United States District Court, Southern District of New York
June 6, 2003
JOHN S. PEREIRA, AS TRUSTEE OF TRACE INTERNATIONAL HOLDINGS, INC. AND TRACE FOAM SUB, INC., PLAINTIFF, AGAINST MARSHALL S. COGAN, SAUL S. SHERMAN, ANDREA FARACE, FREDERICK MARCUS, ROBERT H. NELSON, PHILIP SMITH, KARL WINTERS, TAMBRA KING DEFENDANTS.
The opinion of the court was delivered by: Robert Sweet, Senior District Judge
O R D E R
Plaintiff John S. Pereira, as Chapter 7 Trustee (the "Trustee") of Trace International Holdings, Inc. ("Trace International") and Trace Foam Sub Inc. ("Trace Foam") (collectively "Trace") has moved for entry of a proposed Final Judgment in light of the May 7, 2003 Opinion (the "Opinion") awarding judgment to the Trustee. Pereira v. Cogan, 2003 WL 21039976 (S.D.N.Y. May 8, 2003). The Officer and Director Defendants other than Marshall S. Cogan ("Cogan") have objected to several aspects of that proposed judgment.
For the following reasons, the Trustee's proposed final judgment is adopted except that the Officer and Director Defendants other than Cogan (the "Defendants") shall not be liable for the late charges on the Cogan notes, but instead shall only be liable for prejudgment interest thereon as specified in the Opinion. In addition, the judgment should be modified to acknowledge a few other inconsistences and/or mistakes.
A trial was held on this action from November 12 to November 27, 2002. Post-trial briefing and arguments were completed on April 7, 2003, and the Opinion issued on May 7, 2003. In the Opinion, judgment was granted to the Trustee as against all the defendants. However, the amount of those judgments varied based upon each defendants' culpability, as determined by the Court.
The Trustee submitted a proposed final judgment on May 16, 2003. Counsel for defendants Andrea Farace ("Farace") and Frederick Marcus ("Marcus") filed objections on May 19, 2003. Counsel for defendants Robert H. Nelson ("Nelson"), Philip Smith ("Smith"), and Karl Winters ("Winters") filed objections on May 27, 2003. The Trustee replied on May 30, 2003, at which time the motion was considered fully submitted.
I. Objections Regarding the Cogan and Insider Loans
In their post-trial arguments, the Defendants urged the Court to make a finding of fact that Cogan's loans totaled approximately $13.4 million, based on the figures in Trace's ledger. Such a finding was made. Opinion, at 89. The same Defendants now contend that, in fact, the amount of the Cogan loans should be reduced to $12.175 million, based on the totals from a column of figures that appeared in the opinion. Id. The column does not purport to be a recitation of what is reflected in Trace's ledger. Instead, it is a series of wire transfers to Cogan. It was not relied upon by the Court in finding that, as the Defendants urged, Trace's general ledger reflected $13.4 million in loans to Cogan.
In addition, the $13.4 million figure is about $900,000 less than the notes evidence, and therefore is already a break for the Defendants. As a result, this objection is denied.
The Defendants also object to the amount of prejudgment interest accounted on the Lowrance loan. The Trustee has received $30,000 in settlement on the loan, which was for $43,000. As a result, the appropriate Defendants are liable for $13,000. They contend that prejudgment interest should be on $13,000 from the effective date. The Trustee's calculations are more accurate, however, as he started from the higher principal, and then deducted both the principal and attendant interest reduction on the amounts recovered on this note, effective on the date each partial payment was received.
Two other objections by the defendants are adopted, however.
First, because the amount of Cogan's loan discussed above includes $161,000 in loans to Maureen Cogan, Nelson's liability for that $161,000 amount as an insider loan should not be double counted. The judgment against Nelson therefore should be modified to exclude the additional $161,000.*fn1
Second, the judgment should be modified to calculate pre-judgment interest from September 15, 1997 instead of September 12, 1997, for the $300,000 loan issued on September 15, 1997.
II. Nelson's Liability
Nelson asserts that he should not be held accountable both in bankruptcy court and in this action for the $600,000 in loans that he received from Trace. The bankruptcy action involves a suit on the loans themselves. Here, Nelson has been held liable under a different theory, breach of fiduciary duty, in that he permitted the loans to be made to himself. Therefore, any offsets Nelson may have on his action in bankruptcy court are not defenses to the amount of damages caused by the breach of fiduciary claim. As a result, the potential for double liability or inconsistent amounts in the two actions is not at issue. Of course, as stated in the Opinion, any amounts for which Nelson is held liable and pays as a result of the bankruptcy action will reduce the liability of those held liable for his loans in this action.
III. Farace's Liability
Farace argues that he should not be held liable for Cogan's excess compensation between July 21, 1993 and December 14, 1993, when he became a member of the Trace Board of Directors. Although Farace was not a member during that period, he was an active participant in the Board's subsequent wrongful ratification of Cogan's compensation. The ratification was held to be a breach of the duty of loyalty, for which the participating directors were liable. Opinion 185-87, 202-04. Therefore, Farace is liable for the portion of Cogan's excess compensation due to his actions in ratifying that amount, and his objection is denied.
IV. Smith's Liability
Smith argues that he should be held liable only for loans made to Cogan after mid-1998, when he is charged with knowledge of the Cogan loans. A finding was made, however, that all the Defendants "were aware or reasonably should have been aware" of the loans. Opinion 200. Therefore, all Defendants were held liable for the loans, including Smith. Id. at 211. Smith's objection is denied.
V. The Effects of Partial Recoveries and Settlements
Both objections assert that the final judgment should contain formulae addressing the amount by which each Defendant's liability should be reduced in the event the Trustee obtains recoveries from the other Defendants or from third parties.
The only recovery from any Defendant thus far is $2 million from Sherman. There is no objection to the Trustee's decision to reduce each Defendant's liability by that amount, plus interest. All recoveries from third parties have already been taken into consideration in the final judgment.
If the Trustee obtains further amounts, he is entitled to exercise the traditional prerogatives of a judgment creditor and fiduciary to enforce or settle his judgments as he deems most advantageous to his bankrupt estate. The Trustee has stated that any recoveries or settlements from individual Defendants or third parties may result in the reduction of the amounts that should be paid by one or more Defendants. The amount, timing and circumstances of such collections cannot be determined at this time, however, and any formula derived now may not be appropriate given the particular situation presented.
In any case, because the plaintiff is the Trustee of a bankrupt estate, any recovery of settlement he achieves will be a matter of public record, and any Defendant who thinks the Trustee has failed to give him the appropriate credit for a future settlement or recovery will have an opportunity to be heard at the time any such issue arises. The objections are therefore denied.
VI. Prejudgment Interest on Awards Other Than Cogan Notes
The Court awarded prejudgment interest on the Trustee's claims other than on the Cogan notes in the amount of five percent over the Federal Reserve discount rate. This formulation is taken from Section 2301(a) of Title 6 of the Delaware Code. The Trustee used a single rate on each claim, using the discount rate on the date on which the claim arose. The Defendants argue that the prejudgment interest ought to mirror the increases and decreases in the discount rate during the prejudgment period.
Delaware courts are in accord with the Trustee's position. E. g., Home Ins. Co. v. Concors Supply Co., 618 A.2d 90, 90 (Del.Super. 1992) (citing Rollins Env. Servs. Inc. v. WSMW Indus. Inc., 426 A.2d 1363, 1367-68 (Del.Super. 1980) ("[T]he rate of interest is calculated according to the Federal Reserve discount rate as of the date of commencement of interest liability and it remains fixed at that rate.")). In any case, this Court has the discretion to adopt the Trustee's methodology as the more appropriate measure of the cost to Trace of the loss of the use of this money. Summa Corp. v. Trans World Airlines, Inc., 540 A.2d 403, 409 (Del. 1988).
The objections are therefore denied.
VII. Late Fees on the Cogan Notes
The Opinion does not state that the Defendants other than Cogan should be held liable for the late charges payable under the Cogan notes. However, in calculating the amount of judgment against the Defendants other than Cogan, the Trustee applied the nine percent rate specified in the notes.
The Defendants are persuasive in arguing that by charging them the higher interest rate, the Trustee is seeking to impose a higher prejudgment interest than was specified by the Opinion. Therefore, the judgment should be altered to reflect prejudgment 8 interest on the notes of five percent above the Federal Reserve discount rate at the appropriate times, as discussed above.
VIII. Post-Judgment Interest
The Defendants argue that under Delaware law, post-judgment interest should apply only to the principal amount of damages and not on prejudgment interest. E. g., Summa Corp., 540 A.2d at 410. This argument fails, as post-judgment interest is governed by a federal statute, 28 U.S.C. § 1961. Section 1961 has been construed to require the payment of post-judgment interest on all elements of a monetary judgment, including pre-judgment interest. E.g., Central Hudson Gas & Electric Corp. v. Empresa Navieva Santa, S.A., 56 F.3d 359, 372 (2d Cir. 1995); Air Separation, Inc. v. Underwriters at Lloyds of London, 45 F.3d 288, 291 (9th Cir. 1995); Quesinberry v. Life Ins. Co. of North America, 987 F.2d 1017, 1031 (4th Cir. 1993).
For the foregoing reasons, the Trustee's proposed final judgment cannot be approved as to the Defendants other than Cogan because it provides for a higher prejudgment interest on the Cogan notes than was held appropriate in the Opinion. The final judgment also should be modified to include the two other corrections noted above, regarding the Maureen Cogan loans and the appropriate date to calculate interest for a September 15, 1997 $300,000 loan to Cogan. The Defendants' other objections to the final judgment are denied. The Trustee should accordingly modify the proposed judgment in light of this order and re-submit it for approval within five days of the entry of this order.
It is so ordered.