In Edgewater v. H.I.G. Capital, Inc., C.A. No. 3601-VCS (Del. Ch. March 3, 2010), read opinion here.
Danielle Blount, an associate in our Delaware office, prepared the following summary
The Court of Chancery in this decision determined that the Delaware Fraudulent Transfer Act (“DFTA”) does not implicitly create a cause of action for aiding and abetting a fraudulent transfer.
Edgewater, a limited partnership, which owns a sizeable minority interest in ATM Acquisition, sought to hold former directors of ATM Acquisition Corporation (“ATM Acquisition”) liable for fraudulent transfer. Edgewater alleged that the director defendants conspired with the H.I.G. entities to cause ATM Acquisition to run an unfair, tainted sales process that resulted in ATM Acquisition assets passing to the only bidder for the company.
In its complaint, Edgewater brought claims against the defendants for fraudulent transfer and alleged that the defendants caused the transfer of ATM Acquisition assets with actual intent to hinder, delay or defraud Edgewater. The main argument proffered by Edgewater centered upon the assertion that the director defendants are persons whom a transfer was intended to benefit, they claimed the directors are proper parties to its fraudulent conveyance claims under § 1308(b) of the DFTA. Section 1308 provides that damages may be recovered from “the person for whose benefit the transfer was made.” The director defendants argued that Edgewater’s fraudulent transfer claims must be dismissed, because the only proper defendants in a fraudulent transfer action under DFTA are the transferor or transferee of the assets at issue.
A missing piece in Edgewater’s complaint was its failure to allege that the director defendants were beneficiaries of the transfer of ATM Acquisition’s assets. There is great weight of authority which has held that the Uniform Fraudulent Transfer Act (“UFTA”) does not provide for an aiding and abetting cause of action . (1)
The DFTA’s text is indistinct from the UFTA’s text because the DFTA is based on the UFTA. Moreover, the court held that the DFTA does not create a cause of action for aiding and abetting, or conspiring to commit a fraudulent transfer. The court determined that it had “no legitimate basis . . . to create . . . an implied statutory cause of action by judicial innovation.” Since corporate directors currently face liability to the corporation for breach of fiduciary duty if they knowingly cause the corporation to sell its assets for less than fair value, if a change should be made it should be done by the General Assembly or the authors of the relevant Act, not the judiciary.