Official Committee of Unsecured Creditors v. Invitae Corp.Official Committee of Unsecured Creditors v. Invitae Corp.
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- Before:
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KIRSCH, District Judge
THIS MATTER comes before the Court upon Appellant Official Committee of Unsecured Creditors’ (“Appellant” or the “Committee“) appeal from (1) the United States Bankruptcy Court for the District of New Jersey‘s (“Bankruptcy Court“) “Order Denying the Official Committee of Unsecured Creditors’ Motion for (I) Leave, Standing, and Authority to Commence and Prosecute Certain Claims and Causes of Action on behalf of the Debtors’ Estates, and (II) Exclusive Settlement Authority” (Bankr. ECF No. 914, “Standing Order“)1; and (2) the
I. BACKGROUND
This appeal concerns two interrelated decisions issued by the Bankruptcy Court in July 2024. In the first, the Honorable Michael B. Kaplan, U.S.B.J., denied a request by the Committee to bring a derivative action against creditors and other entities for a series of purportedly fraudulent prepetition transactions. (See Standing Order.) In the second, the Bankruptcy Court confirmed the final Bankruptcy Plan, which contained release provisions shielding a number of individuals and entities from liability in future actions brought by the Debtor—including the very individuals and
As it relates to both issues, the Bankruptcy Court ruled against the Committee, who appealed on August 19, 2024. (ECF No. 1.) As provided previously herein, months of briefing followed (ECF Nos. 11, 44, 46, 48, 60). On June 25, 2025, this Court remanded the matter to the Bankruptcy Court for the limited purpose of supplementing its prior findings of fact and conclusions of law. (ECF No. 69, the “Remand Opinion“.) On July 7, 2025, the Bankruptcy Court issued a twenty-paged “Supplemental Findings of Fact and Analysis Pursuant to Order of Remand.” (See Supp. Op.) The Committee then filed a supplemental brief (ECF No. 76), and Appellees all stood on their prior submissions (ECF No. 75). The Court now addresses the Committee‘s appeal, informed by a complete record and a thorough explication by the Bankruptcy Court.
At this point, the factual and procedural backgrounds of this matter are well known to the parties, and thus the Court only reiterates and supplements its prior factual and procedural recitation—taken from a record spanning more than 10,000 pages—to provide additional necessary context.
A. FACTUAL BACKGROUND
1. Invitae‘s Financial Difficulties
Invitae is a medical genetics company that was founded in 2010 to “deliver[] genetic testing services, digital health solutions, and health data services.” (AD0764, AD0771 ¶¶ 2, 18.)3 After
In 2022, facing financial and liquidity issues compounded by significant debt maturation looming on the horizon, Invitae began considering plans and proposals to address the upcoming debt maturities and other cashflow concerns. In Spring 2022, to address the Company‘s “potential liquidity strain,” Invitae retained independent consultants J. Wood Capital and Perella Weinberg Partners to advise on potential restructuring prospects with creditors. (See Invitae Opp. at 6 (citing AD1332 ¶ 18.)) Invitae also reviewed “no less than five proposals” and engaged in discussions with some of the holders of the 2028 Unsecured Notes. (See Deerfield Opp. at 6 (citing A3964–A4003.)) Nothing proved successful. (Id.)
As 2022 turned to 2023, Invitae remained focused on “addressing the 2024 debt maturity overhang,” i.e., figuring out how to manage the $350 million of unsecured notes that were about to mature. (Invitae Opp. at 7.) As part of this process, Invitae‘s leadership, plus advisors from J. Wood, met and considered proposals with various unsecured noteholders. By February 2023, two proposals remained on the table for consideration: the first proposal would exchange 2028 Unsecured Notes for “a mix of senior secured debt and preferred equity.” (AD1341 ¶ 39.) The
At a Board meeting on February 25, 2023, J. Wood advised the Board to accept the Deerfield proposal because it addressed the more pressing concern of the 2024 Unsecured Notes, rather than the less-urgent 2028 Unsecured Notes. J. Wood explained that there were “various risks” with the 2028 proposal, and “substantially greater benefit of extending the term of the 2024 [Unsecured] Notes (given their relative immediacy).” (AD0675.)
2. The March Exchange
On February 26, 2023, Invitae‘s Board unanimously authorized an exchange of the 2024 Unsecured Notes that would come to be known as the “March Exchange.”4 (AD2171–AD2183.) The March Exchange consisted of two parts: (1) Invitae exchanged $305.7 million in 2024 Unsecured Notes for $275.3 million in Series A 2028 Secured Notes, plus more than 14 million shares of common stock; and (2) Invitae issued $30 million in Series B 2028 Secured Notes (together with the Series A 2028 Secured Notes, the “2028 Secured Notes“) for cash. (A9471.) To be clear, this meant that Invitae was released of its obligation to pay back $305.7 million in 2024 Unsecured Notes that were coming due, and was now instead on the hook for approximately that same amount in Secured Notes that would come due in 2028. Although the new 2028 Secured Notes had a longer runway to pay back, they were also more valuable and would take priority in any future bankruptcy payout—if there were to be one.
The parties’ disagreement over the motivation behind and impact of the March Exchange is central to the present appeal. According to the Committee, the transaction unfairly advantaged
3. The August Exchange
Following the March Exchange, Invitae‘s financial situation did not sufficiently improve. In August 2023, Invitae and Deerfield entered into another “privately negotiated exchange agreement” (A4291) to “further deleverage the Company” (Deerfield Opp. at 10). This time, Deerfield exchanged approximately $17.2 million in 2024 Unsecured Notes for $100,000 in 2028 Secured Notes plus more than 15.8 million shares of the Company‘s common stock. (A4291.) No other parties were involved in this “August Exchange.”
4. Pre-Bankruptcy Measures
Regrettably, Invitae‘s financial picture continue to slide as the Company barreled toward restructuring and third-party sale. This prompted the Company to consider additional financing or restructuring. Toward this end, the Company retained Moelis & Company, Kirkland & Ellis, and FTI Consulting, Inc. to provide counsel and advice in various financial, legal, and accounting
B. BANKRUPTCY PROCEEDINGS
On February 13, 2024, Invitae filed a voluntary petition for Chapter 11 bankruptcy. (See Bankr. ECF No. 1.) On March 1, 2024, the United States Trustee appointed the Official Committee of Unsecured Creditors pursuant to
1. The Transaction Support Agreement
On the same day Invitae filed for bankruptcy, it entered into a Transaction Support Agreement (“TSA“) with Deerfield wherein Deerfield agreed to subordinate its secured claims to a group of small, unsecured claims in Invitae‘s bankruptcy. (See A4360.) The TSA, inter alia, set forth that holders of unsecured claims “in the amount less than $250,000” and unsecured claims involving Invitae‘s subsidiaries would be paid first in full and in cash; then holders of 2028 Secured Note claims would be paid their pro rata share of the distributable value of the Debtor; and finally, holders of the 2028 Unsecured Notes would receive whatever was left. (See A4359–A4360.) In other words, those with 2028 Secured Note claims, like Deerfield, who would typically be paid out before any unsecured creditor, would lose their preferred spot to those with small claims (known as the “Convenience Class Creditors“) and to those who were unsecured creditors of
As part of the TSA, Deerfield also negotiated the ability to “credit bid” in an auction for Invitae‘s assets. (See Supp. Op. at 11; see also AD1189 ¶ 15.) When the auction began, Invitae received only one qualified bid for $180 million from Labcorp. (Id.) However, Deerfield placed a bid higher than Labcorp‘s, who subsequently increased its own bid to $239 million. (Id.) Deerfield effectively facilitated an additional recovery of $59 million for the bankruptcy estate as Labcorp was selected and closed the deal. (Id.)
2. The Standing Motion
On May 21, 2024, the Committee filed a motion for derivative standing (the “Standing Motion“) to commence a lawsuit aimed at unwinding the March and August Exchanges.5 (Bankr. ECF Nos. 526, 792; A0857–A0931, “Standing Mot.“) A 72-paged, 272-paragraphed, fourteen-count proposed Adversary Complaint (the “Proposed Complaint“) was appended to the Motion. (Bankr. ECF No. 792-1; A0933–A1009, “Proposed Compl.“) Through the Standing Motion, the Committee sought to “bring[] a series of estate claims and causes of action . . . to remedy conduct by which the Company‘s officers and directors gave one group of unsecured creditors all of the equity value of the Company‘s assets and attempted to leave more than $1 billion of similarly situated unsecured creditors with nothing.” (Proposed Compl. ¶ 1.) According to the Committee, Invitae‘s Board knew that the March Exchange would not solve the Company‘s financial
The Proposed Complaint sought to bring causes of action on behalf of the Debtor‘s estate against, inter alia: Deerfield; U.S. Bank (solely in its capacity as Trustee and Collateral Agent); eight former members of the Board of Directors who approved either the March or August Exchange, or both; four corporate Officers who had authorization to negotiate the March or August Exchanges; five current Officers at the time of the drafting of the Proposed Complaint; and 100 unnamed John Doe defendants. (Id. ¶¶ 13–36.)
The Committee asserted fourteen causes of action, including constructive and actual fraudulent conveyance as to the March and August Exchanges and certain bonus payments paid out to executives while Invitae was on the brink of bankruptcy, as well as breach of fiduciary duty against Invitae‘s directors and officers and more. (Id. ¶¶ 168–272.)6 The Proposed Complaint sought relief in the form of, inter alia, avoidance (i.e., undoing) of the March Exchange and August
3. The Standing Order and Supplemental Opinion
Prompted by the filing of the Standing Motion and Proposed Complaint on May 21, 2024, the parties exchanged voluminous briefing. (Bankr. ECF Nos. 713, 720, 728, 752.) On July 9, 2024, Judge Kaplan held a six-hour hearing on the Standing Motion where he took testimony from four witnesses, as well as closing arguments from counsel. (See Bankr. ECF No. 785.) On July 12, 2024, Judge Kaplan issued a preliminary bench ruling denying the Standing Motion. (Bankr. ECF No. 793; A7972–A8019, “Standing Hearing,” at 8:20–9:1; see also Supp. Op. at 3.)
Judge Kaplan noted that a bankruptcy court can only grant derivative standing “when a movant has established that there is a colorable claim which exists and that the debtor has unjustifiably refused to bring such claim.” (Standing Hearing at 5:10–12 (emphasis added).) “The bottom line inquiry,” Judge Kaplan explained, “is whether asserting such claims is likely to benefit the estate.” (Id. at 5:13–14.) Judge Kaplan listed a variety of factors that a bankruptcy court “can and should take into account” when examining a debtor‘s decision to pursue litigation, including “the probability of success, anticipated financial recovery for creditors, and the cost and the risks and the delays to the administration of the bankruptcy estate.” (Id. at 5:14–19.) This is a cost-benefit analysis “employed to determine whether the debtors’ decisions or actions are justifiable.” (Id. at 5:22–23.)
Judge Kaplan explained that in undertaking the cost-benefit analysis, he took into account “a variety of significant issues and hurdles” related to the litigation, each of which “would need to be addressed as part of the litigation in order to be successful going forward.” (Id. at 6:12–13; 8:15–16.) The hurdles were:
- “The potential availability of safe-harbor defenses under 546(e)“;
- “The potential availability of exculpation and indemnification rights under both Delaware law and the corporate charter and other corporate governance documents“;
- “The significant factual dispute as to whether the debtor was insolvent at the time of the relevant transactions as opposed to a hindsight analysis or consideration of subsequent events“;
- “Meaningful factual disputes as to the equivalency of the value received by the debtor from the transactions in question“;
- “The potential risks and costs to the estate in jettisoning a confirmable plan supported by significant stakeholders and potentially resulting in significant delays and distributions“;
- “The potential risks and administrative costs and delays associated with pursuing substantive litigation“;
- “The substantial size of the unsecured creditor body, taking into account the significant investment by Deerfield as well [as] relative to any possible recovery“;
- “The arm‘s-length nature of the negotiations pre-petition with multiple parties going back to the Spring of ‘22“;
- “The use of professional advisors, Special Committees, and independent directors in assisting and advising the board in the exercise as well as the [Directors & Officers] in their collective exercise of their business judgment“;
- “A high threshold for overcoming [Director & Officer] business judgment decisions“;
- “The lack of any asserted breach in the underlying financial instruments and documentation“; and
- “In general, Deerfield‘s lack of control over the debtor corporation or its status—lack of status as an insider.”
(Id. at 6:15–7:20; 8:6–8:11.)
The Bankruptcy Court found that “the Committee ha[d] failed to establish the unjustifiability of the debtors’ chosen path not to bring suit.” (Id. at 8:20–22.) On July 22, 2024, the parties participated in an all-day plan confirmation hearing before Judge Kaplan where he heard further testimony from five witnesses and officially closed the record as to the Standing Motion. (See Bankr. ECF No. 877; A8432–A8632.) The next day, on July 23, Judge Kaplan
On remand, Judge Kaplan issued the above-referenced supplemental written opinion. (See generally Supp. Op.) In the opinion, the Bankruptcy Court reiterated the factual and procedural history of the case, focusing in particular on the retention of outside expert consultants who provided neutral, objective advice in coordination with Invitae executives and committees prior to the decision to enter into the March Exchange with Deerfield. (See id. at 5–6, 9–10.) The Bankruptcy Court also detailed the comprehensive independent internal investigation that led to the decision not to pursue any debtor claims. (See id.)
In determining whether the Debtor was justified in choosing not to commence the legal actions as sought by the Committee, Judge Kaplan credited the testimony of Randy Scott, co-founder and Chairperson of Invitae, who described the Company‘s thoughtful consideration of potential transactions throughout the early months of 2023. (Id. at 6–7, 14.) The Bankruptcy Court noted that, when charting a course to manage debt and ultimately enter into the March Exchange, Invitae relied on J. Wood Capital, Perella Weinberg Partners, Goldman Sachs, an internal pricing committee, a finance committee, and a variety of both internal and external governance processes. (Id. at 5–7.)
Consistent with, but expounding upon his prior oral findings, Judge Kaplan emphasized the value of Jill Frizzley, the independent director with “over two decades of expertise focusing
As will be set forth in greater detail hereinafter, Judge Kaplan concluded, consistent with his prior ore tenus decision, that Invitae was “justified in pursuing the many benefits offered through the negotiated TSA, as opposed to the costs, risks and delays attendant to prosecuting the speculative causes of action.” (Id. at 14.) To support this conclusion, Judge Kaplan explained in writing:
The bottom line-inquiry is whether pursuing the proposed claims is likely to benefit the estate, and in doing so, this Court has considered a variety of factors such as the probability of success, anticipated financial recovery for creditors, as well as the anticipated costs, risks and delays to the administration of the bankruptcy estate. In this regard, most dispositive for this Court‘s analysis is the unrebutted testimony of Ms. Frizzley and Mr. Scott—together with supporting evidence—documenting the extensive investigation and review of the potential claims and various restructuring options, undertaken by the independent director, professionals, and the Board‘s appointed committees.
(Id. at 14.)
4. The Confirmation Order
The Bankruptcy Court entered an order confirming the Bankruptcy Plan on August 2, 2024. (See Confirmation Order; A8870–A8929, “Bankr. Plan.“) Central to the second aspect of the instant appeal is Article VIII of the Plan, “Settlement, Release, Injunction, and Related
In its Supplemental Opinion, the Bankruptcy Court made a series of factual findings and held that these Released Parties “engage[d] as critical participants in the Plan process, share[d] a common goal with the Debtors in seeing the Plan succeed, and would have been highly unlikely to participate in the negotiations and compromises that led to the ultimate formation of the Plan (or to participate in the Plan‘s ultimate implementation) without the Debtor Releases.” (Supp. Op. at 16.) In so holding, the Bankruptcy Court found, in particular, that both Deerfield and the Debtors’ directors and officers made substantial contributions facilitating the bankruptcy process, especially since Deerfield had helped develop the TSA and increased the price of the sale with Labcorp, and the directors and officers “spent many hours preparing the Company for (and guiding the Company through) its bankruptcy filing.” (Id. at 17.) Ultimately, the Bankruptcy Plan—including the Debtor Releases—was confirmed notwithstanding the Committee‘s objection. (See id. at 4.)
II. LEGAL STANDARD
A district court has appellate jurisdiction over the final judgments, orders, and decrees of a bankruptcy court.
Issues within the Bankruptcy Court‘s equitable discretion are reviewed for abuse of discretion. In re Hechinger Inv. Co. of Del., Inc., No. 99-2261, 2001 WL 34368282, at *6 (D.N.J. Mar. 21, 2001) (citing In re Cont‘l Airlines, 91 F.3d 553, 560 (3d Cir. 1996)). The decision to deny derivative standing is within the Bankruptcy Court‘s equitable powers. See Cybergenics Corp.,
“This [abuse of discretion] standard is ‘at root a deferential standard of review,’ and the district court ‘should not disturb an exercise of discretion unless there is a definite and firm conviction that the [bankruptcy] court . . . committed clear error of judgment in the conclusion it reached upon weighing the relevant factors.‘” In re Hudson‘s Coffee, Inc., No. 08-5133, 2009 WL 1795833, at *2 (D.N.J. June 22, 2009) (quoting In re Nutraquest, Inc., 434 F.3d 639, 645 (3d Cir. 2006)). As such, a bankruptcy court “abuses its discretion only if no reasonable person could take the view it adopted.” In re Cortuk, No. 22-1690, 2022 WL 17361623, at *1 (D.N.J. Dec. 1, 2022) (quotation omitted) (cleaned up).
On appeal, the Committee challenges the Bankruptcy Court‘s Standing Order and Confirmation Order.9
A. STANDING ORDER
The Committee first appeals the Standing Order. Specifically, Appellant contests the Bankruptcy Court‘s overall analysis of its Standing Motion as insufficient and asserts that some of the “hurdles” that the Bankruptcy Court relied on in its decision would not have negatively affected the putative litigation. (See generally Comm. Br. at 13–25; see also Comm. Supp. Br. at 1.)
1. Derivative Standing
Generally, the trustee of the debtor has a fiduciary duty to “maximize the value of the bankruptcy estate,” which potentially includes bringing avoidance actions against third parties under certain circumstances. See Cybergenics Corp., 330 F.3d at 573. By the terms of the Bankruptcy Code itself, this duty—and by extension, the ability to bring an avoidance action on behalf of the debtor—does not extend to other creditors. See id.; see also In re Adelphia Commc‘ns Corp., 544 F.3d 420, 423 (2d Cir. 2008) (“The Bankruptcy Code does not expressly authorize committees or individual creditors—in contrast to trustees and debtors-in-possession—to sue on behalf of an estate.“). But “[t]his situation immediately gives rise to the proverbial problem of the fox guarding the henhouse. If no trustee is appointed, the debtor—really, the debtor‘s management—bears a fiduciary duty to avoid fraudulent transfers that it itself made.” Cybergenics Corp., 330 F.3d at 573. Indeed, “[d]ebtors sometimes lack the inclination, or the means, to bring
This is where derivative standing comes in, providing a “critical safeguard against lax pursuit of avoidance actions.” Cybergenics, 330 F.3d at 573. As a result, “bankruptcy courts can confer derivative standing upon creditors’ committees to bring actions to recover property for the benefit of the estate.” Centaur, LLC, 2010 WL 4624910, at *4 (citing Cybergenics, 330 F.3d at 548). However, the decision to grant derivative standing is “uncommon” and “‘the exception rather than the rule.‘” In re DeCurtis Holdings, LLC, No. 23-10548, 2023 WL 5274925, at *4 & n.43 (Bankr. D. Del. Aug. 14, 2023) (quoting In re Merritt, 711 F. App‘x 83, 86 (3d Cir. 2017) and citing In re Airocare, Inc., No. 10-14519, 2011 WL 2133526, at *1 (Bankr. E.D. Va. May 24, 2011)) (“The Bankruptcy Code does not expressly permit such parties to initiate adversary proceedings. Derivative standing is thus an implicit exception to the ‘general rule’ whereby the Bankruptcy Code assigns to the trustee or debtor-in-possession ‘the privilege of prosecuting’ various actions on behalf of the estate.” (cleaned up))). The party seeking derivative standing bears the burden of proof. In re Diocese of Camden, N.J., No. 20-21257, 2022 WL 884242, at *4 (Bankr. D.N.J. Mar. 24, 2022); In re MRPC Christiana, LLC, No. 18-26567, 2019 WL 6652237, at *10 (Bankr. D.N.J. Dec. 5, 2019) (“It is the creditor‘s burden in the first instance to demonstrate it satisfies the[] prerequisites for derivative standing.“).
In determining whether to grant a creditor committee derivative standing, courts have employed various formulations10 of the test articulated in In re STN Enters.: first, whether the
even if the proposed actions represent colorable and beneficial claims against the [estate], the [d]ebtor might well be justified in declining to bring them if a claim was colorable but seemed unlikely to result in a favorable resolution. Likewise, the [d]ebtor might be justified in declining to bring a claim that was likely to achieve a favorable resolution but not one favorable enough to justify the time and expense of litigation and a concomitant delay in plan confirmation.
In re Roman Catholic Diocese of Harrisburg, 640 B.R. 59, 85 (Bankr. M.D. Pa. 2022). The cost-benefit analysis is meant to guard against allowing standing “without any assurance that doing so would likely lead to a net recovery for the estate.” Diocese of Camden, N.J., 2022 WL 884242, at *9.
Under STN, a court‘s cost-benefit inquiry (i.e., the second element of the derivative standing test) involves a determination of the following factors: (1) “whether the action [asserting such claim(s)] is likely to benefit the reorganization estate“; (2) “the probabilities of legal success
2. The Bankruptcy Court Properly Conducted a Cost-Benefit Analysis
All parties to this appeal spill considerable ink on the underlying merits of the Committee‘s Standing Motion, rehashing legal arguments related to colorability, various safe harbors, hotly-contested factual discrepancies, and a variety of other issues. Here, the Court‘s role is to determine whether the Bankruptcy Court abused its discretion when, after undertaking a cost-benefit analysis and weighing a wide variety of factors set forth in both its oral and written opinions, it determined the Committee “failed to establish the unjustifiability of the debtors’ chosen path.” (See Standing Hearing at 8:20–22; see also Supp. Op. at 14 (denying derivative standing “in light of the Committee‘s failure to meet its burden with respect to the ‘justifiability’ prong“).)
Taking into account both his oral findings on the record and his Supplemental Opinion, it is clear that Judge Kaplan assessed and analyzed the costs and benefits of litigation thoroughly and sufficiently. A bankruptcy court is not required to conduct a “mini-trial,” but must nonetheless “examine, on affidavit and other submission, by evidentiary hearing or otherwise” whether the action is likely to benefit the estate. See STN, 779 F.2d at 905. Here, Judge Kaplan reviewed the voluminous briefing, including affidavits and extensive exhibits, and also presided over a days-long evidentiary hearing, where he took testimony from seven witnesses, considered approximately 300 exhibits, and heard arguments from both parties. (See A7634–A7848; A8435–
Notably, the Bankruptcy Court did not make any explicit findings as to colorability; but in this posture, it did not have to. The STN test, indeed, all of the derivative standing tests, require that the movant prove all elements—colorability and unjustifiability—to authorize derivative standing. See, e.g., Diocese of Camden, N.J., 2022 WL 884242, at *4. As the Bankruptcy Court made clear in its Supplemental Opinion, “the [Bankruptcy] Court focused on the second prong of the test, to wit, whether the Debtors unjustifiably elected not to pursue the potential causes of action identified by the Committee, in favor of the robustly negotiated Transaction Support Agreement with Deerfield.” (Supp. Op. at 14 (emphasis added).) Indeed, in conducting its extensive cost-benefit analysis, the Bankruptcy Court determined that “there was no need to address whether the proposed claims are even colorable—apart from the noted possible defenses and litigation hurdles considered under the Court‘s ‘cost-benefit’ analysis.” (Supp. Op. at 15.)
Courts, when faced with similar multi-pronged legal tests, routinely proceed directly to address a dispositive prong which necessarily ends the inquiry—even if it is not the first prong of the test. See, e.g., Strickland v. Washington, 466 U.S. 668, 670 (1984) (setting forth the two-pronged test for ineffective assistance of counsel and advising that “[a] court need not first determine [the first element] before examining [the second element] . . . If it is easier to dispose of an ineffectiveness claim on the ground of [the second element], that course should be followed“); Marten v. Goodwin, 499 F.3d 290, 397 (3d Cir. 2007) (applying the Calder effects test and explaining that “[o]nly if the [third] element of the effects test is met need we consider the other
Assuming arguendo that the Committee‘s claims were colorable, the Committee must also prove the unjustifiability prong. See Diocese of Camden, N.J., 2022 WL 884242, at *9 (“The Committee has not shown that Debtor‘s refusal to bring the claim is unjustified. A debtor‘s refusal to bring a claim is unjustifiable when the committee asserts a colorable claim and demonstrates such claim is likely to benefit the estate.” (emphasis added)). Therefore, notwithstanding whatever a hypothetical exhaustive analysis of colorability may have yielded, Judge Kaplan‘s conclusion would have been the same in the end: denial of the Standing Motion on the grounds that the Committee failed its burden to demonstrate that their proposed claims would provide a benefit to the estate that outweighed the costs.
As to the STN factors themselves, bankruptcy courts in this Circuit routinely conduct cost-benefit analyses in the derivative standing context without making explicit findings as to the STN factors, let alone considering each ad seriatim. See, e.g., In re Pack Liquidating, LLC, 658 B.R. 305, 336 (Bankr. D. Del. 2024) (granting derivative standing based solely on the minimal litigation cost); In re Guardian Elder Care at Johnstown, LLC, 666 B.R. 651, 658 (Bankr. W.D. Pa. 2025) (citing STN but not discussing any of the specific factors). Nonetheless, Judge Kaplan‘s oral analysis and supplemental written findings are consistent with and incorporate de facto STN‘s factors. (Supp. Op. at 13 (citing STN).)
As to the first factor, “whether the action is likely to benefit the reorganization estate,” see G-I Holdings, Inc., 2006 WL 1751793, at *11, the Bankruptcy Court identified that the Bankruptcy
As to the second factor, the “probabilities of legal success in the event the action is pursued,” see G-I Holdings, Inc., 2006 WL 1751793, at *11, the Bankruptcy Court referenced the Proposed Complaint‘s many potential legal hurdles including: (1) the availability of safe harbor defenses, such as that under
To be clear, Judge Kaplan did not render a definitive legal opinion on the underlying merits of any of these hurdles. Rather, he correctly acknowledged that determining the applicability of any one of these potentially-viable hurdles to litigation would be costly, fact-intensive, and
As another example, even the Committee itself appears to recognize that the potential availability of exculpation rights under Invitae‘s Certificate of Incorporation (see AD0759, art. VIII § A), might be an obstacle to some of the Committee‘s proposed claims against Invitae‘s directors, as not all of the proposed claims would be affected. (See Comm. Br. at 18-19 (noting, inter alia, the exculpation provision “applies to directors, not officers” and “applies to monetary remedies“) (emphasis added).) Indeed, the Committee‘s seeming acknowledgment proves Judge Kaplan‘s point: the exculpation of Invitae‘s directors in certain instances would be a barrier to the Committee‘s swift and complete recovery.
In addition to accounting for these various legal hurdles to the litigation, the Bankruptcy Court cited the “unrebutted” testimony of the highly-experienced, credentialed independent
The Bankruptcy Court made much not only of Ms. Frizzley‘s extensive experience and qualifications, but also her fulsome investigation into the potential claims the Committee ultimately sought to pursue, including breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent transfer, and breach of fiduciary duty. (Id.) The Bankruptcy Court detailed Ms. Frizzley‘s investigation: first, she directed Kirkland & Ellis to “obtain company books and records,” including public filings, board materials, and relevant emails, so she could determine the scope of the investigation and analyze the subject transactions. (Id.) Next, she directed Kirkland & Ellis to conduct interviews of witnesses, including Invitae‘s CEO Ken Knight and Invitae‘s primary financial advisor, J. Wood. (Id. at 10.) In turn, Kirkland & Ellis spent approximately 600 to 700 hours across four months investigating the potential claims. (Id. at 9-10.)
Following Ms. Frizzley‘s independent investigation and subsequent presentation of her findings to the Board (see A716), the Debtor decided not to pursue any claims, and instead entered
Turning to the third STN factor, “financial recovery in the event of success,” see G-I Holdings, Inc., 2006 WL 1751793, at *11, Judge Kaplan found that, based on the “highly credible, persuasive[,] comprehensive” and “detailed” testimony of both Ms. Frizzley and Mr. Swift, “the commitments obtained through negotiations with Deerfield far exceed the speculative recovery sought by the Committee through pursuit of the costly litigation.” (Supp. Op. at 12.) Here, Judge Kaplan appropriately exercised his discretion by engaging in a balancing of the facts, determining that even if the Debtor estate could recover from a derivative action (which certainly was not guaranteed), the expense of the litigation itself would undoubtedly be high. (Id.) Further, any potential recovery would have paled in comparison to the value gained through the sale to Labcorp, which Deerfield facilitated via the credit bid agreement. (Id.)
Relating to the fifth12 STN factor, the potential cost to the estate, see G-I Holdings, Inc., 2006 WL 1751793, at *11, the Bankruptcy Court considered the possibility of a protracted, expensive, uncertain litigation relative to the definitive and immediate option of a confirmed
What‘s more, Judge Kaplan highlighted a variety of “meaningful factual disputes” that would inevitably have led to costly, extensive discovery by all parties, including the likely retention of expert witnesses on each side. For example, factual disputes as to whether Invitae was insolvent and/or exchanged equivalent value in the March Exchange strike at the very core of the Committee‘s constructive fraudulent transfer claims. (See Standing Hearing at 6:19-24; Miller v. Mott, No. 23-50004, 2023 WL 6467368, at *6 (Bankr. D. Del. Oct. 4, 2023) (noting that with respect to constructive fraudulent transfer claims, “[w]hether a debtor was insolvent at a point in time is highly fact-specific and should be based on . . . appraisals or expert testimony.” (internal quotation marked omitted)); In re Charys Holding Co., Inc., 443 B.R. 628, 638 (Bankr. D. Del. 2010) (noting that with respect to constructive fraudulent transfer claims, “reasonably equivalent value is a fact intensive determination that typically requires testing through the discovery process.“). Here, the Bankruptcy Court accounted for an obvious fact: unraveling the complex
At bottom, Judge Kaplan found—and no party disputes—that the litigation would result in significant delays, include high administrative costs, and require the Debtor estate to expend “considerable resources.” (Standing Hearing at 6:24-7:6; Supp. Op. at 12-13.) This is exactly what Judge Kaplan was required to consider. See G-I Holdings, Inc., 2006 WL 1751793, at *11 (requiring a court to consider “the cost to the estate in proceeding with the action and the terms relative to any attorneys’ fees” (citing STN, 779 F.2d at 905-06)).
In sum, the Court will not disturb the Bankruptcy Court‘s thorough and well-reasoned analysis. The Court is mindful of the fact that the decision to grant derivative standing is “the exception to the rule,” reserved only for the “uncommon” instances where a moving party satisfies its burden by proving that its proposed claims are colorable and that the debtor unjustifiably refused to bring the suit itself. See In re DeCurtis Holdings, LLC, 2023 WL 5274925, at *4 & n.43; In re Diocese of Camden, N.J., 2022 WL 884242, at *4. Given the deferential standard of review and the Committee‘s high burden to show its entitlement to an exceptional “privilege of prosecution” see In re Airocare, Inc., 2011 WL 2133526, at *1, the Court finds that Judge Kaplan did not abuse his discretion in denying the Committee‘s request for derivative standing. The Bankruptcy Court‘s Standing Order is AFFIRMED.
B. CONFIRMATION ORDER
The second aspect of the Committee‘s appeal is of the Bankruptcy Court‘s confirmation of the Bankruptcy Plan, and specifically its confirmation with regard to releases set forth in Article VIII, Section C of the Plan (the “Debtor Releases“). (See Bankr. Plan at 43-44.) The two appeals are interrelated: were the Court to reverse the Bankruptcy Court‘s Standing Order (and thereby
The Bankruptcy Plan releases any claims by the Debtor against a series of Released Parties, including, inter alia, Deerfield, U.S. Bank, each party‘s (including Invitae‘s) current and former directors, managers, officers, employees, attorneys, accountants, consultants, and other “Related Parties.” (See A8885-A8886.) These Released Parties overlap with the putative defendants that the Committee seeks to sue through a derivative suit, which the Bankruptcy Court refused to authorize, as affirmed by this Court in this Opinion.
The Bankruptcy Code permits a bankruptcy plan to provide for “the settlement or adjustment of any claim or interest belonging to the debtor or to the estate.”
(1) an identity of interest between the debtor and non-debtor such that a suit against the non-debtor will deplete the estate‘s resources;
(2) a substantial contribution to the plan by the non-debtor;
(3) the necessity of the release to the reorganization;
(4) the overwhelming acceptance of the plan and release by creditors and interest holders; and
(5) the payment of all or substantially all of the creditors and interest holders under the plan.
In re One2One Commc‘ns, LLC, No. 13-1675, 2016 WL 3398580, at *6 (D.N.J. June 14, 2016) (citing Zenith, 241 B.R. at 110 and In re Master Mortgage Inv. Fund, Inc., 168 B.R. 930, 937 (Bankr. W.D. Mo. 1994)).14 “These factors are neither exclusive nor conjunctive requirements, but simply provide guidance in the [c]ourt‘s determination of fairness.” In re Washington Mutual, Inc., 442 B.R. 314, 346 (Bankr. D. Del. 2011).15 “Two elements are almost universally determinative“: first, that the “success of the debtors’ reorganization bears a relationship to the release of the non-consensual parties,” and second, that the releasees “have provided a critical financial contribution to the debtors’ plan that is necessary to make the plan feasible in exchange for receiving a release of liability.” See In re 710 Long Ridge Road Operating Co., II, LLC, No. 13-13653, 2014 WL 886433, at *14 (Bankr. D.N.J. Mar. 5, 2014).
In his Supplemental Opinion, Judge Kaplan explicitly analyzed the facts through the lens of the Master Mortgage factors, concluding that the Debtor Releases were appropriate as to Deerfield and the “current management and retained professionals.” (Id. at 18.) Integral to Judge Kaplan‘s decision was the “unrebutted and credible” testimony of Ms. Frizzley, Mr. Scott, Mr. Swift, and Ana Schrank, the CFO of Invitae, who holds an MBA and spent more than 25 years working in finance. (Id. at 5; see also AD1161 ¶ 2.) The Bankruptcy Court found each witness to be “highly credible, persuasive and comprehensive in their testimony and detailed explanations as to the underlying exercise of business judgment by Debtors’ management and their professionals in . . . opting to grant the Debtor Releases of claims against certain members of management and stakeholders.” (Id.)
Notably, in its Supplemental Opinion the Bankruptcy Court “carved out” former directors, officers, employees and professionals from the definition of “Released Party” in the Bankruptcy Plan, finding that those parties—“who were not associated with or retained by the Debtors at the time of the bankruptcy filing“—did not make a substantial contribution to the Debtor estate, and
1. Deerfield
Applying the Master Mortgage factors, and relying on the testimony of Ms. Frizzley, Mr. Swift, and Andrew Spirito, Managing Director of FTI Consulting, the Bankruptcy Court found that holders of the 2028 Secured Notes, which included Deerfield, shared an identity of interest with the Debtors because they were “integral parties to the TSA, supported the Plan, and supported the Sale Transaction embodied in the Plan.” (Id. at 16.) As Judge Kaplan explained; “The Debtor Releases provide finality to those parties, critical to effectuating the Sale Transaction and to the wind down efforts of the Debtors, underpin[ning] the settlement and compromise of issues achieved by the Plan, maximiz[ing] value for creditors, and permit[ting] the estates to consummate the Plan.” (Id.) The evidentiary record—to which the Bankruptcy Court cites extensively—reflects Deerfield‘s indispensable involvement in bringing the bankruptcy to fruition through the TSA. Indeed, as a party to the TSA, Deerfield helped set the terms of the Bankruptcy Plan, (see id. (citing AD1189)), which also evidences a substantial contribution to the Bankruptcy Plan. See One2One Commc‘ns, LLC, 2016 WL 3398580, at *8.
Although Deerfield did not provide a direct cash injection into the Debtor estate during the bankruptcy proceedings, it contributed to the financial viability of the estate and, by extension, allowed for a more robust payout to the Debtor‘s claimants. The case of In re rue21, Inc., 575 B.R. 314 (Bankr. W.D. Pa. 2017), is instructive here. In that case, the bankruptcy court found that a released party provided valuable benefit to the debtor‘s estate by agreeing “not to sell or transfer any interest in the [d]ebtors’ stock” and accordingly “forego[ing] the benefit of claiming a worthless stock deduction on account of its equity.” In re rue21, Inc., 575 B.R. at 326-327.
Here, Deerfield submitted a bid in the sale of the Company leading up to the liquidation, which raised the sale price significantly, and by extension, allowed more claims to be paid out to creditors in the bankruptcy proceeding. (See Supp. Op. at 11 (“Deerfield‘s ability to credit bid, negotiated as part of the TSA, also facilitated the recovery of approximately $60 million in additional value reflected in the increased sale price of the assets sold to Labcorp.“) (crediting the testimony of Mr. Swift); see also AD1189 ¶ 15 (“At the outset of the auction, the Debtors only had one qualified bid for $180 million from Labcorp. Deerfield submitted an initial topping credit bid that caused Labcorp to ultimately increase its bid to $239 million, increasing the final headline sale price by $59 million.“).) Further, Deerfield and the other 2028 Secured Note creditors also agreed to subordinate their claims to the Convenience Class Creditors and Subsidiary Unsecured Creditors—accounting for 94% of total unsecured creditors—which allowed those creditors to recover in full. (See AD1190 ¶ 19; AD1198 ¶ 18; see also Supp. Op. at 10-11.)
Additionally, the written declaration of Ms. Frizzley—whose testimony the Bankruptcy Court heavily credited (see Supp. Op. at 5)—establishes that Deerfield provided a “substantial benefit” during the TSA process by agreeing to allow the use of its cash collateral to fund the chapter 11 cases. (See AD1198 ¶ 19; see also Supp. Op. at 19.) As Judge Kaplan explained, “the Debtor Releases facilitated the Debtors’ restructuring,” because without the Releases “it is highly unlikely” the Debtors would have been permitted to use the cash collateral. (Supp. Op. at 19 (relying on testimonies of Ms. Frizzley, Ms. Schrank, Mr. Spirito, and Mr. Swift).) Indeed, this ultimately provided the Debtors “access to approximately $142 million of liquidity to fund the
As Judge Kaplan determined, “[a]bsent the Debtor Releases it is highly unlikely Deerfield would have agreed to support the Plan, and highly unlikely that the TSA, the Asset Purchase Agreement, or the Plan would exist at all.” (Id.) This countenanced highly in favor of confirming the Debtor Releases as to Deerfield, especially since the Master Mortgage factors are “guideposts” which need not all be satisfied. See In re Millenium Lab Holdings, II, LLC, 591 B.R. 559, 584 (D. Del. 2018) (explaining that the Master Mortgage factors are “not considered requirements” (quoting 710 Long Ridge Road Operating Co., II, LLC, 2014 WL 886433, at *14)); In re Alecto Healthcare Servs., LLC, No. 23-10787, 2024 WL 1208355, at *11-12 (Bankr. D. Del. Mar. 20, 2024) (finding that the factors weigh in favor of releases “on balance,” despite finding that only two of the five factors weigh in favor), aff‘d 2025 WL 961482 (D. Del. Mar. 31, 2025). Indeed, Judge Kaplan “properly canvassed the issues and, in its analysis and thorough ruling, considered the factors set forth in [Master Mortgage].” In re Alecto Healthcare Servs., LLC, 2025 WL 961482, at *16.
2. Directors and Officers
The Bankruptcy Court‘s confirmation of the Debtor Releases as to the current directors and officers fares similarly. In its Supplemental Opinion, the Bankruptcy Court found that “significant contributions by Debtors’ directors and officers” warranted their inclusion as Released Parties,
As to the first Master Mortgage factor, the Bankruptcy Court found an identity of interest between the directors and officers and the Debtor because the Debtor would “assume certain indemnification obligations under the Plan.” (Supp. Op. at 16.) In other words, were the directors and officers to be subjected to litigation, it would be the Debtor—not the individuals—who likely would be legally responsible to pay any monetary damages.
As to the second factor, the Bankruptcy Court found that the directors and officers “engaged in prepetition negotiations with lenders, assisted in negotiations relating to the consensual use of cash collateral, attended meetings on first day preparations and reviewed first day pleadings, reviewed and resolved various post-petition claims,” and more. (See Supp. Op. at 17-18.) With regards to the sale to Labcorp, the Bankruptcy Court noted that the retained professionals “played a crucial role in the sale process as well; this included overseeing due diligence, meeting with potential purchasers, preparing for, assisting with, and attending the auction, and assisting on the integration of the Company‘s business with Labcorp.” (Id. at 18.) Judge Kaplan concluded that “it is well settled” under the law that these efforts “constitute a substantial contribution” to the Debtor estate. (Id. at 17 (citing In re Zenith Elecs. Corp., 241 B.R. at 111).)
The Committee challenges Judge Kaplan‘s conclusion, arguing, first, that Judge Kaplan misstated the law,17 and second, that that “the directors and officers made zero contributions to the
Indeed, the remaining Master Mortgage factors weigh in favor of approval. As to the third Master Mortgage factor, and as explained above, Judge Kaplan concluded that “the Debtor Releases are critical to the success of the Debtors’ Plan.” (Supp. Op. at 19.) As to the fourth Master Mortgage factor, the “overwhelming acceptance of the plan and release by creditors and interest holders,” In re One2One Commc‘ns, LLC, 2016 WL 3398580, at *6, Judge Kaplan correctly noted that “the only Voting Class accepted the Plan.” (Supp. Op. at 19; see A8273 (indicating that Class 3, the 2028 Secured Noteholders, were the only class entitled to vote); A8220 (indicating 96.39% of the value of voting Class 3 claims accepted the Plan).) Finally, as to the fifth Master Mortgage factor, “the payment of all or substantially all of the creditors and interest holders under the plan,” the Bankruptcy Court noted that the Plan provided for “meaningful recoveries for creditors, including 100 percent recoveries for over 90 percent of the Debtors’ creditors.” (Supp. Op. at 19.) Indeed, although the creditors represented by the Committee did not ultimately recover under the Plan, many unsecured creditors did, including the Convenience and Subsidiary Class Creditors, and those recoveries were “higher under the Plan than they would have been in a chapter 7 liquidation scenario.” (Id. at 19-20 (crediting testimony of Mr. Spirito).)
[t]he Plan maximizes value and provides meaningful recoveries for all stakeholders under the circumstances. The Court defers to the business judgement exercised by Debtors’ management, upon consultation with the independent director and the Debtors’ professionals, that the significant benefits the Debtors received in exchange for the Debtor Releases, including full payment of the claims of over 90 percent of the Debtor‘s creditors, justifies the inclusion of such releases under the Plan.”
(Id. at 20.) This Court is mindful of the role of the Master Mortgage factors as mere “guideposts,” and, under any standard of review,18 concludes that the Bankruptcy Court did not err in weighing the factors and finding the Debtor Releases to be “fair and equitable.” See In re Coram Healthcare Corp., 315 B.R. at 334.
Accordingly, the Confirmation Order is AFFIRMED.
For the foregoing reasons, the Court AFFIRMS the Bankruptcy Court‘s decision to deny the Standing Motion and AFFIRMS the Bankruptcy Court‘s decision to confirm the Debtor Releases. An appropriate Order accompanies this Opinion.
ROBERT KIRSCH
UNITED STATES DISTRICT JUDGE
Dated: August 11, 2025