MICHAEL E. ROMERO, Bankruptcy Judge.
THIS MATTER is before the Court on the Order Vacating Bankruptcy Court's Judgment and Remanding for Further Proceedings
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334 (a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(F) and (H) as it concerns proceedings to determine, avoid or recover preferences or fraudulent transfers. Venue is proper in this Court pursuant to 28 U.S.C. § 1409(a).
The factual findings in the Court's original trial order entered March 31, 2014 ("Trial Order"), were not disturbed by the District Court on appeal and this Court will not disturb its previous findings here. Accordingly, the Court hereby incorporates all previous findings of fact as set forth in the Trial Order for purposes of this Order, and hereby reproduces only a portion of those findings as a summary.
In April 2008, Mercury executed a Credit Agreement with Comerica Bank ("Comerica") as part of a $45 million loan (the "Comerica Loan"). The Comerica Loan was secured by substantially all of Mercury's assets and the assets of its subsidiaries, including accounts receivable. On July 25, 2008, Comerica swept Mercury's bank accounts and removed approximately $40 million of cash from those accounts. The sweep significantly diminished Mercury's cash on hand.
On July 30, 2008, Mercury management decided to close numerous operating subsidiaries. The decision was made for a variety of reasons, including the cash sweep by Comerica. Mercury ceased operations at 161 locations and began downsizing employees in California, Texas, and Arizona. Mercury remained operating only through subsidiaries in Colorado (collectively, the "Colorado Subsidiaries"). At the time of the closures, Mercury anticipated a payroll of approximately $1.6 million to be paid on August 6, 2008.
Prior to the sweep, four Colorado subsidiaries (collectively the "Colorado Subsidiaries") had a roughly 30% market share in Colorado.
Mercury first attempted to sell the Colorado Subsidiaries to their largest underwriter, First American Title ("First American"), for $1 million on July 31, 2008. First American declined the offer, although it remained in contact with Mercury regarding a potential sale. Mercury also contacted Fidelity, another major national title insurance company, on August 1, 2008, and proposed a sale of the stock in the Colorado Subsidiaries for $5 million.
In its initial discussions with Fidelity, Mercury disclosed its cash shortfall and insolvency. To conduct due diligence and continue its negotiations relating to a possible purchase of Mercury, Fidelity representatives traveled to Denver on August 4, 2008. During the course of the day on August 5, 2008, Fidelity representatives and Mercury's management negotiated and executed a Stock Purchase Agreement ("SPA"). The SPA called for a purchase price of $5 million to be paid in cash, and Fidelity immediately wired $1 million of the purchase price directly to Mercury. Fidelity took control of the Colorado Subsidiaries the same day.
On August 6, 2008, Fidelity wired an additional $1,484,004 toward the purchase price directly to Comerica, satisfying Mercury's outstanding obligations. Comerica released any liens it had on the shares and the assets of the Colorado Subsidiaries.
After the Comerica release, all shares of the Colorado Subsidiaries were controlled by Fidelity free and clear of all liens and claims. On August 28, 2008, twenty-three days after closing, Mercury filed its Chapter 11 petition, Case No. 08-23125, in this Court. As of the petition date, $2,515,996 of the purchase price remained outstanding.
Mercury's Chapter 11 Plan of Reorganization was confirmed on December 13, 2010. Earlier, on January 27, 2010, Mercury commenced this adversary proceeding against Fidelity, arising out of Mercury's sale of the Colorado Subsidiaries. Mercury sought to recover the alleged value of the Colorado Subsidiaries as a fraudulent transfer under 11 U.S.C. § 548.
On March 31, 2014, following a trial on the merits, the Court issued its Trial Order, concluding as follows:
On April 30, 2014, the Court issued an Order granting Mercury's Motion to Amend,
Fidelity filed its Notice of Appeal on May 1, 2014, and Mercury filed its Notice of Cross-Appeal on May 13, 2014. On March 19, 2015, the District Court issued the Remand Order. The parties did not appeal the Remand Order.
The Remand Order, while vacating the Trial Order in its entirety, only remanded certain issues for further consideration. Those issues were set out in detail in the Court's Briefing Order. The District Court did not disturb this Court's findings regarding jurisdiction to enter final judgment on all issues; its findings of fact; its determinations regarding standing; or its ruling that the $1.6 million transfer between Mercury and its Colorado Subsidiaries was not a preference. This Court's previous findings and conclusions on these issues stand as final, and the Court will not revisit those issues in this Order.
However, the District Court instructed this Court to reconsider the following issues:
On June 10, 2015, the Court issued its Briefing Order to the parties. In accordance with the Remand Order, the parties were requested to brief the following issues:
1. As it relates to whether Fidelity breached the SPA or violated the implied covenant of good faith and fair dealing:
2. As it relates to whether Mercury received reasonably equivalent value for the Colorado Subsidiaries, the fair market value of the subsidiaries Mercury sold to Fidelity, as considered in the context of whether the seller obtained reasonably equivalent value from the objective creditor's perspective, without regard to the subjective needs or perspectives of the debtor or transferee.
Mercury claims Fidelity breached the SPA by failing to pay the $2,515,996 balance of the $5 million purchase price. This remaining amount was subject to a hold back in the SPA which allowed Fidelity to review and indicate its satisfaction with post-closing financial information to be provided by Mercury. Fidelity asserts it is excused from paying the balance because information provided after closing indicated the financial statements provided at the time of execution of the SPA were false and did not fairly present Mercury's financial condition.
At trial, this Court found Fidelity breached the SPA by failing to pay the remainder of the purchase price. On appeal, the District Court determined this Court's interpretation of Section 3.8 of the SPA to be mistaken, and vacated certain of the Court's findings.
The SPA provided for a $5 million purchase price for the shares in the Colorado Subsidiaries. One million dollars was to be delivered to Mercury upon execution of the SPA, with the balance to be paid as follows:
In addition to its promise to provide additional financial information, Mercury represented in § 4.8 the SPA that the financial statements attached thereto as Schedule 4.8 "fairly present the financial condition and results of operations of the Purchased Companies as of the date thereof and for the periods covered thereby."
There is no dispute Fidelity did not pay Mercury approximately $2.5 million. However, Fidelity argues § 4.8 of the SPA was breached by Mercury because the financial statements presented by Mercury failed to disclose approximately $8.6 million in "dark office" liabilities, which includes $3.8 million in contingent guaranty liabilities potentially owed by the Colorado Subsidiaries.
To determine the meaning of "fairly present" as set forth in § 4.8 of the SPA, the Court "must give priority to the parties' intentions as reflected in the four corners of the agreement."
Clear and unambiguous terms will be construed according to their ordinary meaning.
Here, the parties do not agree on the meaning of "fairly present." Mercury argues "fairly present" must be taken in the context of the SPA and "can only mean that the Financial Statements were presented as maintained in the ordinary course, without falsification, and as relied upon by management."
"Fairly present" is not a defined term in the SPA. However, the Court finds the term "fairly present" is clear and unambiguous and should be ascribed its ordinary meaning as set forth in Black's and Merriam-Webster: whether the Financial Statements made available presented the Colorado Subsidiaries' information "equitably, honestly, impartially, reasonably, and with substantial correctness." Further, no SPA provision requires the Financial Statements be "kept in the ordinary course" and "as relied upon by management;" but the Court believes such considerations carry weight as to whether the Financial Statements fairly presented the financial condition of the Colorado Subsidiaries. Finally, Delaware law instructs the Court to apply the definition of "fairly present" in harmony with the remainder of the provisions of the SPA.
2. The Financial Statements Provided in Schedule 4.8 of the SPA Fairly Presented the Financial Condition and Results of Operations of the Purchased Companies as of June 30, 2008.
The Court has determined that "fairly present" is unambiguous and its ordinary meaning is to be applied. Therefore, the Court will not compare the content of the Financial Statement to outside accounting standards such as GAAP, which are not referenced by the SPA. Instead, the Court will simply ascertain whether the information provided was equitable, honest, impartial, reasonable, and substantially correct as it relates to Mercury's financial position on June 30, 2008.
As an initial matter, there is no dispute the information provided in the Financial Statements was honest and accurate. Rather, Fidelity takes issue with what information was not provided — approximately $8.6 million in alleged dark office lease liability, including contingent lease guaranty liabilities for non-Colorado entities. Fidelity asserts these omissions constitute material misstatements which skewed the picture of Mercury's financial situation in such a way that Fidelity's liabilities "ballooned," effectively destroying the benefit of its bargain.
However, Mercury argues the listed liabilities were fairly presented as of the date of the Financial Statements — June 30, 2008 — and Fidelity was aware at the time of closing of the substantially negative events that had occurred since that date, including the July 25, 2008 sweep of cash in its bank accounts. Mercury also points to § 5.2 and § 5.3 of the SPA, in which Fidelity represented it was capable of evaluating the merits and risks of the acquisition, had the opportunity to ask questions concerning the financial and other affairs of the Colorado Subsidiaries, and received satisfactory answers.
The weight of the evidence demonstrates the Financial Statements were fairly presented by Mercury as of June 30, 2008. Specifically, all lease payments being made by the Colorado Subsidiaries as of June 30, 2008 — regardless of whether the leases were "dark" or the payments were solely the result of guaranties — were counted as "occupancy expenses" on the Financial Statements. Further, Fidelity admits $5.7 million of the $8.5 million in allegedly undisclosed lease expenses only became direct liabilities of Mercury after June 30, 2008. In addition, Mercury presented a reasonable explanation for why any dark leases were not also listed as liabilities on the June 30 balance sheet — it followed a policy previously created in conjunction with its auditor, KPMG, to determine how to conduct its reporting.
Fidelity points to several cases in support of its argument that the failure to disclose guaranteed liabilities constitutes a materially false financial statement. However, the authority cited for this proposition is not relevant because the cases pertain solely to dischargeability proceedings involving borrower fraud in obtaining credit.
Fidelity argues it requested Mercury to provide a list of contingent liabilities, and it relied upon Mercury's silence as an indication that no such liabilities existed. However, the Court does not find this assertion credible because it hinges on the silence of Mercury in response to a single e-mail as an indication of the non-existence of guaranty liability.
Ultimately, Fidelity admits the fatal flaw in its position — given the rush to close the deal, there simply was not enough time to absorb and understand the information being provided. "Even under the best of circumstances, due diligence takes time — it takes a while to figure out who is who, to whom you can ask questions, and what to ask."
This Court must construe § 4.8 of the SPA in a way that honors the plain meaning of the provision and gives priority to the intentions of the parties as demonstrated in the entirety of the SPA. A fair reading of the SPA shows both parties intended a quick sale and acknowledged they were proceeding with unusually expedited due diligence in order to close the sale.
In the context of the SPA, which required further disclosure of financial information after closing, it cannot be said the financial statement was intended to be an all-encompassing view of the Colorado Subsidiaries' financial picture. Instead, it appears it was intended to be a starting point. Prior to executing the SPA, Fidelity had a chance to review the Financial Statement and its contents, as well as ask all questions it deemed necessary before closing. Fidelity represented it received satisfactory answers. Based on the lack of evidence the Financial Statement was substantially inaccurate or dishonest, this Court finds any "surprises" post-closing were an inherent risk of the transaction.
For these reasons, the Court finds the financial statements provided by Mercury fairly presented the financial condition of the Colorado Subsidiaries, and Fidelity did not act reasonably in refusing to pay the balance of the purchase price to Mercury. Thus, the Court further finds Fidelity breached the terms of the SPA and the covenants of good faith and fair dealing after the SPA's execution.
Mercury agreed to sell the Colorado Subsidiaries to Fidelity for $5 million. Post-petition, Mercury now claims the transaction was a fraudulent transfer under § 547 because it did not receive reasonably equivalent value in exchange for the sale. Mercury claims the Colorado Subsidiaries had a fair market value of $15,627,884 as of the date of the sale.
On appeal, the District Court vacated this Court's finding Mercury received reasonably equivalent value in exchange for the sale of the Colorado Subsidiaries. However, the District Court affirmed this Court's use of the three-factor test set forth in the Fruehauf Trailer caseand did not disturb this Court's findings that the transaction was conducted at arm's length and in good faith.
At the outset, the Court notes that, even when evaluating fair market value solely from the objective creditor's perspective, experts often disagree on the appropriate valuation of corporate properties, "even when employing the same analytical tools."
Many courts have determined "when sophisticated parties make reasoned judgments about the value of assets that are supported by then prevailing marketplace values and by the reasonable perceptions about growth, risks, and the market at the time, it is not the place of fraudulent transfer law to reevaluate or question those transactions with the benefit of hindsight."
Here, the parties agree fair market value is "the amount at which property would change hands between a willing buyer and a willing seller if neither is under compulsion and both have reasonable knowledge of the relevant facts."
The Court previously stated it believes the sale price of the Colorado Subsidiaries might have been higher if Mercury had not been insistent on an immediate sale. However, the Court cautioned that Mercury had not presented sufficient evidence to show the price would have increased by $10 million.
On remand, Mercury argues its expert, Mr. Demchick, provided the only evidence of the fair market value of Mercury, and therefore, Mercury's value should carry the day. According to Mercury, the difference between Mr. Demchick's value and the contract price stems from subjective factors such as Mercury management's mistaken understanding of the amount of cash available and the fear of immediate punitive action by the Colorado Department of Insurance. However, as addressed in the Remand Order, the subjective perspective is inapposite.
Rather, from an objective creditor's standpoint, the Court is persuaded that negative circumstances existed that were not fully taken into account by Mr. Demchick's analysis and that have a significant impact on Mercury's value. These include:
Mr. Demchick's valuation almost entirely skirts the events occurring between July 25, 2008, and August 5, 2008, and, as a result, the Court confirms its previous conclusion that his $15 million valuation is excessive.
Much, if not all, of the "value" in a title company's business is the relationships it has established with its employees and its clients.
For example, Elaine Vincent, president of American Heritage Title Company, one of the Colorado Subsidiaries, testified the effect of the July 2008 cash sweep and subsequent closing of other Mercury operations was "devastating" to her company. Although American Heritage was able to convince "some" customers to stay with the company, "large lenders were notifying [American Heritage] that they would not fund to our trust account, therefore, we couldn't close if we didn't have the funds, so many of the larger lenders, as they started to continue to filter through the system, more and more [customers] were calling [and] requesting to move the file."
John Longo, former president of Security Title Guaranty Co. (which also controlled United Title Company, Inc., one of the Colorado Subsidiaries) testified the effect of the July 2008 cash sweep and subsequent closures had a substantially negative impact on the businesses which was "certainly worse" than he anticipated. According to Mr. Longo, "Employees were now talking about, [s]hould we be leaving? Clients, certainly, we were talking to on a daily basis, trying to, in certain cases, help them transfer their files [to other title companies], and [in] other cases trying to assure them that we're doing everything we can to stabilize. . . ."
Mercury contends all these events were not serious — and points out all the customers who left subsequently returned to the Colorado Subsidiaries. However, Mercury ignores the fact the customers returned after the sale to Fidelity. The evidence shows these customers returned because of the sale, not in spite of it. As even Mr. Hauptman admitted, the problem was "Mercury," not the subsidiaries.
Moreover, the Court notes for purposes of determining reasonable equivalence, the critical date is the date of the transfer.
As to the valuation evidence from Mercury, this leaves the Court with Mr. Hauptman's testimony that the $5 million purchase price offered was a "substantial discount" on Mercury's value in order to obtain an immediate sale.
The evidence presented by Mercury at trial does not support a finding the sale price of the Colorado Subsidiaries would have been high enough to remove the $5 million price from the realm of reasonably equivalent value. For example, First American declined an immediate purchase of the Colorado Subsidiaries for a mere $1 million and apparently expressed concern about certain liabilities of the companies, including dark office liabilities.
However, Fidelity's expert valuation also is not without its flaws. The opinion of Fidelity's expert, Mr. Peltz, fails to take into account the various misjudgments by Mercury's management and assumes an immediate sale was required, when the record clearly reflects it was not.
Therefore, this Court must determine the value of Mercury at the time of sale, weighing the conflicting evidence presented by the parties. This is no easy task, as neither expert report is wholly determinative. However, the Court has identified two applicable factors — the "lack of marketability" discount and the capital structure included in the weighted average cost of capital calculation — to base the adjustment of Mr. Demchick's valuation to what the Court believes is an appropriate ceiling on value.
Mr. Demchick's valuation contained a 10% discount for "lack of marketability."
The Court finds that Mr. Demchick's 10% discount was too low. Although Mercury was selling 100% ownership of the Colorado Subsidiaries, it did not have as much control over the shares and the Colorado Subsidiaries as the figure may suggest. This is because Mercury was required to obtain the consent of First American prior to any sale. Mr. Demchick admitted at trial that he was not aware of the contractual obligation with First American and did not consider it in his analysis. Additionally, Mercury presented no evidence showing it could continue as a going concern for the 30 to 60 days upon which Mr. Demchick premised his valuation. Therefore, the Court finds the control premium applied by Mr. Demchick was unfounded and the lack of marketability discount he applied was inaccurate.
In its brief, Mercury invites the Court to use the 30% discount for lack of marketability as applied by Mr. Peltz, should the Court take issue with the assumptions on timing utilized by Mr. Demchick. For the reasons previously stated, the Court finds it appropriate to consider the sale as it actually happened — immediately. Therefore, the Court will apply the suggested 30% discount to Mercury's valuation, thereby reducing the value ceiling to $11,704,960.
Additionally, the Court finds that Mr. Demchick utilized an incorrect capital structure which inflated the Colorado Subsidiaries' value by $3.28 million. On remand, Mercury admits Mr. Demchick's projected capital structure "is based upon what a hypothetical buyer would hold, not what the Title Companies or Mercury historically held," which Mr. Demchick considered irrelevant.
In contrast, Mr. Peltz considered the unique circumstances then-experienced by Mercury and the title industry as a whole. Mr. Peltz testified the financial distress of Mercury and many other title companies — caused by an industry "in a freefall" — made the ability to achieve or get long term capital "highly questionable."
The Court finds Mr. Peltz's capital structure analysis is more reasonable than that of Mr. Demchick because he considered the unique circumstances associated with the Colorado Subsidiaries and the title industry as a whole, rather than using only book values to arrive at a conclusion. While the Court acknowledges Mercury seemingly held debt on behalf of its title companies as a proxy, the Court finds — as to the Colorado Subsidiaries themselves and given industry conditions — Mr. Peltz's calculation more closely adheres to the proper legal standard of relying upon a company's actual capital structure to apportion debt and equity.
Accounting for the $3.2 million difference between Mr. Demchick's and Mr. Peltz's capital structure, Mercury's valuation of the Colorado Subsidiaries is further reduced to approximately $8,504,960. While the Court has identified a number of other issues upon which Mr. Demchick's valuation is not determinative, the Court believes $8.5 million represents the maximum value which it can ascribe to the Colorado Subsidiaries based upon the evidence presented.
Ultimately, however the burden of proof rests with the party seeking to unwind the transaction; in this case it is Mercury asserting it has not received reasonable value.
Having established a range of value between $5 million to $8.5 million, the remaining issue before the Court is "whether the recovery the debtor's creditors could legitimately expect to realize from the asset received by the debtor is reasonably equivalent to the value of the asset transferred by the debtor."
Here, the Debtor agreed to sell the Colorado Subsidiaries for $5 million and, in exchange, parted ways with entities worth between $5 million and $8.5 million. Based on the evidence presented in this case, the Court concludes the sale price falls within the range of "reasonably equivalent value." Jurisprudence addressing reasonably equivalent value recognizes a buyer can "get a good deal, even a great deal, but not an obscene deal at the expense of the debtor's creditors."
Mercury cites several cases in which there are varying degrees of disparity between fair market value and purchase price — some smaller than this case — and the transactions were found by courts to not have reasonably equivalent value. However, these cases are easily distinguishable. None were commercial transactions with findings of good faith and arm's length;
For the reasons set forth in the Court's incorporated Trial Order and the reasons set forth herein,
IT IS ORDERED judgment shall enter in favor of all Defendants and against Mercury on Mercury's claim for avoidance of the transfer of the Colorado Subsidiaries, with each party to bear their own attorneys' fees and costs.
IT IS FURTHER ORDERED judgment shall enter in favor of Mercury and against FNF Security Acquisition, Inc. on Mercury's claim for breach of the parties' Stock Purchase Agreement and breach of the implied covenant of good faith and fair dealing in the principal amount of $2,515,996.00, plus prejudgment interest from August 5, 2008, through the date of the judgment on this Order at 5% over the Federal Reserve discount rate, plus post-judgment interest from the date of this Order at the federal judgment rate, with each party to bear their own attorneys' fees and costs.
IT IS FURTHER ORDERED judgment shall enter in favor of Mercury and against all Defendants on Mercury's avoidance claim in the principal amount of $1,685,943.76, plus prejudgment interest from August 5, 2008, through the date of the judgment on this Order at 5% over the Federal Reserve discount rate, plus post-judgment interest from the date of this Order at the federal judgment rate, with each party to bear their own attorneys' fees and costs.
