SDNY Rejects Trustee’s Demand for Calculated Damages as “Speculative” and “Flawed”
June 06, 2022, US Bankruptcy Court for the Southern District of New York – The Southern New York Bankruptcy Court found Defendant Yucaipa American Alliance Fund I, L.P. (“Yucaipa”) guilty of breach of fiduciary duty but denied damages to Catherine E. Youngman, the Litigation Trustee (“Trustee”) for Ashinc Corporation, et al. (“Debtors”), because of her failure to establish a reasonable basis for her claimed damages.
The Trustee’s complaint had alleged that Ashinc Corp. fka Allied Systems Holdings, Inc. (“Allied”) had been in default of its two lien secured debts for four years in 2012 when its minority creditors Black Diamond CLO 2005-1 Ltd. and Spectrum Investment Partners, L.P. (“BD/S”) filed an involuntary Chapter 11 petition against Allied.
Yucaipa arguably owned a majority of the lien secured debts and Allied’s equity. Yucaipa also allegedly controlled Allied’s board. The Trustee thereby claims that Yucaipa owed fiduciary duties to Allied’s creditors including BD/S.
In 2011, Allied’s board allegedly became aware that Jack Cooper Transport (“JCT”) desired to acquire the assets of Allied. The Court found that Allied’s Board neglected negotiations with JCT and deferred these to Yucaipa. In the Court’s view, this amounted to breach of fiduciary duties by Allied’s Board and Yucaipa since it controlled the majority of Allied’s board. The Court also observed that Yucaipa breached its fiduciary duties in its negotiations with JCT because it was seeking a higher price for its debt than that offered to BD/S.
In 2011-12, negotiations among JCT on the one hand and Yucaipa and BD/S (acting separately) on the other hand took the form of exchanged term sheets and no agreement was reached among the parties. However, the Trustee claims that Yucaipa’s breach of fiduciary duty harmed Allied and its creditors and resulted in damages of $158.6 million constituting the difference between the consideration set forth in a December 2011 term sheet and the ultimate purchase price JCT paid for Allied’s assets in 2013.
The Court denied the Trustee’s claim for damages holding that her Damages expert, Mr. Risius’s reliance on the December 2011 term sheet for purposes of calculating damages was not reasonable because that term sheet was “preliminary, non-binding, highly conditional, and superseded” by multiple later term sheets in which JCT proposed to pay materially less. The Court also noted that Mr. Risius’s calculated damages did not take into account the actual market trading prices of Allied’s first lien debt and concluded that Mr. Risius’s calculation of damages is “materially flawed” and “wholly speculative”.
Youngman v. Yucaipa Am. All. Fund I, L.P. (In re Ashinc Corp.), 2022 Bankr. LEXIS 1192