Judge Alison Nathan, nominated by President Biden to the US Court of Appeals for the Second Circuit, wrote a 2-1 opinion joined by Biden nominee Judge Sarah Merriam that upheld a $39 million damages award against an investor and business official who, along with a company she controlled, committed fraud by trying to effectively rob assets from a health care company that was about to go bankrupt. Trump judge Steven Menashi partly dissented and tried to reduce the damages award. The decision in LaMonica v Tilton was issued in August, 2023
What happened in this Case?
Lynn Tilton, a private equity investor, owned and was the sole director of TransCare Corp., a company that contracted with hospitals and cities to provide ambulance and related services. When TransCare ran into financial trouble and was on the brink of bankruptcy, Tilton worked with another company she controlled to execute a fraudulent scheme to “salvage the profitable parts of the business and spin them off into a new company” that she would control. Fortunately, the plan did not succeed. TransCare went bankrupt and, on behalf of its creditors and legitimate shareholders, the bankruptcy trustee went after Tilton and her company, Patriach Partners Agency Services (PPAS).
A bankruptcy court and a district court agreed that Tilton had breached her fiduciary duties and committed fraud, and that she and PPAS owed the bankruptcy estate around $39 million. Both Tilton and PPAS appealed to the Second Circuit.
How did Judges Nathan and Merriam and the Second Circuit Rule and Why is it Important?
All three judges who heard the case agreed that Tilton and PPAS were liable for their fraudulent conduct and should pay damages. Judges Nathan and Merriam agreed with the full amount of damages against Tilton and PPAS. Judge Nathan’s opinion noted the importance of full accountability when a “controlling shareholder” like Tilton “engages in a self-dealing transaction” and breaches her “fiduciary duties” to a company. Virtually “all of the badges of fraud” identified in prior cases, the thorough 56-page opinion explained, were present in this case.
Trump judge Steven Menashi, however, partly dissented. He maintained that the damages award was too high due to “double counting”, an argument not raised below or by any party on the appeal. Judge Nathan squarely rejected that claim. The “strict imposition of penalties” under the law, she pointed out, is “designed to discourage” such breaches of fiduciary duty, and courts have “very broad” authority to order damages. Menashi’s argument, Judge Nathan noted, was “meaningfully distinct from, and even at odds with” damages arguments raised by the defendants. In addition, she wrote, it violates the principle that a court’s proper role is to be the “neutral arbiter of matters the parties present.”
The majority opinion of Judges Nathan and Merriam is obviously important to provide accountability for the fraudulent misbehavior of Tilton, as well as justice for innocent creditors and shareholders of TransCare. The opinion also provides a clear signal that the federal courts, particularly in the Second Circuit that includes New York, Connecticut and Vermont, will strictly enforce civil penalties against big investors who commit fraud. In addition, the ruling serves as another reminder of the importance of promptly confirming fair-minded Biden nominees like Judges Nathan and Merriam to our federal courts.