Fiduciary Duty – Page 8 – Delaware Docket

Delaware Chancery Court Denies Creditor Plaintiff’s Breach of Fiduciary Duty, Fraudulent Transfer, and Breach of Covenant Claims

Oct 30 2015

In Quadrant Structured Products Company v. Vertin, plaintiff creditor Quadrant Structured Products Company, Ltd. (“Quadrant”) asserted claims against defendant Athilon Capital Corporation (“Athilon” or the “Company”), challenging transactions made by Athilon in which Athilon purchased securities and notes from Merced Capital, L.P. and its affiliates (together, “Merced”), owners of 100% of the Athilon’s equity and significant amounts of Athilon’s publicly-traded junior and senior notes.[1] Quadrant contended at trial that the repurchase of Merced’s notes breached express covenants in the indenture governing the notes and also violated the implied covenant of good faith and fair dealing. Quadrant also contended that the repurchases of the notes constituted a fraudulent transfer. Finally, relying on its status as a creditor of an insolvent company, Quadrant claimed derivatively that the repurchases of the notes and securities constituted breaches of fiduciary duty by Merced and the individual defendants, who comprised Athilon’s board of directors. The court rejected all of Quadrant’s claims.

Delaware Chancery Court Asserts Personal Jurisdiction over Third Party Defendants in Connection with Contribution Sought for the Advancement of Legal Fees and Costs

Oct 16 2015

By Annette Becker and Sophia Lee Shin

In Konstantino v. AngioScore, Inc. v. Quattro Vascular PTE Ltd, et al., the Delaware Court of Chancery reviewed a motion to dismiss filed by three Singapore entity defendants seeking dismissal of a third party claim brought by AngioScore, Inc. (“AngioScore”) for lack of personal jurisdiction and by the Singapore entity defendants and a Delaware entity defendant for failure to state a claim for contribution and tortious interference with contract in connection with the manufacture and sale of a competing product. The Court of Chancery denied the third party defendants’ motion in part, holding that the Court had personal jurisdiction over the three Singapore entity defendants under the conspiracy theory of jurisdiction, and that AngioScore stated a claim for contribution from all of the third party defendants, and granted the motion in part, holding that AngioScore had not stated a claim for tortious interference with contract.

Chancery Court Dismisses Breach of Fiduciary Duty Claims Against Company and Its Board of Directors Relating to 2014 Recapitalization, But Holds That Contract Claims May Proceed

Jul 16 2015

By Annette Becker and Lauren Garraux

In a July 8, 2015 letter opinion, Vice Chancellor John W. Noble granted in part and denied in part the motion of Capella Holdings, Inc. and Capella Healthcare, Inc. (“Capella” or the “Company”) and five Capella directors (the “Director Defendants”) (collectively, “Defendants”) to dismiss breach of fiduciary duty and breach of contract claims asserted against them by James Thomas Anderson (“Anderson”), a founder and former director and officer of Capella, relating to a 2014 recapitalization of the Company.

Anderson’s counterclaims against Defendants all arise from a recapitalization of Capella which the Director Defendants approved in April 2014. Anderson voted against the recapitalization, which decreased Anderson’s ownership percentage in the Company, as well as that of the minority shareholders, and increased the ownership percentage of affiliates of GTCR Golder Rauner II LLC (“GTCR”), which, upon Capella’s formation, made an equity investment of approximately $206 million in the Company.

Chancery Court Dismisses Derivative Lawsuit against GM Directors Relating to Recalled Ignition Switches, Finding That Plaintiffs Failed to Show Demand Futility

Jul 10 2015

By Scott Waxman and Lauren Garraux

In a June 26, 2015 Memorandum Opinion, Vice Chancellor Sam Glasscock III dismissed a derivative complaint filed by stockholders of General Motors (“GM”) relating to defective ignition switches that led to the recall of approximately 13 million GM vehicles beginning in February 2014. According to Vice Chancellor Glasscock, Plaintiffs failed to adequately plead bad faith on the part of the GM directors named as defendants in the lawsuit and, therefore, failed to show demand futility under Chancery Rule 23.1.

The general facts underlying this derivative lawsuit have been widely publicized and relate to GM’s recall of approximately 13 million vehicles for issues with the vehicles’ ignition switch, which caused a vehicle’s engine and electrical system to shut off, disabling power steering and power brakes and causing the vehicle’s airbags to not deploy in the event of a crash.

Delaware Court of Chancery Declines to Dismiss Claims for Breach of Contract and Breach of Fiduciary Duties

Jul 08 2015

By Nick Froio and Zack Sager

In CMS Investment Holdings, LLC v. Castle, the Delaware Court of Chancery declined to dismiss claims for breach of contract, breach of fiduciary duties, aiding and abetting breach of fiduciary duties, and civil conspiracy, among others.

In Castle, the Plaintiff, CMS Investment Holdings, LLC, was a member of, and holder of Class A units in, RP Holdings Group, LLC, a Delaware limited liability company (the “Company”). The business of the Company (i.e., providing non-legal administrative services in connection with mortgage foreclosures) was created by the principal Defendants (i.e., five individuals who practiced law in Colorado and Arkansas). The Defendants held Class B and C units in the Company and ran the business in their various capacities as employees, officers, and managers of the Company. The Plaintiff’s complaint alleged that the Defendants, along with several of their affiliated entities, intentionally failed to make distributions to the Plaintiff, as a Class A unitholder, in favor of the Defendants in violation of the Company’s limited liability company agreement (the “LLC Agreement”). The Plaintiff also alleged that the Defendants purposefully took actions to block the Company from receiving much-needed debt refinancing, facilitated the Company‘s decline into insolvency, secretly negotiated with its creditors, and then, through their affiliated entities, purchased on favorable terms a major part of the Company’s business back from the Company in receivership.

The Plaintiff brought direct claims against the Defendants alleging (1) breach of the LLC Agreement and the implied contractual covenant of good faith and fair dealing, (2) breach of fiduciary duties, (3) aiding and abetting breaches of fiduciary duties, (4) civil conspiracy, and (5) violation of the Delaware Uniform Fraudulent Transfers Act. The Defendants filed a motion to dismiss for failing to state a claim upon which relief could be granted.

Chancery Court Holds that Company Does Not Have to Pay Damages for Refusing to Appoint Director Represented by Counsel That is Also Representing Opposing Party in Adverse Litigation

Jun 24 2015

By Annette Becker and Priya Chadha

In Partners Healthcare Solutions Holdings, L.P. and GTCR Fund IX/A, L.P. v. Universal American Corp., Partners Healthcare Solutions Holdings, L.P. (“Partners”) sued Universal American Corporation (“UAM”), seeking damages and specific performance following a dispute as to Partners’ appointment of a director to UAM’s board. During the litigation, the parties reached a settlement as to the specific performance aspect of the litigation, leaving only the issues of damages. UAM filed a motion for summary judgment, which Vice Chancellor Glasscock granted.

In March 2012, Partners entered into a merger agreement with UAM, pursuant to which UAM purchased a Partners subsidiary, and Partners became one of UAM’s largest stockholders. Partners was also given a seat for its designee on UAM’s board pursuant to a letter agreement (“Board Seat Agreement”). That agreement provided that the designee must be independent under stock exchange rules, and granted Partners the right to name a replacement in the event that the initial designee resigned. Partners named David Katz, a former board member of Partners, to the UAM board.

Delaware Chancery Court Allows Disclosure of Privileged Information to LLC Members Under Garner Fiduciary Exception

Jun 16 2015

By Scott Waxman and Claire White

In De Vries v. Del Mar, L.L.C., two minority limited liability company members of Del Mar, L.L.C. (the “Company”) sought to compel disclosure of privileged information relating to the settlement of a $3.0 million loan to the Company, the transfer of the Company’s primary asset to the lender in post-settlement negotiations, and potential mismanagement and self-dealing by the managing member of the Company, Baja Management, LLC (“Baja”), and its president and sole managing member, Kenneth Jowdy (“Jowdy”). The Court held that the plaintiffs demonstrated sufficient “good cause” to compel inspection of privileged books and records of the Company related to the post-settlement events under the Garner doctrine of the Fifth Circuit Court of Appeals, adopted by the Delaware Supreme Court in Wal-Mart Stores v. Indiana Electrical Workers Pension Trust Fund IBEW, No. 614, 2013 (Del. July 23, 20

The Company was formed for the principal purpose of owning and developing a hotel, golf course and residential properties in Baja California, Mexico, and its main asset consisted of 9,238 acres of undeveloped land, valued at $68.9 million (the “Property”). Baja, the Company’s majority and managing member, owned 93% of the Company’s membership interests, and the remaining interests were held by various minority members who invested $500,000 each in exchange for a 0.5% interest in a private placement round in 2005. The Company obtained a secured loan of $3.0 million from a “hard money” lender in 2006, but failed to raise substantial investment funds for full development of the Property. Jowdy, the sole managing member of Baja, personally guaranteed the loan. In 2010, the Company defaulted on the loan, and the Company and Jowdy executed confessions of judgment for the full amount of the loan (and interest). Following settlement negotiations, and the Company’s inability to satisfy the judgments with further financing, the Company agreed to transfer the Property to the lender in lieu of the lender recording the judgments against the Company and Jowdy.

Court of Chancery Finds That Manager Breached Her Fiduciary Duty of Loyalty by Engaging in Numerous Self-Interested Transactions

Jun 03 2015

By Nick Froio and Zack Sager

In this memorandum opinion, the Delaware Court of Chancery found Sandra Manno (“Manno”), the manager of CanCan Development, LLC, a Delaware limited liability company (the “Company”), liable for breaching her fiduciary duty of loyalty to the Company by engaging in numerous self-interested transactions.

A manager of a Delaware limited liability company owes traditional fiduciary duties of care and loyalty unless the organizational documents of the limited liability company modify such duties. The Court, citing Feeley v. NHAOCG, LLC, 62 A.3d 649 (Del. Ch. 2012), implied that the organizational documents of the Company did not modify the traditional fiduciary duties.

Tossed Out With The Weeds – Delaware Chancery Court Dismisses Derivative Action Alleging Breaches of Fiduciary Duty by DuPont Directors and Officers

May 18 2015

By Holly Vance and Jonathan Miner

In Ironworkers v. Andreotti, Vice Chancellor Glasscock of the Delaware Chancery Court granted DuPont’s motion to dismiss for plaintiff’s failure to properly state a derivative action claim. In reaching its decision, the Court affirmed that the business judgment rule is the standard of review used in derivative actions where the plaintiff has made a demand of the board of directors and the board declined such demand.

Beginning in 2002 DuPont began to develop genetically modified corn and soybean seeds to compete with Monsanto’s “Roundup Ready” seeds, which have the ability to survive application herbicides, including Monsanto’s own Roundup herbicide. DuPont referred to the product it was developing as “GAT”. During this same time period, DuPont was also licensing the Roundup Ready gene trait from Monsanto. DuPont encountered setbacks in field testing of GAT and as a result began experiments in combining GAT together with the Roundup Ready gene trait. The relationship between DuPont and Monsanto deteriorated as DuPont attempted to develop its GAT products, and in May 2009 Monsanto brought suit against DuPont for breaches of the license agreement for the Roundup Ready gene trait, patent infringement and other related claims. In July 2012 a jury found in favor of Monsanto and awarded it $1.2 billion in damages. DuPont began steps to appeal the decision and began negotiating a settlement with Monsanto. On March 25, 2013 DuPont and Monsanto entered into a settlement agreement that was structured as a new license agreement and included royalty payments to Monsanto of $1.75 billion over 10 years for the rights to use the patent for the Roundup Ready gene trait.

Sound the Alarm? Not so Fast as Chancery Court Dismisses Derivative Suit Alleging Self-Interested “Pump-And-Dump” Scheme Arising Out of Alarm Company’s Repurchase of $450 Million in Stock from Hedge Fund Investor

May 05 2015

By Lauren Garraux and Phillip Kardis

In his April 28, 2015 Memorandum Opinion, Vice Chancellor Parsons dismissed a derivative suit brought by ADT Corp. stockholder Walter E. Ryan, Jr. (“Plaintiff”) against the Company’s board of directors, Corvex Management LP (“Corvex”), a hedge fund investor, and Corvex’s principal arising out of the Company’s repurchase of $450 million in stock held by Corvex, a move that led to a drop in the Company’s stock price. Citing Chancery Court Rule 23.1, Vice Chancellor Parsons dismissed the suit because Plaintiff had neither made a pre-suit demand on the Company’s board nor met his burden of proving that demand should be excused as futile under Aronson.

Plaintiff commenced this derivative action on August 1, 2014 and filed an amended complaint on October 3, 2014, asserting claims of breach of fiduciary duties of care and loyalty against ADT’s board of directors, aiding and abetting those breaches against Corvex and unjust enrichment against Corvex and Corvex principal Keith Meister (“Meister”) who, during the time period relevant to the complaint, held a seat on ADT’s board and audit committee. Plaintiff’s claims arose out of what Plaintiff characterized as a self-interested “pump-and-dump” scheme pursuant to which Meister managed to “pump up” the price of ADT’s stock and then convinced his fellow board members to repurchase most of Corvex’s ADT stock in November 2013 at $44.01 per share for an approximate total of $450 million, the alleged “dump.” Following the repurchase, ADT was left in a “far-worse-than forecasted financial condition,” with “diminished future prospects” and a slipping stock price that ultimately settled around $28 per share in the first few days of February 2014.

Catagory:Fiduciary Duty