Delaware Bankruptcy Court Grants Judgment for Lender Due to Insufficiently Pleading Damages Despite Clear Breach of Fiduciary Duty | King and Spalding

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[co-author: Lauryn Morris]

On May 2, 2022, the U.S. Bankruptcy Court for the District of Delaware issued judgment, after a bench trial, for a lender on breach of fiduciary duty claims brought by the Litigation Trust for the Borrower, concluding that the trust had failed to prove damages. ASHINC Corporation (“Allied”) was a unionized carrier for many major automobile manufacturers. Allied’s main lender, Yucaipa, owned the majority of Allied’s secured debt and equity and also controlled Allied’s board of directors. Two other lenders, Black Diamond and Spectrum (collectively, “BD/S”), were minority holders of Allied’s secured debt. In 2008, after Allied defaulted on its secured debt for an extended period, Jack Cooper Transport entered negotiations to purchase Allied’s assets. Rather than dealing directly with Jack Cooper, the board deferred to Yucaipa, acting in its capacity as majority lender. At the same time, Jack Cooper was also entering into parallel negotiations with BD/S on the redemption of its debt. While Yucaipa and BD/S were aware of each other’s negotiations with Jack Cooper, they were mostly unaware of the details, including the price offered for each other’s debt. In her negotiations, Yucaipa demanded a premium price for herself for the first lien debt, which ultimately caused the deal to fall through. As a result, Allied’s bankruptcy litigation trust asserted that Yucaipa’s conduct constituted a breach of fiduciary duty which harmed Allied and its creditors and resulted in damages of $158.6 million. dollars, being the difference between the consideration shown in a December 2011 term sheet and the final purchase. price paid by Jack Cooper for Allied’s assets in 2013.

After a bench trial, the court issued findings of fact and findings of law in which it determined that, although Yucaipa breached a fiduciary duty of loyalty based on self-declaration evidence, the calculations damages from the trust were “materially erroneous and unreliable.” Specifically, since the trust’s damages calculations stemmed from preliminary, non-binding term sheets proposed by Jack Cooper, the damages proved too speculative to impose liability. Although the Trust proved the claims, it failed to prove the damages resulting from Jack Cooper’s negotiations. As a result, the Court declined to award damages in favor of the trust.

The case is Yungman c. Yucaipa Am. Alliance Fund I, LP (In re ASHINC Corp.), No. 13-ap-50530 (Bankr. D. Del. May 2, 2022). The plaintiff is represented by Fox Rothschild LLP, Landis Rath & Cobb LLP and Stoel Rives, LLP. Defendant is represented by Ballard Spahr LLP, Pachulski Stand Ziehl & Jones LLP and Glaser Weil Fink Howard Avchen & Shapiro. Order is available here.

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