Vaughan v. Standard General L.P.
154 A.D.3d 581
| N.Y. App. Div. | 2017Background
- Plaintiff Kenneth Vaughan was a shareholder of American Apparel, Inc.; defendants were the company’s largest creditor during American Apparel’s October 2015 bankruptcy.
- Vaughan alleged defendants exercised de facto control of the corporation and used that control to block a favorable acquisition offer, causing shareholders to lose a premium on their shares.
- Defendants recovered in full on their bankruptcy claims and the bankruptcy plan was confirmed.
- Vaughan brought claims for breach of fiduciary duty and unjust enrichment, asserting both direct and derivative harms.
- Supreme Court dismissed the complaint without leave to amend; Appellate Division affirmed, finding lack of standing and failure to state claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether claims are direct or derivative | Vaughan argued the alleged lost acquisition opportunity gave him direct individual harm | Defendants argued the injury is common to all shareholders and thus derivative | Court: Claims are derivative because the alleged injury affects all shareholders and arises from board conduct |
| Whether derivative claims survived bankruptcy release | Vaughan argued his claims were not released or otherwise precluded | Defendants argued the confirmed bankruptcy plan released these claims and preclusive effect applies | Court: Claims were released by the confirmed bankruptcy plan and precluded |
| Whether demand was required or futile | Vaughan did not make a pre-suit demand and argued demand would have been futile given defendants’ control | Defendants argued Vaughan failed to plead demand or futility as required by Chancery Rule 23.1 | Court: Dismissed for failure to allege demand or demand futility |
| Whether defendants exercised actual control to state fiduciary breach | Vaughan alleged defendants controlled the board and caused excessive debt assumptions | Defendants argued they did not own or beneficially control a majority and plaintiffs failed to show majority of directors lacked independence | Court: Complaint fails to allege actual control or lack of board independence; fiduciary claim dismissed |
| Whether unjust enrichment claim stands | Vaughan argued defendants were unjustly enriched by recovering in bankruptcy | Defendants argued their recovery was justified by legitimate claims in bankruptcy | Court: Unjust enrichment not stated because recovery was justified |
Key Cases Cited
- Feldman v. Cutaia, 951 A.2d 727 (Del. 2008) (distinguishes direct vs. derivative shareholder claims)
- Agostino v. Hicks, 845 A.2d 1110 (Del. Ch. 2004) (bankruptcy releases and preclusion of derivative claims; demand/futility standards)
- Kahn v. Lynch Commc’ns Sys., Inc., 638 A.2d 1110 (Del. 1994) (standards for control and controller liability)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (elements of unjust enrichment)
- Odyssey Partners, L.P. v. Fleming Cos., Inc., 735 A.2d 386 (Del. Ch. 1999) (director independence and interestedness analysis)