Quadrant Structured Products Company, Ltd. v. Vertin

Majority - Vice Chancellor Laster

Yes, the complaint adequately states derivative claims for breach of fiduciary duty and fraudulent transfer concerning the continued interest payments on the Junior Notes and the payment of excessive affiliate fees, and a claim for secondary liability for civil conspiracy. No, it does not adequately state claims for breach of fiduciary duty regarding the board's general risk-on business strategy, claims for constructive dividends, or claims for injunctive relief as a standalone cause of action. The court found that Quadrant, as a creditor of an insolvent corporation, has standing to bring derivative claims for breach of fiduciary duty, as creditors become the primary residual claimants in such circumstances, referencing N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla. The court clarified that Delaware's Section 327, which imposes a contemporaneous ownership requirement for stockholder-plaintiffs, applies by its plain language only to 'stockholders' and does not extend to creditor-plaintiffs. Extending Section 327 to creditors would conflict with common law principles regarding the assignability of claims and the policy rationale for creditor standing. Regarding the breach of fiduciary duty claims, the court held that the decisions to continue paying interest on the Junior Notes to EBF and to pay excessive service and license fees to ASIA (an EBF affiliate) constitute self-dealing transactions by a controlling stockholder (EBF). Such interested transactions are subject to the 'entire fairness' standard of review, which places the burden on the defendants to prove both fair dealing and fair price. The complaint adequately alleged Athilon's insolvency under the balance sheet test. Furthermore, the court found sufficient allegations to question the independence of directors Vertin, Sullivan, and Gonzalez (due to their direct employment or dependence on EBF), making exculpation under Section 102(b)(7) unavailable at the pleading stage for them. For the other directors, Jundt and Wagoner, summary exculpation was also denied at this stage, as in entire fairness cases, issues of care and loyalty are 'inextricably intertwined' until a full factual record is developed. However, the court dismissed the breach of fiduciary duty claim challenging the Board's general 'risk-on' business strategy. It reasoned that current Delaware law does not mandate that the board of an insolvent company pursue only conservative strategies or immediate liquidation. Boards retain the ability to pursue value-maximizing strategies, even if they are riskier, and are generally protected by the business judgment rule. The court emphasized that it would not 'speculate about whether those decisions might benefit some residual claimants more than others' when decisions affect the firm as a whole, especially without allegations of direct and specific benefits to fiduciaries, citing Sinclair Oil Corp. v. Levien. Applying the entire fairness standard to general business strategy in this context would create the 'fiduciary conflict that Gheewalla sought to avoid'. The complaint lacked sufficient allegations to infer that no rational person would pursue such a strategy. For the fraudulent transfer claims, the court found that Quadrant adequately pled claims under the Delaware Uniform Fraudulent Transfer Act (DUFTA). Under Section 1305(b), the continued interest payments to EBF and the fees to ASIA were transfers to an 'insider' (EBF and its affiliate ASIA) from an insolvent debtor, where the insider had reasonable cause to believe the debtor was insolvent, and Quadrant was a creditor whose claim arose before the transfers (as a successor-in-interest to original noteholders). Under Section 1304(a)(1), the complaint sufficiently alleged 'actual intent to hinder, delay or defraud' creditors, citing 'badges of fraud' such as insider transfers, insolvency, and the lack of a legitimate need for such payments. For the excessive fees, a claim was also stated under Section 1305(a) for lack of 'reasonably equivalent value' given the diminished services, increased fees, and market rate disparity. The court dismissed the 'constructive dividend' claim, stating that Delaware law maintains a 'formal and technical approach' to the DGCL, adhering to the 'bedrock doctrine of independent legal significance.' The DGCL sections governing dividends do not extend to other types of transactions between a corporation and its stockholders, and improper transfers are to be evaluated under breach of fiduciary duty, not by expansively re-characterizing non-dividend payments. Claims for injunctive relief (Counts III and VI) were also dismissed, as injunctions are a form of remedy, not a standalone cause of action. Finally, the civil conspiracy claim (Count X) was dismissed to the extent it was based on fraudulent transfer, as Delaware law does not recognize conspiracy for fraudulent transfer. However, the claim for civil conspiracy (akin to aiding and abetting) survived against ASIA for the underlying wrongs pled as breaches of fiduciary duty by the individual defendants and EBF, as ASIA's role as a conduit for value tunneling was sufficiently alleged.