter and Mr. Wissmann to negotiate a cash settlement of the insurance claim in lieu of rebuilding the Boiler and to continue as a nonintegrated tissue mill. SOF ¶ 15. On December 10, 2013, the Board authorized LPT to accept $49.8 million from FM Global to settle the insurance claim.⁷ SOF ¶ 16. Thereafter, LPT operated as a nonintegrated tissue mill, continuing to operate tissue machines and produce tissue products through August of 2015. SOF ¶¶ 15, 18. In September of 2015, LPT filed for Chapter 11 bankruptcy. SOF ¶ 153.

D. The Distributions

In December of 2013 and May of 2014, the LPT Board authorized distributions to LPT Holding (collectively, the "Distributions"). The Committee asserts that these Distributions constituted constructive fraud. Below, I discuss the facts of each Distribution, as well as the financial condition of LPT at the times surrounding each Distribution.

1. December 2013 Distribution

On December 17, 2013, one week after the LPT Board authorized the insurance settlement, the Board authorized LPT to distribute $3 million to LPT Holding ("December 2013 Distribution"). SOF ¶ 19. LPT Holding, in turn, was authorized to make a distribution to its members, and CCP received a distribution of $1,050,000. SOF ¶¶ 20-22. In connection with this distribution, CCP's Class A Member received $1,039,500 and CCP's Class B Member (Mr. Meltzer or an affiliated entity) received $10,500. SOF ¶ 90.

a. Berry Dunn Audit⁸

LPT's management prepared monthly and yearly financial statements and enlisted Berry Dunn McNeil & Parker, LLC ("Berry Dunn") to independently audit those statements. SOF ¶¶ 28-29. On July 10, 2014, Berry Dunn released its audit of LPT's financial statements for the period ending on December 31, 2013 ("2013Audited Financial Statements"),⁹ and issued a clean audit opinion ("2014 Audit Opinion"). SOF ¶ 32. As part of its auditing process, Berry Dunn interviewed LPT's management, reviewed LPT's assumptions in creating its financial statements, and...