An IIlinois Bankruptcy Court – A Corporate Fiduciary Need Not “Give Up” His Contractual Rights To His Detriment To Fulfill His Fiduciary Duty
May 17, 2021, Northern District of Illinois – Debtor VitaHEAT Medical, LLC manufactured and sold medical products. Defendant William Haas was the director of the Debtor, and his company, Defendant Thinheat, LLC, was one of the Debtor’s members. Thinheat owned several patents and in 2012 issued a patent license to the Debtor. Six years later, unhappy with the Debtor, Haas had Thinheat terminated the license, and the Debtor allegedly ended up in a Chapter 7 bankruptcy case. Ilene Goldstein was appointed as a Trustee for the bankruptcy estate of the Debtor. Goldstein brought an adversary proceeding alleging that Haas and Thinheat breached their fiduciary duties to the Debtor by terminating the license and sought damages for the breach. She also alleged that the license termination was a fraudulent transfer and hence must be avoided. Haas and Thinheat moved to dismiss Goldstein’s amended complaint for failure to state a claim.
Regarding the breach of fiduciary duty claim, the court noted that although Haas and Thinheat arguably owed fiduciary duties to the Debtor, Goldstein did not specifically allege that they breached those duties. Goldstein simply claimed that Haas and Thinheat violated their duty of loyalty to the Debtor when they threatened to terminate and eventually terminated the license because they placed their interests above the Debtor. The Court held that the Trustee is mistaken because under the Delaware law, actions a corporate fiduciary takes under a contract with his corporation may breach the contract itself, but it does not breach its duties to the corporation. Citing Ocean Tomo, LLC v. PatentRatings, LLC, 375 F. Supp. 3d 915, 942 (N.D. Ill. 2019), the Court reasoned that a corporate fiduciary need not “give up” his contractual rights “to his detriment in order to fulfill his fiduciary duty.” The Court added that corporation’s recourse, if any, is a breach of contract action against the fiduciary, not an action for breach of fiduciary duty.
The Court found that Goldstein only alleged that Haas and Thinheat threatened to exercise their rights under the license and ultimately exercised them, terminating the license. She alleged no misconduct on their part other than the exercise of their contractual rights and did not even assert that the termination breached the license. Thus, the Court held that Goldstein simply alleged a fiduciary duty but no breach of it. To state a claim under Delaware law for breach of fiduciary duty, the Trustee must allege both (1) that the defendant owed a fiduciary duty, and (2) that the defendant breached it. The Court dismissed the Trustee’s argument on this count.
As for the fraudulent transfer claim, the Court found that the Trustee failed to state a claim because she did not allege either a transfer or Debtor’s insolvency. While Goldstein maintained that the termination of license was a transfer she can avoid, the Court concluded that termination of a contract is not an avoidable transfer because it did “not operate to the prejudice of the legal or equitable rights of the debtor’s creditors.” The Court stated that “a prepetition termination of a contract according to its terms and the consequent cessation of a debtor’s rights under a contract does not constitute a transfer” under section 548(a). The Court concluded that when a contract was terminated, there was no “disposing of or parting with property” that the trustee could recover. The Court ruled that since there was no transfer to avoid, Goldstein had no section 548 claim.
With regards to the insolvency claim, the Court held that Goldstein did not supply any facts. She merely alleges that “the Debtor was insolvent at the time of the termination.” According to the Court, these allegations were merely conclusions and not facts.
The Court dismissed the Trustee’s complaint with leave to amend.
Goldstein v. Haas (In re VitaHEAT Med., LLC), Nos. 18 B 35295, 20 A 406, 2021 Bankr. LEXIS 1329 (Bankr. N.D. Ill. May 17, 2021)