Upholding the district court, the Fifth Circuit used the bankruptcy of ATP Oil & Gas Corp. to insulate corporate officers and directors from liability for paying preferred dividends and bonuses before bankruptcy.
An offshore oil and gas producer, ATP was financially crippled by the Deepwater Horizon disaster in 2010, which spawned new regulations and moratoria on drilling. In 2010 and 2011, the ATP board approved bonuses to certain officers. In 2012, when ATP was considering bankruptcy, the board approved a special dividend to shareholders.
The bonuses were allegedly paid in violation of the company’s internal policies, and the board paid the dividends over the advice of counsel, who warned that the payments might violate state and bankruptcy laws.
ATP filed a chapter 11 petition in August 2012. After the case was converted to chapter 7 in 2014, the chapter 7 trustee prosecuted a suit in federal district court in Louisiana against officers and directors, contending that the bonuses and dividends gave rise to claims for fraudulent transfer, breach of fiduciary duty and conspiracy to violate fiduciary duty.
The district court dismissed the suit on the pleadings, and the Fifth Circuit upheld dismissal in a per curiam opinion on Oct. 27.
The appeals court said that the Texas business judgment rule protects officers and directors from claims for breach of fiduciary duty except for “acts that are ultra vires, fraudulent, or oppressive to minority shareholder rights.”
With regard to the dividends, the complaint was defective, the circuit court said, because the trustee did not “plead any facts explaining why such a preferred stock dividend payment necessarily harmed the corporation itself.” The court also faulted the complaint for failing to specify which officers and directors were responsible for authorizing the dividend.
With regard to the executive bonuses, the complaint was deficient because the “trustee concludes without evidentiary support that the bonuses in question were excessive” and did not explain how the ATP dividends were “excessive in comparison to other similarly sized public companies in the oil and gas industry.”
Of particular importance to companies contemplating bankruptcy, the appeals court said that “continuing to compensate corporate managers during times of financial hardship may be necessary to retain these employees. And during a time of potential insolvency, retaining corporate leadership may be the best way to revitalize the corporation.”
On the fraudulent transfer claims for paying and receiving bonuses, the complaint was deficient for failing “to present any financial data showing that ATP was actually insolvent,” even though the trustee had access to the company’s books and records. The circuit court said that conclusory allegations, even at the pleading stage, “fail to plausibly state a claim upon which the court may grant relief.”
The civil conspiracy claims failed because the trustee had not stated an underlying claim for breach of fiduciary duty or fraudulent transfer. Also, the trustee did not allege that “any meeting of the minds occurred” among the defendants.