Delta financial liquidating trust
We conclude that the articles of incorporation were not effective in waiving Copeland's and the other conflicted directors' duty of loyalty, and so proof of their disloyal acts (had the jury been permitted to find that they'd indeed committed those acts) would have placed on them the burden of proving the “entire fairness” of the bridge loans.But, say our defendants, the plaintiff still had to prove proximate cause and what has “entire fairness” to do with that? For “in the review of a transaction involving a sale of a company, the directors [once the application of the business-judgment rule is rebutted] have the burden of establishing that the price offered was the highest value reasonably available under the circumstances,” Cede & Co. Technicolor, Inc., supra, 634 A.2d at 361—in other words, the burden of proving that the shareholders did as well as they would have done had the defendant directors been loyal and careful.General Corporation Law § 102(b)(7), while Maryland law allows a corporation to shield its directors from all liability other than for “active and deliberate dishonesty.” Md.
The founders received common stock in the new corporation at the outset. He is the director principally accused of disloyalty to Cadant. This is what is known as the “internal affairs” doctrine—“a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands.” Edgar v. Maryland law applied at that time and under that law directors have no duty to “accept, recommend, or respond on behalf of the corporation to any proposal by an acquiring person.” Md. Morgan before the loan was made, while remaining a director of Cadant. The plaintiff was injured when a heavy metal scale collapsed on the railroad platform on which she was standing.
In April 2000 the board turned down a tentative offer by ADC Telecommunications to buy Cadant's assets for $300 million. Code, Corporations and Associations § 2–405.1(d)(1). In the fall of 2000, Cadant found itself in financial trouble. The loan was a “bridge loan,” which is a short-term loan intended to tide the borrower over while he seeks longer-term financing. The scale had buckled from damage caused by fireworks dropped by a passenger trying, with the aid of a conductor, to board a moving train at some distance from the scale.
The first point—that the burden of proof on the issue of causation was on the defendants—is counterintuitive.
Ordinarily the burden of proving causation is on the plaintiff, since without an injury caused by the defendant there is no tort no matter how wrongful the defendant's behavior was. Mc Neil Consumer Healthcare, 615 F.3d 861, 865–66 (7th Cir.2010).
And if there was disloyalty in this case it was deliberate, and maybe that's enough to prove “active and deliberate dishonesty.”We needn't decide, because we think the Delaware statute controls, so far as the bridge loans are concerned, and they are the focus of the suit. It was on November 8, 2000, that Cadant's board formally approved the decision to reincorporate, in a resolution which stated that “the Board believes that the State of Delaware has an established body of case law that better enables the Board effectively to meet its fiduciary obligations to the stockholders of the Company.” Copeland's failure to disclose disloyal acts that he committed during the negotiation was a disloyal act that caused the loan to be approved, and it was approved in January, after the company had reincorporated under Delaware law.
The negotiations leading up to the first bridge loan took place in the fall of 2000 and the loan was approved by Cadant's board on January 10, 2001—nine days after Cadant's reincorporation in Delaware took effect. The board would have assumed that, certainly from that day forward, the duties of the directors relating to both that loan and the second bridge loan would be governed by Delaware law.
Venrock Associates, 348 F.3d 584 (7th Cir.2003), we held that the suit was a derivative suit—a suit on behalf of the corporation against individuals and firms that had injured it by wrongful conduct. Shortly after the purchase the Houston real estate market collapsed and his investment was wiped out.
A derivative suit is an asset of the corporation, so if as in this case the corporation is in bankruptcy the suit is an asset of the bankrupt estate. The misrepresentation had not caused that collapse but it had been a cause of the plaintiff's buying the building and thus had contributed to his loss. That would be as futile as making the manufacturer of the scale an insurer of Mrs. The present case is superficially similar to Movitz because it is possible that what did in Cadant and hence its common shareholders (some at least of the preferred shareholders—such as Venrock and J. Morgan—seem to have come out all right) was not the defendants' alleged misconduct but the collapse of the dot-com bubble.
Some of the plaintiff's strongest evidence of the disloyalty of the conflicted directors concerns Copeland's actions during the negotiation of the first loan, and the plaintiff argues that that loan initiated the events which led to the desperation sale of the company to Arris. Apart from the board's refusal to sell the company to ADC Telecommunications, moreover—an act squarely governed by Maryland law and exempted from liability by that law because it was concluded before reincorporation was resolved upon, let alone accomplished—most of the disloyal acts of which the plaintiff complains occurred while Cadant was a Delaware corporation, and most that occurred earlier occurred after the board had decided that Delaware law made a better fit with Cadant than Maryland law did.
We cannot apply both states' law to the first bridge loan, and so we fall back (as did the court in the only factually similar case we've found, Demoulas v. E.2d 159, 169 (Mass.1997)) to general choice of law principles, see Restatement, supra, §§ 309, 6, and ask which state's law governing the duties of directors the parties would have expected to govern Cadant's internal affairs in the critical period, and which state had the greater regulatory interest in the corporation's internal affairs then. So Delaware had a greater regulatory interest than Maryland in the governance of Cadant's internal affairs in the critical period in which the events giving rise to this lawsuit occurred.