In a recent Chancery Court decision that covers the intersection of corporate law and bankruptcy law, the court determined that the claims made were derivative and not direct in nature, and therefore, belonged to the corporate debtor’s bankruptcy estate. Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, et al., download file, involved a sponsored management buyout transaction that generated claims of breach of fiduciary duty against certain officers and directors who received special distributions in connection with the buyout.
The court concluded that the Motion to Dismiss should be granted because most of the plaintiff’s claims were barred as being derivative in nature, not direct, and thus belonged to the bankruptcy estate of the corporate debtor that had filed for bankruptcy under Chapter 11 of the bankruptcy code. The court emphasized that to hold otherwise would have the unavoidable effect of granting relief that would unfairly advantage the plaintiff, an unsecured creditor, over any number of other unsecured creditors having claims in the bankruptcy.
The court summarized its holding thusly: “Simply put, this case stands for the well established proposition that derivative claims cannot be used by a single creditor to upset the structured bankruptcy process. That principle equally applies when a plaintiff has erroneously characterized various derivative claims as direct, in the hope of escaping the broad jurisdiction of the bankruptcy court and the proceedings therein.”
Supplement: At, footnote 50 of Vice Chancellor Lamb’s opinion in this case is pointed out as citing to writings of both Prof. Bainbridge and Prof. Ribstein, both of whom have blogs that are often referred to here.