Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, 922 A.2d 1169 (Del. Ch. 2006), read opinion here, is a Chancery Court decision that dismissed claims by an unsecured creditor against the directors of a debtor company based on a finding that they were derivative and thus belonged to the estate of the bankrupt debtor. (This decision was rendered last year, but for some reason did not make it onto my blog, so I am highlighting some of the key parts of the decision now).
The court described the transactions giving rise to the claims as complex, but I will mention a few key facts. In 2000, the parent of KB Toys entered into a management buyout and in addition to the cash it received, it held a $45 million note. About 18 months after refinancing in 2002, the company filed for Chapter 11 bankruptcy. The claims made were based on alleged breaches of fiduciary duty, fraud and conspiracy. The court dismissed all but one claim in light of their derivative nature and the remaining claim based on failure to state a claim. The court also reasoned that to allow the claim to proceed would unfairly advantage this plaintiff over other unsecured creditors, and to rule otherwise would allow one creditor to "upset the structured bankruptcy process".
One of the rejected claims was the the creditor was falsely induced in 2002 not to object to the refinancing (i.e., to refrain from collecting a debt). But the court found that there was no right to collect the debt, or object to the refinancing, at that time. The court cited to several cases that demonstrate the reluctance of courts to grant relief where one is fraudulently induced to refrain from collecting a debt.
Also, on a policy level, at footnote 50, the court cites to separate articles by Professors Ribstein and Bainbridge to the effect that creditors are in a much better position than shareholders to negotiate protection for themselves, and the court noted that the creditors here should have done a better job in securing better terms in the relevant documents.