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Edgewater Growth Capital Partners, L.P. v. H.I.G. Capital, Inc., C.A. No. 3601-VCS (Del. Ch. Mar. 3, 2010) (Strine, V.C.).

March 3, 2010

In this memorandum opinion, the Court of Chancery granted defendants’ motion to dismiss fraudulent transfer claims because it concluded that there was no basis to impose liability upon the director defendants under the Delaware Uniform Fraudulent Transfer Act.

The case arose from a foreclosure sale of the assets of ATM Acquisition Corp. (“ATM Acquisition”) by its senior lenders, H.I.G. Capital, Inc. and its affiliates (the “HIG Entities”). ATM Acquisition allegedly sold its assets to Pendum Acquisition Corp. (“Pendum”), an affiliate of the HIG Entities. During the time of the sale to Pendum, however, ATM Acquisition was in default in its obligations to the HIG Entities, which were entitled to foreclose on ATM Acquisition’s assets.

Plaintiffs Edgewater Growth Capital Partner, L.P. and Edgewater Private Equity Fund III, L.P. (together, “Edgewater”) held a sizeable minority interest in ATM Acquisition. Edgewater alleged that the sale of ATM Acquisition to Pendum constituted a fraudulent transfer, claiming that former directors of ATM Acquisition (the “Director Defendants”) conspired with the HIG Entities to encourage ATM Acquisition to run an unfair, tainted sales process that resulted in ATM Acquisition’s assets passing to Pendum.”

The Director Defendants moved to dismiss Edgewater’s fraudulent transfer claims, arguing that the “only proper defendants in a fraudulent transfer action under the Delaware Fraudulent Transfer Act are the transferor or transferee of the assets at issue.” Edgewater countered that the defendants were persons whom a transfer was intended to benefit and, as such, were proper defendants for its fraudulent conveyance claims under Section 1308(b) of the Delaware Fraudulent Transfer Act, which provides that “damages may be recovered from ‘the person for whose benefit the transfer was made.’” The Court noted, however, that the complaint failed to allege that the defendants were beneficiaries of the transfer of ATM Acquisition’s assets, or that the defendants received any portion of the assets transferred to Pendum.

Vice Chancellor Strine observed that the Delaware Fraudulent Transfer Act does not create a cause of action for “aiding and abetting, or conspiring to commit, a fraudulent transfer;” rather, the Act only provides for a cause of action by a creditor against debtor-transferors or transferees, including i) “actions seeking an injunction against the debtor-transferor or transferee to prevent ‘further disposition’ of assets,” ii) actions “for damages against ‘[t]he [first] transferee of the asset or the person for whose benefit the transfer was made,’” or iii) “‘[a] ny subsequent transferee other than a good-faith transferee or obligee.’” After acknowledging that the Delaware Fraudulent Transfer Act is identical to the Uniform Fraudulent Transfer Act, the Court noted that the Delaware General Assembly could have “explicitly provided for liability for aiding and abetting a fraudulent transfer,” which is not covered under either act. Because the weight of authority interpreting the Uniform Fraudulent Transfer Act did not provide for an aiding and abetting cause of action, Vice Chancellor Strine could “perceive no legitimate basis” to create “such an implied statutory cause of action by judicial innovation when the General Assembly is free to do so itself,” and when such an act would cause the Delaware Fraudulent Transfer Act to be inconsistent with the Uniform Fraudulent Transfer Act. As such, the Court dismissed the fraudulent transfer claims against the Director Defendants because it concluded that Edgewater failed to show that the defendants were beneficiaries of the transfer of ATM Acquisition’s assets (i.e., within the statutory class of transferees) and “because a claim for aiding and abetting a fraudulent transfer is not available under the Delaware Fraudulent Transfer Act.”

The full opinion is available here