Second Circuit Appeals Court Affirms Coherent Expert’s $39.2 Million Damages Opinion

On August 28, 2023, the United States Court of Appeals for the Second Circuit upheld a damages award of $39.2 million to TransCare Corporation’s bankruptcy estate in a breach of fiduciary duty suit against TransCare’s former director and indirect owner, Lynn Tilton. Tilton was found liable at trial in U.S. Bankruptcy Court in the Southern District of New York of engaging in a fraudulent transfer of certain assets of TransCare as it teetered on the verge of bankruptcy.  The trial court’s damages award that Tilton challenged, and which has now withstood two appeals, was based on expert testimony offered by Coherent Economics’ Senior Affiliate Dr. Jonathan Arnold, who served as the bankruptcy trustee’s damages expert at trial.

Dr. Arnold developed a damages estimate by valuing the disputed TransCare assets as a going concern based on a peer multiples method, relying on projections created and used by Ms. Tilton and her team. The Second Circuit directly addressed and affirmed several elements of Dr. Arnold’s approach in its opinion.

Dr. Arnold and the Coherent team used projections that were developed by Ms. Tilton and her team as the basis for assessing the value of TransCare’s assets as a going concern. The evidence showed that Ms. Tilton and her team had relied upon and shared the business model projections with outside third parties, such as an insurance broker, in an effort to secure insurance coverage. Consistent with Dr. Arnold’s approach, both the bankruptcy court and district court adopted the use of Ms. Tilton’s financial projections in assessing the lost going-concern value of the assets.  The Second Circuit concluded that the district court did not err in its conclusion that Ms. Tilton “had failed to demonstrate fair dealing or fair price.”  Moreover, the Second Circuit concluded that “[i]n this case, the Trustee had the burden of proof, which he met by providing expert projections based on the evidence available to him.  The defendants failed to rebut it or provide their own estimate of damages.”

One of Ms. Tilton’s claims was that TransCare’s assets were “too distressed” for a sale.  The Second Circuit, however, noted that Dr. Arnold “specifically compared the business lines in the Subject Collateral to other ‘smaller, distressed, low operating, or undercapitalized’ companies when he arrived at his damages estimate.”  The Second Circuit further quoted the district court’s finding that Ms. Tilton “did not offer any substantive evidence of how [Dr. Arnold] failed to account for risks, made inappropriate assumptions, used incomplete or inaccurate financial information, or excluded comparable companies.”

Using an EBITDA multiple derived from Dr. Arnold’s comparable companies multiples method, the bankruptcy court arrived at a damages award of $39.2 million.  The Second Circuit noted that the district court “used the same valuation method” to arrive at its damages award of $38.2 million for breach of fiduciary duties and $39.2 million for the fraudulent transfer.

The bankruptcy estate was represented by Avery Samet of Amini LLC. Dr. Arnold was supported in this matter by a team at Coherent including Coherent President Laurel Van Allen, Dr. Dora Altschuler, Kelsey Shaw, Seb Peinado, and others.

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