Central liquidating and associates
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They brought this case initially as a freestanding suit in federal district court. The first was that there was insufficient evidence of proximate cause to allow a reasonable jury to render a verdict for the plaintiff, and the second was that there was likewise insufficient evidence of a breach of fiduciary duty. (Ordinarily the issue of duty would precede that of cause, but no matter.)The term “proximate cause” is pervasive in American tort law, but that doesn't mean it's well understood. The plaintiff had bought a building in Houston in reliance on what he claimed was the defendant's misrepresentation of its value.
To explain: When a director is sued for breach of his duty of loyalty or care to the shareholders, his first line of defense is the business-judgment rule, which creates a presumption that a business decision, including a recommendation or vote by a corporate director, was made in good faith and with due care. But the presumption can be overcome by proof that the director breached his fiduciary duty to the corporation—his duty of loyalty and his duty to exercise due care in its performance. Delaware law permits the shareholders to adopt (and Cadant's shareholders did adopt) a charter provision exculpating directors from liability in damages for failure to exercise due care, but does not enforce a provision exculpating them from liability for disloyalty, Emerald Partners v.
The district judge granted the motion with a brief oral statement of reasons, precipitating this appeal.
This suit, brought by a trust that holds the common stock of a bankrupt company formerly known as Cadant, charges several former directors with breaches of their duty of loyalty to the corporation, and charges two venture-capital groups, which we'll abbreviate to “Venrock” and “J. Morgan,” with aiding and abetting the disloyal directors. Seven weeks into the trial on liability the plaintiff rested and the defendants then moved for judgment as a matter of law.
That amount was just large enough to satisfy the claims of Cadant's creditors and preferred shareholders (Venrock and J. The stock in the Arris Group that Cadant received in exchange for Cadant's assets became the property of the bankrupt estate. Our previous decision therefore directed that the suit be treated as an adversary action in the bankruptcy proceeding. § 157(e), when the plaintiff demanded a jury trial and the parties did not agree to allow the bankruptcy judge to conduct it. Coming closer to our case, the defendants cite our decision in Movitz v.
It was the estate's only asset, and its value fell to a level at which Cadant was worth less than the claims of the bridge lenders and other creditors, with the result that the common shareholders were wiped out. Initially the district court referred the case to the bankruptcy court, but the reference was withdrawn and the case returned to the district court, pursuant to 28 U. The district judge gave two independent grounds for granting judgment as a matter of law for the defendants. First National Bank of Chicago, 148 F.3d 760 (7th Cir.1998).
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 0 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.
It was later that year that the board proposed and the shareholders approved the reincorporation of Cadant in Delaware, effective January 1, 2001. The defendants attribute this to the deflating—beginning in the spring of 2000 and continuing throughout the year and into the next year—of the dot-com bubble of the late 1990s. The million bridge loan to Cadant was for only 90 days, at an annual interest rate of 10 percent; it also gave the lenders warrants (never exercised) to buy common stock of Cadant. Morgan then made a second bridge loan, in May, this one for million, again negotiated on Cadant's behalf by Copeland. She sued the railroad; it would have been unthinkable for her to sue the scale's manufacturer, even though if heavy metal scales did not exist she would not have been injured.
The suit involves decisions by Cadant's board made both when Cadant was incorporated in Maryland and when it was reincorporated in Delaware. We'll return to the question of what caused Cadant's financial distress, but whatever the cause the company needed fresh investment. The terms of the loan were negotiated on Cadant's behalf by Copeland. Cadant ran through the entire loan, which had been made in January 2001, within a few months. The loan agreement provided that in the event that Cadant was liquidated the lenders would be entitled to be paid twice the outstanding principal of the loan plus any accrued but unpaid interest on it; as a result, little if anything would be left for the shareholders. No one would think the scale's manufacturer should be liable, because no one would think that tort law should try to encourage manufacturers of scales to take steps to prevent the kind of accident that befell Mrs. The railroad was a more plausible defendant; its conductor had tugged the passenger aboard while the train was already moving.
Yet we ruled, without using the term “proximate cause,” that he could not recover from the defendant because (among other reasons) that would produce overdeterrence by making the defendant an insurer of conditions that he could not control. And indeed the district court ruled that the plaintiff had failed to prove that the defendants' misconduct had been a “proximate cause” of Cadant's ruination, just as in Movitz. First, the burden of proof on the issue of causation (or if one prefers, of “proximate causation”) was on the defendants rather than on the plaintiff and the judge cut off the trial before the defendants presented their defenses.
Second, there was enough evidence that the bursting of the dot-com bubble did not account for the entire loss to Cadant to make causation an issue requiring factfinding and therefore for the jury to resolve.
“If”—and here we come to the nub of the causation issue in this case—“the [business-judgment] rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the ‘entire fairness' of the transaction to the shareholder plaintiff.” Id. Berlin, 787 A.2d 85, 95–97 (Del.2001), and that is the charge in this case. Cadant's articles of incorporation in both Maryland and Delaware said that its directors would be exempted from liability for breaches of fiduciary duty to the fullest extent permitted by state law—and the two states' laws are, or at least may be, different.