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

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.

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