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Commercial Litigation Team Prevails in Delaware Hearing on Application of Business Judgment Rule

November 12, 2014

A White and Williams Commercial Litigation team prevailed in a hearing before the United States District Court for the District of Delaware in its representation of defendant James Tousignant, former President and CEO of Ultimate Escapes, Inc. Judge Brendan L. Shannon entered proposed finding of fact and conclusions of law in favor Tousignant, holding that his actions in negotiating and executing a controversial asset purchase agreement were protected by the business judgment rule.

Ultimate Escapes, a luxury destination club providing its members with access to high-end vacation residences, filed voluntary petitions for relief pursuant to Chapter 11 of the Bankruptcy Code on September 20, 2010. Thereafter, the trustee of the Ultimate Escapes Bankruptcy Estate, Edward T. Gavin, filed an adversary proceeding against Tousignant and the former Chairman of Ultimate Escapes, Richard Keith, claiming that Tousignant and Keith breached their fiduciary duties by selling Ultimate Escapes’ member list for $115,000 in the waning days of the company’s existence. Gavin asserted the member list was worth approximately $40,000,000 and the agreement was an irrational waste of corporate assets.

The defense argued (a) Tousignant acted in good-faith, with undivided loyalty when he entered the agreement, (b) the only asset sold pursuant to the agreement was a limited right to solicit approximately thirty of Ultimate Escapes’ 1,250 members, (c) the agreement was a last-ditch effort to save a dying company and (d) regardless of any unforeseen negative consequences, the Trustee could not maintain a breach of fiduciary duty claim against Tousignant or Keith, because the business judgment rule guards against the “impos[ition of] retroactive fiduciary obligations on directors [simply] because their chosen business strategy d[oes] not pan out.” Trenwick America Litigation Trust v. Ernst & Young LLP, 906 A.2d 168, 174 (Del. Ch. 2006) (aff’d, 931 A.2d 438 (Del.2007)).

Ruling in favor of Tousignant and Keith, Judge Shannon found that the asset purchase agreement was limited in scope and that Tousignant only intended to offer the right to solicit a small sub-set of Ultimate Escapes’ members. More importantly, the Court held that Tousignant’s actions in negotiating and executing the agreement were protected by the business judgment rule. To rebut the presumption of the rule’s application, the Trustee was required to provide “sufficient facts to support a reasonable inference that the decision to enter int the [] Agreement was a breach of Tousignant’s duty of loyalty or duty of care.” Opinion, p. 18 (quoting In re Autobacs Strauss Inc., 473 B.R. 525, 562 (Bankr. D. Del 2012). Judge Shannon rejected the Trustee’s arguments, applied the business judgment rule and held that Tousignant’s decision was attributable to a rational business purpose, despite the outcome.

The trustee appealed Judge Shannon's decision to the district court and the appeal is pending. 

Tousignant and Keith were represented by Michael Onufrak, James Yoder and Siobhan Cole.  

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