Bankruptcy

Delaware Bankruptcy Court: Breach of Fiduciary Duty Claim Was Not Disguised Deepening Insolvency Claim; Aiding And Abetting Fraudulent Conveyance; In Pari Delicto

By Scott Riddle

From the Delaware Bankruptcy Blog, comes the case of  Miller v. McCown De Leeuw & Co., Inc. (In re Brown Schools), No. 05-10841, Adv. No. 06-50861 (Bankr. D. Del. April 24, 2008).

Duty of care violations more closely resemble causes of action for deepening insolvency because the alleged injury in both is the result of the board of directors’ poor business decision. To defeat such an action, a defendant need only prove that the process of reaching the final decision  was not the result of gross negligence. Therefore, claims alleging a duty of care violation could be viewed as a deepening insolvency claim by another name. 

For breach of the duty of loyalty claims, on the other hand, the plaintiff need only prove that the defendant was on both sides of the transaction. Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (“When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate  their utmost good faith and the most scrupulous inherent fairness of the bargain.”). The burden then shifts to the defendant to prove that the transaction was entirely fair. Id. This burden is greater than meeting the business judgment rule inherent in 5 MDC cites Paragraph 65 of the Second Amended Complaint which reads: “During the period that Defendants wrongfully perpetuated [the Debtors’] operations and existence, the insolvency of [the Debtors] increased by more than $22 million.” (Second Am. Compl. ¶ 65.) MDC also cites Paragraph 71 which reads: “As a result of the Defendants’ breach of their fiduciary duties, [the Debtors] suffered the damages previously alleged.” (Id. at ¶ 71.)  duty of care cases. Further, duty of loyalty breaches are not  indemnifiable under the Delaware law. 8 Del. C. § 102(b)(7). 

Therefore, the Court concludes that the Trustee’s claims for  breach of the fiduciary duty of loyalty in the form of self dealing are not deepening insolvency claims in disguise.  Consequently, the Trenwick and Radnor decisions are not  controlling.

The opinion also addresses deepening insolvency as a measure of damages, fraudulent transfers, aidding and abetting fraudulent transfers, and the in pari delicto defense.

Full post as published by Georgia Bankruptcy Blog on June 05, 2008 (boomark / email).