Chancery Decides Questions of First Impression Regarding Statutory Claims for Unlawful Dividends and Fraudulent Transfers
Enforcement mechanisms available to creditors of Delaware corporations may include, inter alia, claims against directors to recover unlawful dividends under Section 174 of the Delaware General Corporation Law; and fraudulent transfer claims against the corporation and transferees including, where Delaware law applies, under Delaware's Uniform Fraudulent Transfer Act.
July 31, 2019 at 09:01 AM
8 minute read
Enforcement mechanisms available to creditors of Delaware corporations may include, inter alia, claims against directors to recover unlawful dividends under Section 174 of the Delaware General Corporation Law (8 Del. C. Section 174), and fraudulent transfer claims against the corporation and transferees including, where Delaware law applies, under Delaware's Uniform Fraudulent Transfer Act, referred to as DUFTA (6 Del. C. Section 1301). In JPMorgan Chase Bank v. Ballard, C.A. No. 2018-0274-AGB (Del. Ch. July 11, 2019), Chancellor Andre G. Bouchard of the Delaware Court of Chancery addressed three important questions of first impression concerning standing and limitations periods issues under these statutes.
Background
Data Treasury Corp. (DTC) is a Delaware corporation whose primary business allegedly was suing financial institutions for infringement of check-imaging patents. DTC sued JPMorgan, and, in 2005, settled its claims in exchange for a $70 million licensing arrangement. The license agreement contained a “most-favored license provision,” providing that if DTC later licensed the patents to another party, JPMorgan would be entitled to notice and “the benefit of any and all more favorable terms.”
DTC allegedly soon began violating the agreement by entering into licensing agreements for the patents without informing JPMorgan or giving it the benefit of the more favorable terms. Among other such instances, DTC licensed the patents to a bank for just $250,000 in fall 2012.
Simultaneously, between 2006 and 2010, DTC allegedly issued more than $117 million in dividends to stockholders (the challenged dividends), when its directors knew or should have known that its business was in jeopardy due to the large refund owed to JPMorgan in accord with the most-favored license provision and the likely effects of patent litigation reform legislation.
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