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Quadrant Structured Prods. Co. v. Vertin

Court of Chancery of Delaware

July 22, 2014, Submitted; October 1, 2014, Decided

C.A. No. 6990-VCL

Opinion

 [*166]  LASTER, Vice Chancellor.

Plaintiff Quadrant Structured Products Company, Ltd. ("Quadrant") owns debt securities issued by defendant Athilon Capital Corp. ("Athilon" or the "Company"), a Delaware corporation. Quadrant alleges that Athilon is insolvent and that the individual defendants, [**2]  who are members of Athilon's board of directors (the "Board"), should wind up the Company's business and dissolve the entity. Quadrant contends that instead, the Board has found ways to transfer value preferentially to Athilon's controller, defendant EBF & Associates ("EBF"). In this action, Quadrant has asserted breach of fiduciary duty claims derivatively against the Board and EBF. Quadrant has also asserted fraudulent transfer claims directly against EBF and its affiliate, Athilon Structured Investment Advisors, LLC ("ASIA"). The defendants have moved to dismiss the complaint. Their motion is denied to the extent that Quadrant has challenged specific transfers of value to EBF or ASIA. To the extent that Quadrant has challenged the Board's business decision to take on greater risk, the motion to dismiss is granted.

I. FACTUAL BACKGROUND

The facts are drawn from Quadrant's verified amended complaint (the "Complaint" or "Compl.") and the documents it incorporates by reference. At this procedural stage, the Complaint's allegations are assumed to be true, and Quadrant receives the benefit of all reasonable inferences.

A. The Company And Its Business Model

Athilon is a credit derivative product [**3]  company created to sell credit protection to large financial institutions. The Company's wholly owned subsidiary, Athilon Asset Acceptance Corp. ("Asset Acceptance"), wrote credit default swaps on senior tranches of collateralized debt obligations. The Company guaranteed the credit swaps that Asset Acceptance wrote. In a typical transaction, Asset Acceptance sold protection to a bank in the form of a credit swap that referred to a designated pool of investment grade debt securities, known as "Reference Obligations." If the pool of Reference Obligations suffered net losses that exceeded a contractually defined figure, then Asset Acceptance was liable up to a fixed limit. The Company was liable as the guarantor of Asset Acceptance's performance.

To obtain and maintain a AAA/Aaa credit rating, which was essential to the Company's business model, the ratings agencies required the Company to have a limited business purpose and to adopt and follow operating guidelines for its business (the "Operating Guidelines"). The Amended and Restated Certificate of Incorporation for the Company (the "Athilon Charter") limits its business to "guaranteeing or providing other forms of credit support for [**4]  the obligations of its subsidiaries" and activities related to that business. The Amended and Restated Certificate of Incorporation for Asset Acceptance (the "Asset Acceptance Charter") limits its business to "transactions judged by [Asset  [*167]  Acceptance] to be credit default swaps" and activities related to that business.

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102 A.3d 155 *; 2014 Del. Ch. LEXIS 193 **; 2014 WL 5020273

QUADRANT STRUCTURED PRODUCTS COMPANY, LTD., Individually and Derivatively on behalf of Athilon Capital Corp., Plaintiffs, v. VINCENT VERTIN, MICHAEL SULLIVAN, PATRICK B. GONZALEZ, BRANDON JUNDT, J. ERIC WAGONER, ATHILON CAPITAL CORP., ATHILON STRUCTURED INVESTMENT ADVISORS LLC, and EBF & ASSOCIATES, LP, Defendants.

Subsequent History: Rehearing denied by Quadrant Structured Prods. Co. v. Vertin, 2014 Del. Ch. LEXIS 214 (Del. Ch., Oct. 28, 2014)

Summary judgment denied by Quadrant Structured Prods. Co., LTD. v. Vertin, 115 A.3d 535, 2015 Del. Ch. LEXIS 129 (Del. Ch., 2015)

Prior History: Quadrant Structured Prods. Co. v. Vertin, 93 A.3d 654, 2014 Del. LEXIS 291 (Del., 2014)

CORE TERMS

insolvent, stockholders, alleges, fiduciary duty, fiduciary, dividend, subsidiary, Counts, breach of fiduciary duty, insolvent corporation, controlling stockholder, residual, stock, transferred, swaps, claimants, liquidity, insider, entity, business judgment rule, license fee, ownership, shareholders, solvent, fraudulent transfer, standard of review, good faith, affiliate, derivative claim, Guidelines

Civil Procedure, Dismissal, Involuntary Dismissals, Failure to State Claims, Evidence, Inferences & Presumptions, Inferences, Pleadings, Complaints, Requirements for Complaint, Business & Corporate Law, Management Duties & Liabilities, Fiduciary Duties, General Overview, Duty of Care, Duty of Loyalty, Duty of Good Faith, Actions Against Corporations, Standing, Claim Presentation, Derivative Actions, Duty to Third Parties, Corporations, Corporate Finance, Procedural Matters, Torts, Intentional Torts, Breach of Fiduciary Duty, Justiciability, Burdens of Proof, Governments, Legislation, Interpretation, Demands, Appeals, Standards of Review, De Novo Review, Business Judgment Rule, Causes of Action, Misfeasance & Nonfeasance, Directors & Officers, Indemnification & Reimbursement, Scope of Authority, Limitations on Authority, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Burdens of Proof, Allocation, Fraud & Misrepresentation, Actual Fraud, Elements, Business & Corporate Compliance, Contracts Law, Standards of Performance, Creditors & Debtors, Contracts Law, Assignments, Heightened Pleading Requirements, Fraud Claims, Constructive Fraud, Dividends & Reacquisition of Shares, Declaration & Distribution of Dividends, Right to Dividends, Concerted Action, Civil Conspiracy