United States: Fifth Circuit Affirms Dismissal Of Claims Relating To Pre-Petition Payments To D&O's

The Bottom Line

The Fifth Circuit, in In the Matter of: ATP Oil & Gas Corp. (Tow v. Bulmahn, et. al.), dismissed breach of fiduciary duty claims and fraudulent transfer claims brought by a chapter 7 trustee relating to cash bonuses and dividend payments made pre-bankruptcy to the officers and directors of a financially distressed company. In doing so, the Fifth Circuit identified several key shortcomings in the trustee's complaint, and reaffirmed the protections of the business judgment rule when it comes to the decisions that officers and directors make while a company is in financial trouble, particularly with respect to executive compensation.

What Happened?

Background

ATP Oil & Gas Corporation ("ATP") suffered in the wake of the 2010 Deepwater Horizon explosion and oil spill, and by the summer months of 2012 was contemplating filing for bankruptcy. But before entering bankruptcy, ATP's board of directors approved a special dividend payment for stock holders, and sizeable cash bonuses to some of its officers and directors.

After filing for chapter 11 relief, ATP's case was converted to chapter 7, and the trustee brought suit against ATP's officers and directors, alleging that "ATP's cash bonuses and preferred stock dividend payout represented breaches of fiduciary duties by the [o]fficers and [d]irectors under Texas law; the cash bonuses amounted to fraudulent transfers for which ATP did not receive equivalent value in exchange; and the [o]fficers and [d]irectors conspired to breach their fiduciary duties, or aided and abetted such breaches." In the Matter of: ATP Oil & Gas Corp. (Tow v. Bulmahn, et. al.), Case No. 17-30077 [Doc. 514213228] at 4 n.3 (5th Cir. Oct. 27, 2017).

Originally assigned to the Southern District of Texas Bankruptcy Court, the dispute was transferred to the District Court for the Eastern District of Louisiana, where the district court granted the officers' and directors' 12(b)(6) motions to dismiss the Trustee's complaint.1 The trustee appealed, and the Fifth Circuit affirmed the district court's dismissal.

The Fifth Circuit Opinion

In an unpublished opinion, the Fifth Circuit affirmed the district court's dismissal of the trustee's breach of fiduciary duty claims, civil conspiracy and aiding and abetting claims regarding the purported breaches of fiduciary duties, and fraudulent transfer claims.

With respect to the breach of fiduciary duty claims, in dismissing the claims the Fifth Circuit focused on the fact that the trustee failed to allege with specificity which officers and which directors authorized the disputed payments, along with the fact that the trustee failed to distinguish between the different roles of the officers and directors (but instead alleged improprieties by the officers and directors generally). The court also found the trustee's complaint lacking with respect to the trustee's allegations that the cash bonuses paid to the officers and directors were improper and excessive, citing to the lack of any indication in the complaint that the bonuses were not comparable with bonuses made to executives at other similarly situated companies. Likewise, the court pointed out that, with respect to the trustee's allegation that the company was insolvent during the relevant time period, the trustee failed to present any information showing that ATP was insolvent or had insufficient capital when the bonus payments were made. Importantly, the court also emphasized the protections afforded to the officers and directors on account of the "business judgment rule," which "generally protects corporate officers and directors, who owe fiduciary duties to the corporation, from liability for acts that are within the honest exercise of their business judgment and discretion." Id. at 6 (quoting Sneed v. Webre, 465 S.W.3d 169, 173 (Tex. 2015)). Recognizing that the award of cash bonuses and other compensation to officers and directors during a time of financial hardship may ultimately benefit a distressed company, the Fifth Circuit explained:

Executives may judge that continuing to compensate corporate management during times of financial hardship may be necessary to retain those employees. And during a time of potential insolvency, retaining corporate leadership may be the best way to revitalize the corporation.

Id. at 9. The Fifth Circuit reiterated that the courts will generally not interfere with a company's affairs "unless officers or directors commit acts that are ultra vires, fraudulent, or oppressive to minority shareholder rights." Id. at 9 (citation omitted).

Why This Case is Interesting

There are two ramifications of the decision – one specific and one more general. By identifying several shortcomings in the trustee's complaint against the defendant officers and directors, this case clearly signals the Fifth Circuit's views regarding the specificity needed for a complaint of this nature. This includes clearly identified defendants and their respective roles, non-conclusory allegations as to the impropriety of a bonus award, and more than bare-bones assertions as to a company's insolvency.

However, the decision also more generally recognizes that there are numerous decisions that a distressed company's board must make in navigating the choppy waters of distress which events may ultimately lead to a potential filing. By embracing the flexibility afforded by the business judgment rule, including to stabilize operations, the court recognizes that executive compensation may be a bona fide consideration for a financially distressed business to retain key personnel and, therefore, bonuses are not per se improper. Nonetheless, boards should proceed with caution as to the timing and size of any such bonuses and comparable support before awarding them. One thing remains clear – pre-bankruptcy bonuses will always attract scrutiny (whether or not ultimately found to be within the business judgment rule).

Footnote

[1] The Trustee sought, and was granted, leave to amend his complaint with respect to the fraudulent transfer claim against several of the Officers, who then filed a motion to dismiss which was also granted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions