- Case Type:
- Case Status:
- 16-1679 (3rd Circuit, Mar 17,2017) Not Published
- Third Circuit affirmed district court's adoption of bankruptcy court's recommendation to enter judgment in favor of two inside directors where trustee failed to prove they breached their fiduciary duty. A fiduciary's actions are measured at time he acted, not in hindsight. Trustee failed to rebut presumption that business judgment rule applied, rather than entire fairness standard. Trustee failed to show directors were materially self-interested, grossly negligent or wasteful, so business judgment standard applied.
- Procedural context:
- Appeal from the U.S. District Court for the District of Delaware
- Ultimate Escapes (UE) was a membership club offering high-end vacation homes to its 1,250 members. The membership database was valued at $14.5 million on UE's public filings, and it was pledged to its lender as collateral for a revolving loan. The loan was also personally guaranteed by two of UE's inside directors, Mssrs. Tousignant and Keith. When UE ran into financial trouble, UE began merger discussions with its main competitor, Club Holdings. Keith and Tousignant each made cash advances so the company could pay its debts. As financial troubles continued, UE asked Club Holdings for funding. Club Holdings agreed to purchase one of UE's properties, but the closing left UE with a $115,000 shortfall. Club Holdings agreed to pay $115,000 to UE in exchange for UE's best efforts to transfer three properties and 30 members to Club Holdings. In the membership-transfer paragraph, the Agreement lifted confidentiality restrictions inconsistent with the membership transfers. One month later, UE doubted whether the merger with Club Holdings would happen, so it hired a bidding agent to solicit bids for its assets. The bidding agent accidently sent Club Holdings an email discussing potential bidders. Upon learning that UE was not committed to the merger, Club Holdings began soliciting all of UE's members. When challenged, Club Holdings relied on the solicitation waiver under the Agreement. UE filed bankruptcy, rejected the Agreement, and sought a TRO to enjoin Club Holdings from soliciting its members. Although rejection of the Agreement was approved, a TRO was denied because the court found the Agreement likely permitted solicitation. The Trustee sued the inside directors for breach of fiduciary duty in executing the Agreement. After a three-day trial, the bankruptcy court recommended that the district court enter judgment for the defendants. On appeal, the Trustee argued that the court applied an improper legal standard for review of the directors' actions. The bankruptcy court applied a business judgment standard (which upholds an action if there is a rational basis for it). The Trustee argued the entire fairness standard (which requires an act to be fair dealing and a fair price) should apply due to (I) the directors' material interest (keeping UE afloat would improve chance of being repaid cash advances, relieved of personal guaranties, employed by acquiring company, and avoiding civil and criminal liability for missing payroll); (ii) their gross negligence due to poorly drafted Agreement; and (iii) the doctrine of waste. The Third Circuit affirmed the lower courts' findings rejecting each of the Trustee's arguments.
- Ambro (author), Vanaskie and Scirica
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