Quadrant Structured Products Company v. Vertin, C.A. No. 6990-VCL (October 1, 2014) (Laster, V.C.)

By William Axtman and Dotun Obadina

In Quadrant Structured Products Company v. Vertin, creditor plaintiff Quadrant Structured Products Company, Ltd. (“Quadrant”) asserted breach of fiduciary duty claims derivatively against the Board of Directors (the “Board”) of the Athilon Capital Corp. (the “Company”) and EBF & Associates (“EBF”), the holder of all of equity and certain junior debt of the Company.  EBF also managed the operations of the Company through service and license agreements between the Company and an affiliate of EBF, Athilon Structured Investment Advisors, LLC (“ASIA”), and appointed all five directors of the Board, three of which are current employees of EBF.

Quadrant, as holder of senior notes of the Company, asserted that (a) the Company was insolvent and (b) the directors of the Board and EBF breached their fiduciary duty of loyalty and committed corporate waste by (i) continuing to unnecessarily make interest payments on the junior debt, even though such payments could be deferred for an extended period of time (past the likely date of dissolution and liquidation of the Company), (ii) paying excessive service and license fees to ASIA and EBF to operate the Company, and (iii) changing the Company’s business model to take on greater risk under a strategy where EBF would  benefit from any upside as the sole holder of the junior debt and the Company’s equity, but the Company’s more senior creditors (including Quadrant) would bear the cost of any downside.  In addition, Quadrant asserted claims under the Delaware Uniform Fraudulent Transfer Act based on the non-deferral of interest on the junior debt and the payment of excessive service and license fees to ASIA and EBF to operate the Company.

The defendants brought a motion seeking to dismiss Quadrant’s complaint for failing to state a claim on which relief can be granted.  The court held that Quadrant had gained standing to bring derivative claims for breach of fiduciary duties by pleading that the Company was insolvent and that Quadrant, as a creditor, need not satisfy the contemporaneous ownership requirement under Section 327 of the Delaware General Corporation Law.  The court also held that Quadrant’s complaint stated a derivative claim for which relief could be granted to the extent it challenged (a) the failure of the directors of the Board and EBF to cause the Company to defer interest payments on the junior debt and (b) the Company’s payment of excessive service and license fees to ASIA and EBF.  In addition, the court found that Quadrant’s complaint stated claims for fraudulent transfer under the Delaware Uniform Fraudulent Transfer Act with respect to both the non-deferral of interest on the junior debt and the payment of excessive service and license fees to ASIA and EBF to operate the Company.

The court, however, dismissed Quadrant’s claim that the directors of the Board breached their fiduciary duty of loyalty by causing the Company to pursue a more risky business strategy, holding that Quadrant’s complaint failed to state a claim for which relief could be granted.  The court found that the Board’s decision to change the Company’s business strategy appeared rationally designed to increase the value of the Company as a whole and was unwilling to speculate about whether those decisions might benefit some residual claimants more than others.

Quadrant v. Vertin

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