NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 16-1679
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In re: ULTIMATE ESCAPES HOLDINGS LLC, et al,
Debtors
EDWARD T. GAVIN, Trustee of the UE Liquidating Trust,
On behalf of the Estates of Ultimate Escapes Holdings LLC, et al.,
Appellants
v.
JAMES M. TOUSIGNANT; RICHARD KEITH
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Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Action No. 1-15-cv-00241)
District Judge: Honorable Richard G. Andrews
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Submitted Under Third Circuit LAR 34.1(a)
January 18, 2017
Before: AMBRO, VANASKIE, and SCIRICA, Circuit Judges
(Opinion filed: March 17, 2017)
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OPINION*
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AMBRO, Circuit Judge
Edward T. Gavin, the Trustee of a Chapter 11 liquidating trust, appeals the
judgment—following a three-day bench trial—of a breach-of-fiduciary-duty lawsuit in
favor of two inside directors of an insolvent company that set up memberships relating to
high-end vacation residences and related services. The alleged breach of fiduciary duty
stems from a deal an inside director negotiated at the eleventh hour to cover a cash
shortfall. The deal, which was intended to transfer, among other things, only a limited
number of members to the bankrupt company’s direct competitor, provided the basis for
that competitor later to solicit all of the company’s members. Gavin alleges this deal
transferred the company’s most valuable asset worth up to $40 million for the paltry sum
of $115,000.
Gavin’s appeal raises factual issues masquerading as legal challenges. Because
we review factual findings for clear error, of which there are none, we affirm.
I. Background
Ultimate Escapes Holdings, LLC, and affiliates signed up approximately 1,250
members for its services. Ultimate Escapes (sometimes referred to simply as “UE”)
maintained a proprietary database for its information, which the company’s public filings
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
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valued at over $14.5 million. The membership information served as collateral for a
revolving loan by its primary lender, CapSource. The loan was also personally
guaranteed by Appellees James M. Tousignant and Richard Keith, the company’s inside
directors. Ultimate Escapes ran into significant financial difficulties and began
confidential merger discussions with its direct competitor, Club Holdings, LLC, whose
primary lender was also CapSource. Ultimate Escapes’ Board, which included
Tousignant, Keith, and three outside directors, viewed a merger with Club Holdings as
the best option because CapSource would need to approve the newly formed company’s
restructured debt. The Board authorized Tousignant and Keith to take action as
reasonably necessary to effect the merger.
While the merger discussions continued with Club Holdings, Ultimate Escapes
continued to face financial problems. To cover cash shortfalls, Keith contributed
$100,000 for mortgage payments and Tousignant contributed $50,000 for interest
payments. The financial difficulties continued, however, and in late July 2010 the Board
discovered that Ultimate Escapes had insufficient cash to meet payroll and other urgent
obligations due Friday, August 6. Tousignant approached CapSource for funding, but it
refused. Tousignant then asked Club Holdings for funding. It agreed to purchase one of
Ultimate Escapes’ properties, but due to unanticipated closing costs Ultimate Escapes
still needed $115,000.
To cover this unexpected shortfall, Tousignant negotiated with Club Holdings an
agreement that forms the basis of this case. The latter provided the $115,000. In
exchange, Ultimate Escapes agreed to use its best efforts to transfer three properties and
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30 members to Club Holdings. In the membership-transfer paragraph, the Agreement
also lifted confidentiality restrictions that would be inconsistent with the membership
transfers. J.A. 9 (“UE hereby knowingly and voluntarily waives any [confidentiality]
restrictions . . . that may be construed as limiting or inconsistent with the rights of CH
under this Section. . . . UE shall in no way or manner hold CH liable for any actions with
respect to the direct solicitation of its members as set forth herein.”). At 8:30 a.m. on
Monday, August 9, Tousignant made a phone call to CapSource as a final attempt to
secure funding. When it refused, Tousignant signed the Agreement with Club Holdings
on behalf of Ultimate Escapes. It received the $115,000 and was able to pay its
employees and cover other urgent expenses that afternoon.
Later that month, Ultimate Escapes started to doubt whether the merger would
happen, so it began seeking bidders for its assets. In September, its bidding agent
accidently sent Club Holdings an email that discussed potential bidders. Alerted that
Ultimate Escapes was pursuing alternatives to a merger, Club Holdings began mass-
soliciting Ultimate Escapes’ members. Ultimate Escapes sent a cease-and-desist letter,
but Club Holdings responded that the Agreement permitted solicitation.
Ultimate Escapes then filed for Chapter 11 bankruptcy and sought to reject the
Agreement as an executory contract1 and requested a temporary restraining order
1
“An executory contract is a contract under which the obligation[s] of both the bankrupt
and the other party to the contract are so far underperformed that the failure of either to
complete performance would constitute a material breach excusing the performance of
the other.” In re Exide Techs., 607 F.3d 957, 962 (3d Cir. 2010), as amended (June 24,
2010) (citation and quotation marks omitted). A debtor may, with the court’s permission,
reject an executory contract in bankruptcy. 11 U.S.C. § 365.
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enjoining solicitation of its non-transferred members by Club Holdings. The Bankruptcy
Court allowed the company to reject the executory contract but denied the TRO, as it
concluded that the Agreement likely permitted Club Holdings to solicit Ultimate
Escapes’ members. The confirmed liquidation plan transferred all assets into a
liquidating trust and Gavin was appointed Trustee. He then brought suit against
Tousignant and Keith for breaching their fiduciary duties to Ultimate Escapes in
executing the Agreement on its behalf.
Following a three-day bench trial, the Bankruptcy Court filed its Proposed
Findings of Fact and Conclusions of Law in recommending that the District Court enter
judgment in favor of Tousignant and Keith. Gavin filed objections, and the District
Court, after conducting a fresh review of the record, overruled the objections. This
appeal followed.
II. Jurisdiction and Standard of Review
The Bankruptcy Court and District Court had jurisdiction under 28 U.S.C. §§ 157
and 1334, and we have jurisdiction under 28 U.S.C. §§ 158 and 1291. We review the
District Court’s legal conclusions without any presumption of correctness and its factual
findings for clear error. See Copelin v. Spirco, Inc., 182 F.3d 174, 180 (3d Cir. 1999)
(citing 28 U.S.C. § 157).
III. Analysis
Gavin primarily argues that entire fairness instead of business judgment review
should apply because Tousignant and Keith were either interested parties with conflicts
or grossly negligent. The flaw underlying all Gavin’s arguments is his use of hindsight.
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He would have us analyze the fiduciary breach because of an after-the-fact result: that
over a month after the Agreement’s execution Club Holdings was tipped off that the
merger no longer might go through, decided to mass-solicit customers, and relied on
opaque language in the Agreement to justify doing so. Regardless of the eventual
outcome, we judge a fiduciary’s actions based on what he reasonably knew at the time he
acted. See, e.g., Chen v. Howard-Anderson, 87 A.3d 648, 665 (Del. Ch. 2014)
(“Fiduciary decisions are not judged by hindsight. The defendants’ actions must stand or
fall based on what they knew and did at the time.”).
A. Business Judgment Rule or Entire Fairness
The business judgment rule is Delaware’s default standard of review for a business
decision. It presumes that the directors “acted on an informed basis, in good faith and in
the honest belief that the action taken was in the best interests of the company.” In re
Trados Inc. S’holder Litig., 73 A.3d 17, 43 (Del. Ch. 2013) (quotation marks and
citations omitted). A director’s decision is upheld if it has any rational basis. Id.
However, if a director breaches a fiduciary duty to the entity, such as the duty of loyalty
or of care, the court applies the entire fairness standard. See id. at 44. Under this
standard, the director must prove “that the transaction was the product of both fair
dealing and fair price.” Id. (emphasis in original) (quotation marks and citation
omitted).2
2
In the alternative, Gavin argues that an intermediate level of review, enhanced scrutiny,
should apply. As the Bankruptcy and District Courts correctly ruled, however, enhanced
scrutiny does not apply because the Agreement did not cause a change in control and was
not a merger agreement, or any other specific, recurring, and readily identifiable situation
6
The Bankruptcy Court and District Court ruled that Gavin failed to carry his
evidentiary burden to rebut the presumption that the business judgment rule applied. See
In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 747 (Del. Ch. 2005), aff’d, 906
A.2d 27 (Del. 2006). Gavin argues that either the conflict of Tousignant and Keith or
their gross negligence calls for entire fairness review.
1. Interestedness
Gavin asserts that, “because he alleged interestedness, the trial court was first
required to examine whether Appellees Tousignant and Keith stood to gain a material
potential benefit or avoid a potential detriment from the challenged transaction . . .” App.
Repl. Br. 9. This misstates Delaware law. See Trados Inc., 73 A.3d at 51–52 (“At the
pleadings stage, Chancellor Chandler recognized that it was reasonably conceivable that
the VC directors faced a conflict of interest. . . . At trial, the plaintiff had the burden to
prove on the facts of this case, by a preponderance of evidence, that [they were
interested].”) (citation omitted). At any rate, the Bankruptcy and District Courts found
that Tousignant and Keith were not interested despite Gavin’s characterization that “the
District Court short-circuited the analysis and effectively assumed [they] were
disinterested and independent.” App. Repl. Br. 9-10.
in which Delaware law requires enhanced scrutiny. See Reis v. Hazelett Strip-Casting
Corp., 28 A.3d 442, 457 (Del. Ch. 2011). Although one of the Agreement’s purposes
was to keep the company in business to facilitate a later merger, it was not a merger
agreement and contemplated no change in control. It was also not a sale of the company,
as it only intended to transfer 30 members.
7
In addition, Gavin mischaracterizes the Bankruptcy and District Courts’ decisions
as failing to take into account whether Tousignant and Keith were materially interested in
the Agreement. Delaware law requires that “the benefit received by the director and not
shared with stockholders must be ‘of a sufficiently material importance, in the context of
the director’s economic circumstances, as to have made it improbable that the director
could perform her fiduciary duties . . . without being influenced by her overriding
personal interest.’” Trados, 73 A.3d at 45 (alteration in original) (citations omitted). The
Bankruptcy and District Courts found that Tousignant and Keith were not materially
interested in the Agreement. We agree: they gained no personal benefit from the transfer
of the 30 membership interests nor from the provision on which Club Holdings
eventually relied to justify mass solicitation of Ultimate Escapes’ clients.
Gavin nonetheless contends that Tousignant and Keith were materially interested
because the Agreement would allow Ultimate Escapes to meet payroll and stay in
business, thus increasing chances of a future merger with Club Holdings. And if the
merger went through, Tousignant and Keith would have a better chance of 1) being
repaid their cash advances and relieved of personal guarantees, 2) remaining in similar
positions and commensurate salary at the new company, and 3) avoiding civil and
criminal liability for missing the August 6 payroll.
We see no clear error in the finding that these alleged benefits—including an
increased chance of a merger with Club Holdings that might advantage Tousignant and
Keith more than other stakeholders—did not have a material influence on the decision to
enter the Agreement. The record shows that Keith was not involved in it; at most, he had
8
general knowledge of the Agreement but did not know of the specific provision that
allowed solicitation of Ultimate Escapes’ members. As to Tousignant (who negotiated
the Agreement), the Board still thought a merger with Club Holdings was the best option,
and Tousignant’s actions were entirely consistent with the Board’s planned course of
action. Tousignant also credibly testified that he entered this Agreement to protect
Ultimate Escapes. If the company missed payroll, it would have to make a damaging
disclosure in securities filings, all officers and directors could face civil or criminal
liability, and it might have been forced to enter bankruptcy and cease operations. Hence,
given the potential harm that could befall Ultimate Escapes if it did not cover the cash
shortfall, we do not see sufficient evidence that an increased chance of merger-specific
benefits overrode Tousignant’s actions on the eve of a funding deadline.
2. Gross Negligence
Gavin next argues that entire fairness review applies because Tousignant and
Keith were grossly negligent. See In re Walt Disney Co. Derivative Litig., 906 A.2d 27,
64 (Del. 2006). As the Courts here correctly found, they were not grossly negligent
because Tousignant, who took the lead in negotiating the Agreement, worked diligently
on a constrained deadline to cover the cash shortfall. He was in constant communication
with Keith and the rest of the Board throughout the weekend and was also steadily
working throughout that time on closing the sale of a property to shore up the funding
gap. He shared the Agreement with Ultimate Escapes’ general counsel. He also made
one last request for funding from the company’s primary lender, and only after being
rejected acquiesced to the Agreement.
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Most importantly, Tousignant understood the Agreement to transfer 30 members
only, and we agree with the District Court that only a “keen legal eye . . . [could] have
recognized the poorly drafted language that [Club Holdings] relied upon as a basis for its
mass solicitation.” J.A. 41. Thus the record does not support the conclusion that any of
Tousignant, Keith, or the Board, working under a tight deadline, was grossly negligent.
Because the business judgment rule applies, all Tousignant and Keith needed to
show was that the transaction had a rational business purpose. Trados, 73 A.3d at 43.
This requirement is easily met here: the transaction infused Ultimate Escapes with
necessary cash to keep it afloat.
B. Waste
Finally, Gavin contends the Agreement constituted “waste.” See Walt Disney Co.,
907 A.2d at 748–49 (“Corporate waste is very rarely found in Delaware courts because
the applicable test imposes such an onerous burden upon a plaintiff—proving ‘an
exchange that is so one sided that no business person of ordinary, sound judgment could
conclude that the corporation has received adequate consideration.’”) (citation omitted).
We agree that the Agreement does not qualify as wasteful. It was intended to transfer 30
members to support the additional transfer of three properties to Club Holdings, thus
following the industry custom of 10 members per home. Club Holdings did not start its
mass solicitation until over a month after the Agreement was executed, and not until it
discovered Ultimate Escapes was no longer wedded to the planned merger. 3 While
3
Gavin also contends that the Bankruptcy Court was inconsistent because, in its early
ruling on Ultimate Escapes’ requested TRO to enjoin solicitation, it ruled that the
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perhaps Ultimate Escapes could have found a better source of funding—especially if it
were not pressed against a tight deadline—we cannot conclude on this record that the
Agreement amounted to waste.
* * * * *
We thus affirm.
Agreement likely allowed the solicitation of members. At that stage, however, the Court
was working off an abbreviated record and evaluating factors for preliminary relief. Here
it conducted a three-day bench trial that included what Tousignant knew or reasonably
could have known at the time he entered the transaction.
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