Archive for September, 2009

Greene LLP Attorneys Recover $5.3 Million from Insiders in Telecom Bankruptcy Litigation and an Additional $450K from Swiss Financial Giant UBS

Tuesday, September 15th, 2009

After almost four years of litigation, Greene LLP attorneys recently obtained approval from the United States Bankruptcy Court for the District of Delaware to settle claims against former directors and officers of CTC Communications, its corporate attorney, and other persons closely connected to the CTC corporate insiders for $5.34 million.  The settlement was paid to the CTC Litigation Trust, a litigation trust that collected assets for the benefit of CTC’s unsecured creditors in connection with CTC’s Chapter 11 bankruptcy.

The case, CTC Litigation Trust v. Fabbricatore, et al. arose out of a series of claims that prior to the CTC bankruptcy, CTC insiders had improperly taken assets from the struggling communications company for their personal benefit.  Many different transactions were at issue in the litigation.  Several officers, for example, had opened margin accounts with PaineWebber, a subsidiary of the Swiss banking corporation, UBS, and pledged CTC stock against the amounts they borrowed.  The company’s principals used company money to repay those loans, even though CTC received no benefits from the transaction.  After the money had been paid out, the company’s lawyer was supposed to obtain security from all of the insiders whose loans were paid, and the company reported in its SEC filings that the “loans” were secured.  In fact, some of the officers never posted any security.  In other cases, the security was plainly inadequate or the company lawyer failed to take the necessary steps to perfect the security agreement.  Needless to say, many of the corporate officers never repaid their “loans.”

Attorneys at Greene LLP also uncovered that as CTC’s financial situation deteriorated and most creditors’ bills were not being paid, one creditor’s bills were being paid in full and even more rapidly than when the company had adequate cash.  That special creditor was a sister company that was still privately held and the founder of CTC held a majority of that company’s stock.  The Trust alleged that CTC retained the sister company for increasing amounts of services without obtaining competitive bids,  and that the sister company provided numerous services that CTC had formerly performed for itself at a much lower cost.  Moreover, the amount paid to the sister company substantially increased after the independent members of the Board of Directors turned down the founder’s request to have CTC purchase the sister company.   Attorneys from Greene LLP alleged that once the founder could not get the company to buy out his stock, he became determined to get as much company cash as possible transferred to the sister company that he still controlled.

The most complicated transaction the Trust challenged concerned the founder, some of the former officers and their close friends purchasing a piece of real estate needed for CTC’s expanding operations and leasing it back to the company.  The “purchase” of the real estate was a 100% financed non-recourse transaction that was entirely dependent upon CTC’s credit; none of the insiders paid any money or had any funds at risk.  The property was then leased back to CTC under grossly excessive terms that were never fully disclosed to the board of directors.  The Board itself, exhibited no interest in the transaction, performing no oversight and neglecting to learn the most basic information concerning the one sided transaction.  Further, Greene LLP attorneys discovered evidence that millions of dollars of CTC funds that were supposed to be used to renovate the property may have been diverted and used by the founder and the general contractor for their personal real estate development project on Nantucket .

Claims against corporate directors and officers for self dealing and improper use of corporate assets are relatively straightforward.  The Trust, however, also brought claims against the independent corporate directors for their failure to monitor the insiders’ use of corporate assets for personal gain despite substantial knowledge of such actions.  Such claims are very difficult to maintain under Delaware law, which provides broad protection to the directors pursuant to the Business Judgment Rule.  The attorneys from Greene LLP, on behalf of the Trust, however, were able to establish that the independent directors’ conduct could constitute improper delegation of their duties or bad faith conduct, which allowed the suit to proceed.  A copy of the Bankruptcy Court’s opinion, which was instrumental in setting the stage for a favorable settlement, is attached here.

In addition to the claims against the insiders, the Trust also brought a fraudulent transfer claim against UBS, as the parent of PaineWebber, the brokerage house that accepted corporate funds to pay off the private debts of the officers while CTC was insolvent.  The Trust argued that because CTC received no benefit from the payment of the private debts, CTC received less than a reasonably equivalent value for the funds that it transferred.   This claim led to a separate settlement in favor of the Trust for an additional $450,000.

Greene LLP Announces $3.5 Million Settlement in Action Against Directors and Officers’ of Bankrupt Technology Company

Tuesday, September 15th, 2009

An action against the former CEO of Robotic Visions Systems, Inc. (RVSI) and the former directors of RVSI for breach of fiduciary duty brought by lawyers at Greene LLP has resulted in a $3.5 million settlement.  Greene LLP attorneys had been retained as special counsel by Steven Notinger, the Chapter 7 Trustee of RVSI in a highly contested New Hampshire bankruptcy proceeding.  As a result of the settlement, it is likely that the RVSI estate will escape administrative insolvency and that some assets will be available for distribution to unsecured creditors of RVSI.

The RVSI bankruptcy was one of the largest Chapter 11 proceedings in New Hampshire in recent years and has been hotly contested.  The former CEO of RVSI originally sought bankruptcy protection when the corporation’s secured lender refused to advance any further funds unless the CEO resigned.  Although, RVSI was able to reach a short term accommodation with the lender shortly after the Chapter 11 filing, the lender and RVSI reached a complete impasse within three months of the filing.  In an extraordinary move, the Bankruptcy Court replaced the CEO with a “control person”.  This led to extensive litigation between the former CEO and the debtor in possession, the person the court appointed to operate RVSI and the attorneys originally retained by the CEO to act as bankruptcy counsel.  The intense litigation drove up the administration costs, and promptly resulted in the administrative insolvency of the bankruptcy estate.

After RVSI’s operating assets were sold under Bankruptcy Court supervision, Steven Notinger was appointed Chapter 7 Trustee, and he retained special counsel to determine whether any claims could be raised against any of the former officers or directors of RVSI, a Delaware corporation.  Greene LLP attorneys conducted an extensive investigation, and determined that notwithstanding the considerable protections granted corporate fiduciaries under Delaware law, viable claims against the CEO, and the other members of the Board of Directors could be established.

Delaware law immunized the CEO and the other directors from claims for breach of their duty of care in making corporate decisions.  Delaware fiduciaries can be liable for breach of their duty of loyalty, but most claims of that nature involve self dealing, looting or improper use of corporate assets, which, for the most part, did not exist at RVSI.  Greene LLP lawyers, however, realized that the CEO’s efforts to entrench himself, by refusing to take necessary action that would have diminished his corporate control, was a violation of his duty of loyalty.  Any the other directors subservience to the CEO—their complete failure to perform any oversight or oppose his fiat—was an improper delegation of their duties.   On behalf of the Chapter 7 Trustee, Greene LLP attorneys argued that taking action to preserve the CEO’s control of the corporation was not acting in the interest of RVSI, but in the personal interest of the CEO, and violated all of the fiduciaries’ duties of good faith.

Ruling on the Defendants’ motion to dismiss, the Bankruptcy Court completely agreed with the Chapter 7 Trustee’s position.  The decision can be found here.  It held that the Trustee could pursue his claims against the CEO and the former directors, and recognized that entrenchment can be a viable claim for breach of the duty of loyalty outside of the merger context.

The favorable ruling led to serious negotiations between the parties, which ultimately resulted in the $3.5 million settlement.  The settlement was ultimately approved by the New Hampshire Bankruptcy Court as being in the best interest of the estate and the estate’s creditors.

Greene LLP Announces $2.4 Million Settlement in Electrocution Case

Tuesday, September 15th, 2009

Attorneys of Greene LLP announce the recent settlement of an electrocution case for $2.4 million.  The action was a wrongful death case involving an electric sign installer who was electrocuted while replacing a neon light transformer in the common area of the Holyoke Mall.  Plaintiff contended that defendants–the mall and the mall’s management company–failed to de-energize the circuit before allowing the work to be performed.

Defendants countered with the claim that the sign installer had requested that the circuits remain energized so that he would be able to test the transformer after he replaced it.  Plaintiff’s experts–an electrical engineer, a master electrician and a shopping mall industry expert–opined that industry codes and OSHA regulations required defendants to ensure that their circuits were de-energized during service and repair.

Moreover, the experts found that the defendants failed to comply with regulations and code provisions that required a means of disconnection capable of shutting off the power to the transformer to be located within sight of the transformer.  Defendants sought to introduce proof that decedent has worked with live power on prior occasions, which was rebutted with evidence that decedent had requested that the circuits be de-energized when he performed work at the mall on prior occasions.  The case was filed in the United States District Court for the District of Massachusetts in Springfield.  Judge Ponsor held three separate sessions mediating the case with counsel for the parties which facilitated a settlement of the case for $2.4 million dollars.