CDX Liquidating Trust v. Venrock Associates
2011 U.S. App. LEXIS 6390
| 7th Cir. | 2011Background
- Cadant, a bankrupt Cadant firm in the hardware/telecom sector, faced fiduciary-duty claims by its common shareholders via a derivative suit.
- Disloyal conduct alleged against Copeland (Venrock) and other conflicted Cadant directors tied to two bridge loans negotiated by Copeland.
- Delaware law governs internal affairs for the critical period; Maryland law applied to pre-reincorporation acts, creating potential conflict of law.
- Bridge loans to Cadant (January 2001 and May 2001) were structured to favor lenders (Venrock and J.P. Morgan), with a heavy liquidation preference.
- Cadant reincorporated in Delaware in 2001; the court considered whether Delaware law controls the duties of loyalty and care for the loans at issue and whether exculpation clauses could shield directors.
- The case was bifurcated, with liability tried first and damages reserved for later; the district court granted judgment as a matter of law for defendants, prompting appellate review.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Burden of proof on causation in director liability | Cadant shareholders show disloyalty caused loss | Plaintiff must prove causation; failure bars liability | Burden shifts to defendants; causation for jury to resolve |
| Governing law for duties of directors on the bridge loans | Delaware law applies to fiduciary duties | Maryland law may apply to pre-incorporation acts | Delaware law governs bridge-loan duties; Delaware has greater interest in internal affairs |
| Effect of exculpation clauses on alleged disloyalty | Exculpation cannot shield disloyal acts | Disclosure of conflicts may immunize otherwise | Exculpation cannot cure disloyal acts; disclosure does not excuse disloyalty |
| Liability of Venrock and JPM for aiding and abetting | Aiding and abetting supported by evidence of knowing participation | No liability absent director misconduct | Evidence sufficient to present jury issues on aiding and abetting |
| Whether the district court should have allowed trial on causation and entire fairness | Causation and fairness issues should proceed to jury | Judicially determined causation suffices for JMOL | Remand for retrial with Delaware-law framework and bifurcated trial structure |
Key Cases Cited
- Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del.1993) (business-judgment rule; burden-shifting in fairness review)
- Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114 (Del.2006) (disloyalty not proved by mere conflict disclosure)
- Gatz v. Ponsoldt, 925 A.2d 1265 (Del.2007) (aiding and abetting fiduciary breach requires knowing participation)
- Malpiede v. Townson, 780 A.2d 1075 (Del.2001) (aiding and abetting standard in corporate fiduciary context)
- Emerald Partners v. Berlin, 787 A.2d 85 (Del.2001) (exculpation limits for duty of loyalty not care; interplay with internal affairs)