Rights of Creditors Will be Determined by Contract Terms and Fraudulent Conveyance Statutes—Quadrant v. Vertin
by | posted in: Avoidance | 0

By Abigail Pickering Bomba, Steven Epstein, Arthur Fleischer, Jr., Peter S. Golden, Brian T. Mangino, J.Christian Nahr, Philip Richter, Brad Eric Scheler, Robert C. Schwenkel, Gail Weinstein of Fried, Frank, Harris, Shriver & Jacobson LLP

In Quadrant Structured Prods. Co., Ltd. v. Vertin, No. 6990-VCL, 2015 WL 6157759 (Del. Ch. Oct. 20, 2015), the Delaware Court of Chancery emphasized that creditors’ rights will flow from the contractually agreed terms of the debt, and that creditors’ derivative claims for breach of fiduciary duty will rarely succeed.

Fried Frank discusses whether there are circumstances under which a creditor’s claim for breach of fiduciary duty might succeed. Based on Vertin and a prior opinion in the case, it can be argued that a creditor’s fiduciary duty claim regarding a company’s post-insolvency adoption of an equity value maximization plan can succeed only if the directors were so uncareful or disloyal in formulating the plan, or the plan was so patently flawed, that the plan would not pass muster under the business judgment rule. Moreover, although the transactions in Vertin did not support a claim for breach of fiduciary duty, the opinion leaves open whether affiliated transactions may give rise to a creditor’s claim for breach of fiduciary duty.

For the full memo, please click here.

The Duty to Maximize Value of an Insolvent Enterprise
by | posted in: Bankruptcy Administration and Jurisdiction | 0

By Brad Eric Scheler, Steven Epstein, Robert C. Schwenkel, and Gail Weinsten of Fried, Frank, Harris, Shriver & Jacobson LLP

In the recent Delaware Chancery Court decision of Quadrant Structured Products Company, Ltd. v. Vertin (October 1, 2014), the Court clarified its approach to breach of fiduciary duty derivative actions brought by creditors against the directors of an insolvent corporation. Importantly, the Court applied business judgment rule deference to the non-independent directors’ decision to try to increase the value of the insolvent corporation by adopting a highly risky investment strategy—even though the creditors bore the full risk of the strategy’s failing, while the corporation’s sole stockholder would benefit if the strategy succeeded. By contrast, the court viewed the directors’ decisions not to exercise their right to defer interest on the notes held by the controller and to pay above-market fees to an affiliate of the controller as having been “transfers of value” from the insolvent corporation to the controller, which were subject to entire fairness review.

This decision appears to stand for the proposition that, under all but the most egregious circumstances, the business judgment rule will apply to directors’ decisions that relate to efforts to maximize the value of an insolvent corporation. Thus, even decisions made by a non-independent board for a high-risk business plan that favors the sole equity holder over the creditors, as in Quadrant, will be subject to business judgment deference. The court also distinguished decisions involving direct transfers of value from the insolvent corporation to the controller, holding that these decisions would be subject to entire fairness review because the controller stood on both sides of such transactions.

See here for a more detailed discussion of this case.