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In re Perry H. Koplik & Sons, Inc.

United States District Court, S.D. New York

August 14, 2013

In re PERRY H. KOPLIK & SONS, INC., Debtor.
v.
Michael Koplik and Marc Siegel, Personal Representative of the Estate of Alvin Siegel, Defendants. Michael S. Fox, as Litigation Trustee of Perry H. Koplik & Sons, Inc., Plaintiff,

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Christopher Robert Belmonte, Satterlee, Stephens, Burke & Burke LLP, New York City, for Plaintiff.

Ronald Lewis Cohen, Seward & Kissel LLP, New York City, Nancy Lynn Kourland, Sanford Philip Rosen, Rosen & Associates, P.C., New York City, Kenneth Michael Lewis, Lewis Law PLLC, White Plains, NY, for Defendants.

MEMORANDUM AND ORDER

P. KEVIN CASTEL, District Judge.

This adversary proceeding arises in the context of the Chapter 11 bankruptcy of Perry H. Koplik & Sons, Inc. (the " Debtor" ). The original defendants, Michael Koplik and Alvin Siegel (the " Officers" ), were officers and directors of the Debtor, a closely held New York corporation that operated as a broker, sales agent, and distributor of various paper products. Defendant Koplik was the Debtor's sole shareholder. Plaintiff, the Debtor's litigation trustee (the " Trustee" ), brought suit against the Officers alleging breaches of fiduciary duty, negligence and gross mismanagement, and certain fraudulent transfers. The Trustee's principal allegation was that the Officers breached their duties by authorizing excessive extensions of credit to one of the Debtor's major customers, American Tissue Inc. (" American Tissue" or " ATC" ), which itself filed a Chapter 11 petition in September 2001, after a failed bond offering, and was soon revealed to be the subject of a financial fraud perpetrated by two of its senior executives. Among other things, the Trustee alleged that the Officers' lack of care caused the Debtor to lose its principal source of financing, a revolving credit facility, and compromised its ability to recover the sums lent to American Tissue under a trade credit insurance policy. The Trustee also alleged that, after the Debtor was insolvent, the Officers caused it to forgive loans to them, which, the Trustee asserted, constituted fraudulent transfers and breaches of the duties of care and loyalty.

After a trial before the Honorable Robert E. Gerber of the U.S. Bankruptcy Court for the Southern District of New York, the Bankruptcy Court issued its 107-page Proposed Findings of Fact and Conclusions of Law after Trial (as Amended) (the " Proposed Findings" or " PF" ).

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In re Perry H. Koplik & Sons, Inc., 476 B.R. 746 (Bankr.S.D.N.Y.2012). The Bankruptcy Court proposed that judgment be entered against the Officers, awarding the Trustee damages for certain breaches of the Officers' fiduciary duties to the Debtor and for certain constructive fraudulent transfers from the Debtor to the Officers. Before the Court are the Trustee's and the defendants' objections to the Proposed Findings, which the Court reviews de novo as to all non-core matters as to which an objection has been made.[1]28 U.S.C. § 157(c)(1); Rule 9033(d), Fed. R. Bankr.P.

As will be explained, upon de novo review, the Court largely adopts the Bankruptcy Court's Proposed Findings. The Officers, one of whom was the Debtor's sole shareholder, caused the Debtor to experience considerable exposure to American Tissue through the extension of trade credit and loans. It appears from the record, however, that the Debtor's losses were principally the result of the unforeseen fraud at American Tissue, which caused the company to appear financially healthier than it was. The Trustee did not prove that the Officers knew of the fraud or that, through the exercise of reasonable care, they would have discovered it. Without the benefit of hindsight, the Officers' decision to extend trade credit to American Tissue, one of the Debtor's largest and, in the Officers' view, most important customers, was a reasonable business judgment. And the Court finds that, to the extent the Officers breached their duties in extending non-trade loans to American Tissue without adequate credit analysis, the Debtor's losses were caused by the American Tissue fraud, not the Officers' breach of duty. Thus, although the Court finds that the Trustee may recover for certain discrete breaches of duty and certain constructive fraudulent transfers, in the main, the Trustee cannot recover for the Officers' conduct in connection with the credit the Debtor extended to American Tissue. The Court further finds that the Trustee is entitled to prejudgment interest on his claims for breach of fiduciary duty, an issue not addressed by the Bankruptcy Court.

BACKGROUND

I. Procedural History

In March 2002, certain of the Debtor's creditors filed an involuntary petition under Chapter 7 of the Bankruptcy Code. The case was later converted from Chapter 7 to Chapter 11 and the Bankruptcy Court confirmed a reorganization plan for a controlled liquidation. Michael Fox was appointed as the Trustee.

On March 3, 2004, the Trustee filed a complaint against, among others, the Officers, seeking to recover damages arising out of the Officers' alleged breaches of fiduciary duty and negligence and gross mismanagement of the Debtor. The Trustee filed an amended complaint on July 17, 2006, adding claims for recovery of allegedly fraudulent transfers from the Debtor to the Officers (the " Amended Complaint" ). The case was tried before the Bankruptcy Court, which issued Proposed Findings of Fact and Conclusions of Law on March 30, 2012. These, as amended on July 11, 2012, constitute the Proposed Findings to which the parties have raised objections.

II. Factual Background

The factual background is, in material respects, undisputed. See, e.g., Amended

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Joint Pre-Trial Order filed October 9, 2012 (" PTO" ).

In 1960, non-party Perry Koplik and defendant Michael Koplik founded the Debtor, a broker, sales agent, and distributor of paper products. (PF 5.) After Perry Koplik's retirement, Michael Koplik became President and Chief Executive Officer of the Debtor and was its sole shareholder at all relevant times. ( Id. ) Defendant Siegel was Vice President and Chief Operating Officer. ( Id. at 6.) Non-party Michael Kelly, the Debtor' Vice President of Finance and Chief Financial Officer, oversaw certain aspects of the Debtor's business with American Tissue. ( Id. at 21-22.) Although Perry Koplik remained a member of the Debtor's board of directors (the " Board" ) until his death in September 2001, the Officers were the only active members of the Board during the period in question. (PTO ¶¶ 5.70-5.72.) Prior to the Debtor's bankruptcy filing, it had roughly 50 employees. (PF 5.)

In 1999, the Debtor entered into a $60 million revolving credit facility (the " Revolver" ), with Fleet Bank (" Fleet" ) as agent, secured by a first lien on certain of the Debtor's assets, including accounts receivable and inventory. ( Id. at 6.) The availability of credit under the Revolver was based on the Debtor's available assets, principally its eligible accounts receivable and inventory. ( Id. ) The Revolver also imposed a number of restrictions on the Debtor. It required that the Debtor obtain Fleet's written approval before making certain kinds of investments or loans and imposed restrictions on the amount and nature of the Debtor's receivables. ( Id. ) Notably, the Revolver limited the eligible trade accounts receivable due to the Debtor from American Tissue to $15 million. ( Id. ) In connection with the Debtor's request to raise that limit to $15 million, the Debtor agreed to obtain trade credit insurance with respect to its American Tissue receivables in that amount. ( Id.; PTO ¶¶ 5.15, 5.113.)

To meet its obligation to obtain trade credit insurance, the Debtor entered into a trade credit insurance policy (the " Policy" ) with Lumbermens Mutual Casualty Company, a subsidiary of Kemper Insurance Companies (" Lumbermens" or " Kemper" ). (PF 7.) Although the Policy had a face value of $15 million, Kemper was only liable for 85% of the nominal $15 million in coverage and its duty to pay was further reduced by a $1 million deductible; thus, the maximum payout under the Policy would be $11.75 million if the Debtor suffered a covered loss of $15 million or more in trade credit. ( Id. ) Coverage under the Policy was also contingent upon the Debtor's compliance with a number of conditions. Among these were the requirements that the Debtor take all reasonable steps to avoid or minimize loss and that the Debtor not enter into certain agreements, including any agreement concerning the rescheduling of a covered debt, without Fleet's prior written consent. ( Id. ) The Policy further provided that it would be void if the Debtor made any materially false or fraudulent statements to the insurer or withheld any material information in connection with the Policy. ( Id. at 7-8.)

From 1999 to 2001, with the Revolver and the Policy in place, the Debtor extended significant credit (exceeding $27 million at its peak) to American Tissue as both trade credit and outright loans. ( Id. at 8.) The Officers also authorized the " re-aging" of certain American Tissue receivables from 30- to 60- and then to 90-day terms. ( Id. at 8, 11.) During that time, American Tissue was one of the Debtor's largest customers. ( Id. at 8.) Koplik also had a close working relationship with American

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Tissue's CEO, Mehdi Gabayzadeh, who personally had guaranteed certain of American Tissue's debts to the Debtor. ( Id. at 9; PTO ¶¶ 5.51a, 5.51g, 5.112.) In 1999, with Koplik's " consent," Gabayzadeh hired Ed Stein, then the Debtor's CFO and one of Koplik's trusted advisors, as American Tissue's CFO. (PF 9, 22.)

In addition to transactions with American Tissue, the Debtor made loans to Liberty Umbrella, a maker and distributor of umbrellas and other items from which the Debtor purchased promotional materials. ( Id. at 58-59.) Notably, Liberty Umbrella was owned by Koplik's cousin and his wife, and the loans to Liberty Umbrella were authorized by Koplik, not Seigel. ( Id. ) Liberty Umbrella's outstanding debt to the Debtor stood at nearly $400,000 in December, 2001. ( Id. at 59.)

American Tissue filed for bankruptcy in September 2001, following the failure of a proposed $400 million bond offering. ( Id. at 41, 50.) On September 21, 2001, the Debtor filed a $14.995 million claim under the Policy in an attempt to recover amounts owed by American Tissue. (PF 32; PTO ¶ 5.53.) Shortly thereafter, in October 2001, one of American Tissue's creditors discovered that two of American Tissue's senior officers, Gabayzadeh and Stein, had falsified the company's financial statements, inflating revenues, improperly capitalizing expenses and assets, and otherwise overstating revenues and assets. (PF 50, 96.) Both executives were subsequently indicted on federal criminal charges, including bank and securities fraud. ( Id. at 50.) Stein pleaded guilty and Gabayzadeh was convicted at trial. ( Id. )

In October 2001, the Debtor retained Realization Services Inc. (" RSI" ) to assist the Debtor, among other ways, in finding a way to repay its creditors. ( Id. at 51-52.) By October 28, 2001, however, RSI had determined that the Debtor could not continue as a going concern. ( Id. at 52.) On November 2, 2001, the Debtor's Board approved a plan for an out-of-court liquidation of the Debtor's assets. ( Id. at 52.)

On November 9, 2001, Fleet notified the Debtor that it was in default under the Revolver. ( Id. at 52.) The Debtor entered into a forbearance agreement with Fleet and its other lenders, dated November 12, 2001 (as amended, the " Forbearance Agreement" ), in which the Debtor acknowledged a number of defaults under the Revolver, including the extension of over $8 million in loans to American Tissue, and agreed to a repayment schedule, higher interest rates, and the payment of a forbearance fee. ( Id. at 43-46; PL's Exs. 7, 8.)

Also on November 12, 2001, Kemper disclaimed coverage under the Policy, denying the Debtor's nearly $15 million claim for amounts owed by American Tissue. (PF 32.) Kemper's November 12, 2001, letter denying coverage under the Policy (the " Denial Letter" ), asserted a number of grounds for denying the Debtor's claim. (PL's Ex. 33A.) First, Kemper took the position that much, if not all, of the Debtor's claim was not covered by the Policy because the trade credit was extended at a time when American Tissue was two months or more overdue on its payments to the Debtor, in violation of the Policy's " Overdue Debtor Endorsement." ( Id. at 1.) Second, Kemper stated that sales to three of American Tissue's subsidiaries were not covered by the Policy because those subsidiaries were not listed as " Approved Debtors" in the Policy. ( Id. at 2.) Third, Kemper identified the Debtor's rescheduling of nearly $5 million in American Tissue receivables in March 2001 as a violation of a covenant in the Policy that required, among other things, that the Debtor obtain the insurer's prior written

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consent before entering into any agreement providing for the rescheduling of the payment of a covered debt. ( Id. at 3.) Fourth, Kemper reserved the right, upon further investigation, to deny coverage based on the Debtor's failure to adhere to its pre-existing credit practices, in violation of a Policy covenant. ( Id. ) Fifth, Kemper stated that the Debtor's " nearly quadrupling" of receivables from American Tissue, which it knew to be delinquent in payment, constituted a failure by the Debtor to take reasonable steps to avoid or minimize loss, in violation of a Policy covenant. ( Id. at 4.) Sixth, Kemper suggested that the Policy " may" be void ab initio because the Debtor failed to disclose the status of the American Tissue receivables. ( Id. ) Kemper reserved the right to modify its position and assert additional defenses to coverage. ( Id. at 5.)

In December 2001, after the Debtor's Board approved a liquidation plan but before the Debtor's bankruptcy filing, the Debtor forgave loans to Koplik and Siegel in the amounts of $299,800 and $100,000, respectively. (PF 60-67.) [2]

In January 2002, following Kemper's denial of coverage under the Policy, the Debtor retained the law firm Kirkpatrick & Lockhart LLP (" K & L" ) to prepare an assessment of the Debtor's insurance claim (the " K & L Assessment" ). ( Id. at 32.) The 32-page K & L Assessment analyzed the " minefield of defenses" raised by Kemper and ultimately concluded that the Debtor was " in a reasonably strong position to collect a portion of its initial claim, in the range of $2-9.6 million (taking into account the applicable deductible and coverage percentage)." (PL's Ex. 35 at RE-500 66-67.) K & L recommended that the Debtor initiate negotiations with Kemper and, if necessary, pursue its claim through arbitration. ( Id. at RE-500 67.)

Following the Debtor's involuntary bankruptcy petition in March 2002, and the subsequent appointment of the Trustee, the Trustee was able to recover from Liberty Umbrella all but $52,494 of its outstanding debt to the Debtor. (PF 59.) As to the Debtor's nearly $15 million claim under the Policy for trade credit to American Tissue, the Trustee, represented by K & L, pursued a claim against Kemper in arbitration but ultimately settled the dispute for $1.7 million before any award. ( Id. at 36.)

III. The Bankruptcy Court's Proposed Finding Of Fact And Conclusions Of Law

a. Conclusions Of Law

In adjudicating the Trustee's claims, the Bankruptcy Court was called upon to decide two pure questions of law. First, the Bankruptcy Court concluded that, under New York law, the Debtor's solvency at any given time was not relevant to whether the Trustee could recover for breaches of the Officers' fiduciary duties. ( Id. at 79-81.) While solvency might be relevant in determining who may sue derivatively on behalf of a corporation (shareholders or creditors), in the Bankruptcy Court's view, the Officers owed fiduciary duties to the Debtor irrespective of its solvency and the Trustee was empowered to pursue claims for breaches of those duties on behalf of the Debtor. ( Id. ) Second, the Bankruptcy Court addressed whether the fact that the Debtor was a closely held corporation

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(with Koplik as its sole shareholder) affected the duties owed by the Officers. ( Id. at 82-86.) The Bankruptcy Court concluded that " courts applying New York law would likely hold that while lower levels of formality are acceptable for closely held corporations, the duties of care and loyalty still apply." ( Id. at 82.) No party has objected to these conclusions of law.

b. Findings Of Fact And Mixed Questions

Applying these principles to the facts, the Bankruptcy Court found that the Officers had breached their fiduciary duties in some respects and that certain transfers from the Debtor to the Officers constituted constructive fraudulent conveyances. But it further concluded that not all breaches of duty had caused a recoverable loss.

The Bankruptcy Court found that the Officers' decision to extend $8.5 million in outright, unsecured loans to American Tissue was undertaken too hastily, without proper analysis, and without proper documentation, thereby violating the Officers' duty of care to the Debtor. ( Id. at 94.) It also found, however, that the Trustee had not proven causation. The Bankruptcy Court reasoned that it was American Tissue's inability to pay, not the Officers' failure to obtain promissory notes or engage in corporate formalities such as holding board meetings, that had prevented the Debtor from recovering the amounts owed. ( Id. at 95.) More significantly, the Bankruptcy Court found that the fraud at American Tissue— of which the Officers had no knowledge— constituted an " intervening factor" that broke the chain of causation. ( Id. at 96.) Even if the Officers had exercised more care in reviewing and analyzing American Tissue's financial statements and other financial information, the Bankruptcy Court concluded that the Officers would have found a deceptively rosy picture of American Tissue's finances. ( Id. ) The Bankruptcy Court also found that the Officers were not negligent in failing to look beyond the information they were given by American Tissue, or in extending credit to American Tissue in light of what they did know. ( Id. at 96-97.) Thus, it concluded that the Trustee could not recover damages for the Officers' breach of the duty of care in connection with non-trade loans to American Tissue. ( Id. )

Regarding the Debtor's extension of approximately $18 million in trade credit to American Tissue, the Bankruptcy Court differentiated between the portion of the trade credit that was covered by the Policy and the portion that exceeded the Policy's coverage. ( Id. at 97-98.) Ultimately, it found that the Trustee could not recover damages as to either. As to the portion falling within the Policy's coverage, the Bankruptcy Court found that the extension of trade credit to American Tissue would not have been a breach of duty if the Officers had complied with the Policy's conditions, including the requirement that the Debtor not enter into any agreement concerning the rescheduling of covered debts without the insurer's prior written consent. Had the Officers done so, the Bankruptcy Court reasoned, the Debtor would have been substantially insured in the event of American Tissue's default on the trade credit. Thus, the Bankruptcy Court concluded that the extension of trade credit to American Tissue, insofar as it fell within the Policy's coverage limits, was not, in and of itself, violative of the Officers' duty of care. ( Id. ) For the trade credit that exceeded the Policy's coverage, the Bankruptcy Court found that the incremental increase in risk would have been justified by profit-making opportunities— again, had the Officers complied with the conditions of the Policy. ( Id. ) Thus, the Bankruptcy Court concluded that the Officers'

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extension of trade credit to American Tissue did not, standing alone, constitute a breach of the duty of care.

Separately, however, the Bankruptcy Court found that the Officers' failure to comply with the conditions for recovery under the Policy did constitute a breach of the duty of care. ( Id. at 98-99.) [3] The Bankruptcy Court found that " the Officers had a shocking lack of knowledge of the requirements for recovery under the policy, and that, lacking knowledge of what they needed to do (and avoid doing) to recover under the policy, [the Officers] took measures that were violative of conditions for recovery." ( Id. at 98.) Most notably, the Bankruptcy Court found that the Officers breached the duty of care by authorizing the re-aging of certain American Tissue receivables in March 2001. ( Id. at 26-29.) The Bankruptcy Court also found that, with respect to compliance with the Policy's conditions, the fraud at American Tissue did not constitute an intervening cause: " Even with the fraud at American Tissue, the Debtor could reasonably have expected to recover all or substantially all of its $11.75 million in coverage under the Trade Credit Insurance Policy if the Officers had taken the steps necessary to protect the Debtor's rights to recover under it." ( Id. at 99.) The Bankruptcy Court recognized the difficulty in calculating damages for this breach in light of the fact that the Trustee had settled the coverage dispute for a fraction of the total claim after the Officers were no longer in control of the Debtor. ( Id. at 71-73.) Ultimately, it fixed the damages for this breach of duty at $2.15 million, the difference between the maximum amount recoverable under the Policy ($11.75 million) and an " imputed" litigation recovery (had the Debtor not settled the coverage dispute) of $9.6 million, which was the high end of the range predicted in the K & L Assessment. ( Id. at 103-106.) [4]

Additionally, although acknowledging that " [t]he Trustee did not sue separately for the incremental costs to the Debtor ( e.g., the higher interest rates, forbearance fee, and legal fees) resulting from the violations of terms of the Revolver" ( id. at 46), the Bankruptcy Court noted that " the Trustee did introduce evidence of the incremental costs," and therefore awarded the Trustee $2,311,613 as damages for the Officers' breach of the duty of care in extending non-trade credit to American Tissue in knowing violation of the Revolver. ( Id. at 103.)

The Bankruptcy Court also found that the Officers breached their duties of care and loyalty by authorizing the forgiveness of loans to themselves. ( Id. at 101-102, 106-107.) The Bankruptcy Court rejected the argument that forgiveness of the loans

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was justified by services rendered by the Officers, finding instead that the loan forgiveness was entirely gratuitous. ( Id. at 101.) In addition to violating the duties of care and loyalty, the Bankruptcy Court found that the forgiven loans constituted constructive fraudulent transfers because the Debtor was insolvent at the time they were made and because the Debtor did not receive reasonably equivalent value in exchange. ( Id. at 102; see Bankruptcy Code §§ 544, 548, 550; N.Y. Debt. & Cred. Law §§ 273, 278). The Bankruptcy Court fixed the damages associated with the forgiven loans at the amounts forgiven: $299,800 for the loan to Koplik and $100,000 for the loan to Siegel. (PF 103.) [5]

Finally, the Bankruptcy Court found that Koplik violated his duties of care and loyalty to the Debtor by authorizing extensions of credit to Liberty Umbrella, a company controlled by Koplik's family member that, the Bankruptcy Court found, did not provide any meaningful benefit to the Debtor. ( Id. at 100.) The Bankruptcy Court fixed these damages at $52,494, the amount the Trustee was unable to recover from Liberty Umbrella. ( Id. at 103.) [6]

DISCUSSION

I. Standard Of Review

" The manner in which a bankruptcy judge may act on a referred matter depends on the type of proceeding involved." Stern v. Marshall, ---U.S. ----, 131 S.Ct. 2594, 2603, 180 L.Ed.2d 475 (2011). A bankruptcy court may enter final judgment in a core proceeding referred to it, subject to review by the district court. 28 U.S.C. § 157(b). Where a proceeding is not a core proceeding, but is " otherwise related to a case under title 11," and the parties have not consented to entry of final judgment by the bankruptcy court, the bankruptcy court " shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1); see also Rule 9033(d), Fed. R. Bankr.P. (" The district judge may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions." ).

Here, the Bankruptcy Court expressed the view that, while the " great bulk of the claims asserted here are for breach of fiduciary duty under state law and are non-core" (PF 3 n. 6), " the fraudulent transfer claims asserted here are within [the Bankruptcy Court's] power constitutionally to enter final judgment" ( id. at 4 n. 7). Accordingly, the Bankruptcy Court denominated its factual recitals as " findings of fact with respect to the fraudulent transfer claims, and ... proposed findings of fact with respect to the remainder of the claims." ( Id. at 5 n. 8 (emphasis original).) Acknowledging, however, that there are differing views on this point, and also that a " fraudulent transfer judgment would be for the same loss covered by its proposed judgment on duty of loyalty claims," the Bankruptcy Court determined that " the

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best course ... is for this Court ... to defer entry of the judgment it is empowered to enter on the fraudulent transfer claims pending determination of the remainder of the case by the district court ...." ( Id. at 4 n. 7.) The Court need not resolve the issue because, whether the fraudulent transfer claims are reviewed on a deferential basis or de novo, the outcome would be the same.

II. The Officers' Fiduciary Duties

The bulk of the parties' objections relate to the Trustee's claims for breach of fiduciary duty. New York law governs the Officers' fiduciary duties to the Debtor, a New York corporation. See Hart v. Gen. Motors Corp., 129 A.D.2d 179, 182-83, 517 N.Y.S.2d 490 (1st Dep't 1987). Under New York law, " [t]he elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant's misconduct." Rut v. Young Adult Inst., Inc., 74 A.D.3d 776, 777, 901 N.Y.S.2d 715 (2d Dep't 2010) (citation omitted). The Officers do not dispute that, as officers and directors, they owed duties of care and loyalty to the Debtor, see Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255, 264 (2d Cir.1984) (applying New York law), but they do dispute that they breached their duties and that the alleged breaches caused the Debtor harm.

" The duty of care refers to the responsibility of a corporate fiduciary to exercise, in the performance of his tasks, the care that a reasonably prudent person in a similar position would use under similar circumstances." Norlin, 744 F.2d at 264. The duty of care is subject, however, to the business judgment rule, which " bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." Auerbach v. Bennett, 47 N.Y.2d 619, 629, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979). As codified, see Lindner Fund, Inc. v. Waldbaum, Inc., 82 N.Y.2d 219, 224, 604 N.Y.S.2d 32, 624 N.E.2d 160 (1993), New York's business judgment rule requires that an officer or director " shall perform his duties ... in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances." N.Y. Bus. Corp. Law §§ 715(h), 717(a).

The duty of loyalty " derives from the prohibition against self-dealing that inheres in the fiduciary relationship." Norlin, 744 F.2d at 264. In addition to the statutory requirement that officers and directors act in good faith, N.Y. Bus. Corp. Law §§ 715(h), 717(a), the duty of loyalty dictates that " [t]hey may not assume and engage in the promotion of personal interests which are incompatible with the superior interests of their corporation." Foley v. D'Agostino, 21 A.D.2d 60, 66, 248 N.Y.S.2d 121 (1st Dep't 1964). " It is black-letter, settled law that when a corporate director or officer has an interest in a decision, the business judgment rule does not apply." In re Croton River Club. Inc., 52 F.3d 41, 44 (2d Cir.1995) (applying New York law). " Once a prima facie showing is made that directors have a self-interest in a particular corporate transaction, the burden shifts to them to demonstrate that the transaction is fair and serves the best interests of the corporation and its shareholders." Norlin, 744 F.2d at 264; see also Croton, 52 F.3d at 44 (" [I]if the business judgment rule does not protect a board's decision, then the burden falls upon the board to demonstrate that its actions were reasonable and/or fair." ). Thus, " directors who approve their own

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compensation bear the burden of proving that the transaction was fair to the corporation." Marx v. Akers, 88 N.Y.2d 189, 204, 644 N.Y.S.2d 121, 666 ...


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