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Court Throws Out Creditors’ DIP Breach of Fiduciary Claims

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June 27, 2022, US Bankruptcy Court for the Eastern District of Virginia – The Eastern Virginia Bankruptcy Court granted a motion for summary judgment brought by David A. Brandon, Paul E. Raether, et al. (“Defendants”) dismissing TRU Creditor Litigation Trust’s count alleging breach of fiduciary duty against the Defendants for authorizing post-petition financing of Debtor-In-Possession (“DIP”).

The Trust alleged that Defendants breached their fiduciary duties to TRU by taking on DIP financing at the start of the bankruptcy proceeding. Defendants maintained that the Court’s final order in 2017 approving the DIP financing and finding that the financing was an exercise of the Debtor’s “prudent business judgment consistent with their fiduciary duties” is the binding law in this case. Allegedly, no party had opposed the proposed financing or its terms when the final order was passed and no party had appealed against the order.

The Trust claimed that the final DIP Order was interlocutory in nature rather than an appealable final order. The Trust contends that the Court’s plan confirmation orders take precedence over DIP financing order. The confirmation orders allegedly preserve the claims assigned to the Trust that it is now asserting against the Defendants. The Court concluded that the Trust’s position, that the final DIP Order was interlocutory and only became final upon entry of the confirmation orders, disregarded the intent of Congress and Fourth Circuit precedent that together compel the conclusion that a bankruptcy court order approving post petition debtor-in-possession financing on a permanent basis should be considered final and subject to immediate appeal.

The Defendants emphasized the application of the ‘law of the case’ doctrine reasserting the words of the final DIP order that it “shall be binding upon all the parties in interest” in the bankruptcy case. However, the Trust opposed the application of the ‘law of the case’ doctrine alleging that certain material facts were not before the Court when it approved the DIP financing. The Trust alleged that the Defendants “misrepresented” the facts and “omitted” important evidence to obtain Court’s approval for the financing.

The Court observed that the Court in its DIP financing order had factually found that the incurrence of indebtedness was “necessary and vital” for maintaining DIP as a going concern and for its successful reorganization and that the financing terms were “fair and reasonable, reflect the DIP Loan Parties’ exercise of prudent business judgment consistent with their fiduciary duties and constitute reasonably equivalent value and fair consideration”.

The Court also found that the Trust’s allegations of gross negligence, bad faith, conflicts of interest, reckless indifference, and an abdication of their fiduciary duties fall short of claiming that the Defendants committed a fraud on the Court in connection with DIP financing. The Court further notes that there is no “new evidence” that, in the view of the Court, was not available through discovery and that could have been offered prior to the entry of the final DIP order.

The Court concluded that the essential facts necessary to establish a breach of fiduciary duty and associated claims in connection with securing the DIP financing have already been decided in favor of the Defendants. The Court rejected the Trust’s claim that these facts could be changed by subsequent confirmation orders declaring that they had already become the law of the case as a result of the final DIP order.

TRU Creditor Litig. Trust v. Brandon (In re Toys “R” Us), 2022 Bankr. LEXIS 1789

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