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

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.

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