Board of Directors Votes for Bonuses and Dividends at the Same Time as it is Considering a Bankruptcy Filing

From Bill Rochelle’s Daily Wire:

Fifth Circuit Insulates Ds&Os for Authorizing Prebankruptcy Dividends and Bonuses

To avoid dismissal, a complaint must allege each officer’s acts that breached fiduciary duty.

ATP filed a chapter 11 petition in August 2012.  After the case was converted to chapter 7 in 2014, the chapter 7 trustee prosecuted a suit in federal district court in Louisiana against officers and directors, contending that the bonuses and dividends gave rise to claims for fraudulent transfer, breach of fiduciary duty and conspiracy to violate fiduciary duty.

The district court dismissed the suit on the pleadings, and the Fifth Circuit upheld dismissal in a per curiam opinion on Oct. 27.

The appeals court said that the Texas business judgment rule protects officers and directors from claims for breach of fiduciary duty except for “acts that are ultra vires, fraudulent, or oppressive to minority shareholder rights.”

With regard to the dividends, the complaint was defective, the circuit court said, because the trustee did not “plead any facts explaining why such a preferred stock dividend payment necessarily harmed the corporation itself.”  The court also faulted the complaint for failing to specify which officers and directors were responsible for authorizing the dividend.

With regard to the executive bonuses, the complaint was deficient because the “trustee concludes without evidentiary support that the bonuses in question were excessive” and did not explain how the ATP dividends were “excessive in comparison to other similarly sized public companies in the oil and gas industry.”

Of particular importance to companies contemplating bankruptcy, the appeals court said that “continuing to compensate corporate managers during times of financial hardship may be necessary to retain these employees.  And during a time of potential insolvency, retaining corporate leadership may be the best way to revitalize the corporation.”

Tow v. Bulmahn (In re ATP Oil & Gas Corp.), 17-30077 (5th Cir. Oct. 27, 2017).

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