Quadrant Structured Prods. Co. v. Vertin, C.A. No. 6990-VCL (Del. Ch. Oct. 20, 2015) (Laster, V.C.)
In this post-trial decision, the Court of Chancery held that a company’s repurchase of senior notes from an insider approximately six months after returning to solvency did not violate the express or implied terms of the indenture, constitute a fraudulent transfer, nor give rise to fiduciary duty claims on which the creditor had standing to sue.
This dispute arose over a series of transactions involving a company’s repurchase of relatively illiquid securities and a sizeable block of senior notes from an investment manager holding 100% of the company’s equity. The repurchase of the senior notes, though preceded by several years of deep insolvency for the company, occurred at a time when the company’s GAAP balance sheet showed that the company was solvent. The plaintiff-creditor, who invested in the company’s senior notes believing that the company would dissolve and liquidate its assets, sued derivatively for breach of fiduciary duty and contended that the repurchase was a fraudulent transfer. In addition, the plaintiff brought direct claims alleging that by engaging in the repurchase, the company violated the express terms of the senior indenture prohibiting selective repurchases that benefit insiders as well as the implied covenant of good faith and fair dealing. Applying New York law, the Court of Chancery held that the plaintiff failed to prove any entitlement for relief under the express terms of the senior indenture or the implied covenant of good faith and fair dealing.
Regarding the fraudulent transfer claim, the Court held that the repurchase was neither an intentionally fraudulent transfer nor a constructively fraudulent transfer under the Delaware Uniform Fraudulent Transfer Act. The Court found that at the time of the repurchase, the company was solvent under both the balance sheet test, because the company’s GAAP balance sheet reported positive equity based on a fair valuation of the company’s assets and liabilities, and the cash flow test because the company was able to pay its debts when they came due. The Court further found that the repurchase did not render the company insolvent but rather strenghtened the company’s balance sheet. Because a transaction only can be constructively fraudulent if the debtor was insolvent at the time or became insolvent as a result, the Court concluded that the repurchase could not have been a constructively fraudulent transfer. The Court also found that the company did not act with the “‘actual intent to hinder, delay or defraud’” its creditors by engaging in the repurchase even though it increased the risk of default faced by the company’s remaining creditors. The Court explained, “Unless a creditor bargains for an applicable contract right, the creditor does not have the ability to interfere with the operations of a solvent firm.” Finally, given that the company was solvent when the plaintiff introduced the fiduciary duty claims, the Court of Chancery held that it lacked standing to sue.