Quadrant Structured Products Company, Ltd. v. Vertin
102 A.3d 155
| Del. Ch. | 2014Background
- Quadrant owns Athilon debt and alleges Athilon is insolvent; EBF acquired control and seated on Athilon’s board; Vertin and Sullivan joined the board, with EBF ownership influence over ASIA and ASIA-related fees; Operating Guidelines and charters constrain investments and runoff, and the company entered runoff after ratings losses; Quadrant alleges transfers of value to EBF through interest on Junior Notes and elevated fees to ASIA amid an insolvency.
- Quadrant contends the Board, controlled by EBF, continued cash payments and fees that benefit EBF at the expense of creditors, and adopted a riskier investment strategy to maximize EBF’s upside.
- The Company’s capital structure included about $700 million in capital against roughly $426 million in assets, with deficits after large unwinding payments in 2008–2010; the rating downgrades and runoff forced liquidation, creating a context where creditors are the residual claimants.
- Quadrant seeks derivative fiduciary-duty claims (Counts I–II) and fraudulent-transfer claims (Counts IV–V) against the Board and EBF, with injunctive relief (Counts III, VI) and conspiracy (Count X) asserted; the court will assess standing, pleading, and the appropriate standard of review under Delaware law.
- The court ultimately denies some aspects of the motion to dismiss (subject to entire fairness and other defenses) and permits Counts I, II, IV, V, and X to proceed to the extent pleaded, while dismissing Counts III, VI, IX to the extent they seek new theories of relief or are regulatory in nature.
- Procedural posture included a Rule 12(b)(6) dismissal motion, with prior appellate history guiding the standing and no-action clause analysis; Gheewalla governs creditor standing in insolvency contexts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Quadrant has standing to sue derivatively as a creditor | Quadrant asserts derivative standing under Gheewalla as a creditor of an insolvent company. | Defendants contend Section 327 contemplates stockholders, not creditors, for derivative standing. | Creditor standing exists under Gheewalla; claims may proceed derivatively. |
| What standard applies to evaluating board decisions on ongoing strategy | Board decisions should be subjected to a stricter standard due to dual fiduciaries and creditor interests. | Business judgment rule should apply absent conflicts; decisions to pursue riskier bets can be rational for value maximization. | Business judgment rule applies; extended analysis suggests no outright entire-fairness breach for the risk-on strategy. |
| Whether continuing to pay interest on Junior Notes and paying ASIA fees state fiduciary-duty claims | Continued payments benefit the controller and deplete assets, breaching loyalty. | Unless proven, such decisions are within business judgment and not wasteful. | Counts I–II survive to the extent they allege non-deferral of interest and excessive fees; waste aspect may be pleaded but is not determinative. |
| Whether DUFTA claims succeed for non-deferral of interest and fees | Transfers to insiders while insolvent were fraudulent and lacked reasonably equivalent value | Arguments hinge on insolvency and insider status; defenses may apply if value received is not reasonably equivalent. | Counts IV–V viable; Section 1305 claims allowed, with causation limited to transfers on or after Oct. 28, 2010; Count IX rejected as to DGCL dividends. |
| Whether Count X (conspiracy/Aiding and Abetting) can proceed | If primary fiduciary claims exist, secondary liability may attach for aiding and abetting. | Conspiracy/aiding and abetting hinges on underlying fiduciary breaches; some theories may fail. | Count X survives to the extent it targets underlying Counts I–II as to secondary liability. |
Key Cases Cited
- Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971) (equal treatment as a safe harbor; self-dealing analysis for dividends)
- Gheewalla v. Gheewalla, 930 A.2d 92 (Del. 2007) (creditors may sue derivatively but have no direct fiduciary rights; standing shift at insolvency)
- Production Resources Grp., L.L.C. v. NCT Grp., Inc., 863 A.2d 772 (Del. Ch. 2004) (insolvency-related duties and entire fairness context for related transfers)
- Trados Inc. S'holder Litig. (Trados II), 73 A.3d 17 (Del. Ch. 2013) (standard of conduct vs. review; business justification under Solvent context)
- Klamath Falls Falls v. Trenwick Am. Litig. Trust, 864 A.2d 912 (Del. Ch. 2004) (insolvency and debt structure influence on fiduciary duties)
- Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863 A.2d 772 (Del. Ch. 2004) (discussion on business judgment vs. entire fairness in insolvent context)