On November 15, 2024, the Delaware Chancery Court ruled that a creditor aided and abetted a breach of fiduciary duty. The lawsuit came after Versa Capital Management LLC bought debt owed by BridgeStreet Worldwide, Inc., with the ultimate goal to own BSW. BSW later defaulted on the debt, and the parties began negotiating a forbearance agreement. Not long before, another company had acquired a large portion of BSW’s stock and acquired the right to appoint a member of BSW’s board and obtain information. But the BSW directors stiff-armed the appointment and slow-rolled information requests until it finished negotiating the forbearance agreement. Both acts violated BSW’s shareholder’s agreement.
As part the forbearance agreement, Versa agreed to indemnify BSW’s board for lawsuits brought by the new shareholder and acquired new security interests in BSW’s subsidiaries. BSW eventually breached the forbearance agreement, Versa foreclosed, and litigation ensued.
The court first determined that the directors breached the fiduciary duty of loyalty owed to BSW when approving the forbearance agreement. The directors approved the forbearance agreement largely because Versa agreed to indemnify them for claims BSW’s new shareholder might bring, and they did so while anticipating that BSW’s new shareholder would sue. They thus had a conflict of interest.
The court then went on to consider whether Versa aided and abetted that breach by knowingly participating in it. To knowingly participate, Versa must have knowingly advocated for or assisted in the breach of fiduciary duty. The court determined that Versa had done so. Versa knew that the BSW directors violated the shareholders agreement by stonewalling BSW’s new shareholder. It also knew that the BSW directors wanted indemnification for those violations. So, Versa twisted the directors’ conflicts of interest to its own end—eventually owning BSW, in part by foreclosing on its new security interests—and persuaded the BSW directors to approve the forbearance agreement in exchange for indemnification. This, said the court, was aiding and abetting.
The case is GB-SP Holdings, LLC v. Walker, No. 9413-VCF (Del. Ch. Nov. 15, 2024). The plaintiffs are represented by Chipman Brown Cicero & Cole, LLP and O’Hare Parnagian LLP. The defendants are represented by Landis Rath & Cobb LLP, Dechert LLP and Bellew, LLC. The opinion is available here.
