This is another case summary by associate Carl Neff about another example of the Bankruptcy Court’s application of Delaware corporate law. The Harvard Corporate Governance Blog also published their own summary of the case noted below.
In Bridgeport Holdings Inc. Liquidating Trust v. Boyer, et al., Adv. No. 07-51798, 2008 WL 2235330 (Bankr. D.Del. 2008), read opinion here, a liquidating trust brought an action against the former officers and directors of Bridgeport Holdings, Inc., along with the restructuring professional appointed to the position of chief operating officer.
The liquidating trust asserted claims for breach of fiduciary duty and corporate waste. In granting in part and denying in part Defendants’ Motion to Dismiss, Bankruptcy Judge Peter Walsh held:
(i) Delaware’s statute of limitations barred certain claims for breach of fiduciary duty; (ii) the trust stated claims for breach of the duty of loyalty and acting in bad faith under Delaware law; (iii) the exculpatory provision in the certificate of incorporation did not defeat a claim for breach of duty of care by former directors; (iv) complaint failed to state claim for breach of duty of due care and lack of good faith against former officers; (v) complaint stated claim for breach of fiduciary duties against restructuring professional; and (vi) complaint failed to state claim for corporate waste.
In denying the motion as to the duty of loyalty claims, the Court held that the trust properly stated a claim for breach of duty of loyalty and acting in bad faith. The trust properly asserted that the breach of loyalty was premised upon the failure of a fiduciary to act in good faith, consistent with Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).
In denying the motion as to the duty of loyalty and acting in bad faith under Delaware law, the Court held that neither the exculpatory provision nor the business judgment rule vitiates this count. The Court relied on the Delaware Supreme Court decision in McMullin which held that a board of directors has a duty under 8 Del. C. § 251(b) to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders.
In the absence of a majority shareholder, the directors “may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement.”
Additionally, the Court granted the Motion to Dismiss as to the duty of care claims against the D&O defendants, as the Complaint is too short on facts regarding the conduct of the officers in pursuing the sale transaction to survive the motion to dismiss with regards to these counts.
Finally, the Court granted the Motion as to waste claims, holding that the Complaint did not allege facts that support the conclusion that no reasonable person would find $28 million adequate for the Assets of a failing entity. The Court added that only “extraordinary circumstances can justify a finding of waste and the Complaint here does not present those circumstances.”