the “panoply of remedies” 20 available
to creditors, the court cautioned that
“when creditors are unable to prove
that a corporation or its directors
breached any of the specific legal duties
owed to them, one would think that
the conceptual room for concluding
that the creditors were somehow,
nevertheless, injured by inequitable
conduct would be extremely small, if
extant.” 21 Thus, the court emphasized
that recovery under equitable
theories should be rare for lenders.
Having firmly established that negotiated
contractual provisions are a creditor’s
“primary source” of protection, the
court rejected Quadrant’s allegation that
Athilon’s repurchase of senior notes
from Merced constituted a breach of
the express contractual terms or an
implied covenant of good faith and
fair dealing. Finding that no provision
of the applicable indenture restricted
Athilon’s use of capital or required a
mandatory redemption before the
stated maturity dates, the court rejected
Quadrant’s arguments, emphasizing
that Quadrant’s other claims “should
be taken with an extra grain of salt.” 22
Lender Liability, Post-Quadrant II
Clearly, under the current legal
landscape in Delaware, lenders cannot
look to fiduciary duty law as a reliable
basis to protect their investments.
Instead, they must look, almost
exclusively, to enforcing the contractual
rights and remedies contained in
their loan documents. Logically,
then, the same Delaware courts that
have limited creditor fiduciary duty
rights should give a similarly poor
reception to claims by borrowers or
other parties seeking to impose “lender
liability” on lenders that aggressively
pursue their contract rights.
Like most states, Delaware implies a
duty of good faith and fair dealing in all
contracts. In Delaware, evolving case
law suggests that the implied covenant
should be narrowly construed. 23
For example, “the implied covenant
‘cannot properly be applied to give the
plaintiffs contractual protections that
they failed to secure for themselves.’” 24
As one Delaware court summarized:
“Fair dealing” is not akin to the fair
process component of entire fairness,
i.e., whether the fiduciary acted fairly
when engaging in the challenged
transaction as measured by duties
of loyalty and care. . . . It is rather a
commitment to deal “fairly” in the
sense of consistently with the terms
of the parties’ agreement and its
purpose. Likewise, “good faith” does
not envision loyalty to the contractual
counterparty, but rather faithfulness
to the scope, purpose, and terms of
the parties’ contract. Both necessarily
turn on the contract itself and what
the parties would have agreed
upon had the issue arisen when
they were bargaining originally. 25
Fundamentally, the covenant is not
intended to “appease a party who later
wishes to rewrite a contract he now
believes to have been a bad deal” 26
or serve as a “catch-all that can be
used to prevent any injustice.” 27
Although perhaps not by design,
these implied covenant decisions
are consistent with the reasoning of
Quadrant II. One would hope (if not
expect) that additional restrictions
on lenders’ rights to assert breach of
fiduciary duty claims should engender
similar restrictions on borrowers/
debtors arguing that lenders have
breached an implied covenant of good
faith and fair dealing by aggressively
pursuing their contractual rights.
Given these trends in the case law,
how should lenders proceed when one
of their borrowers is insolvent, is in
distress, or has defaulted under its loan?
The old wisdom of applying restraint in
the exercise of remedies may no longer
be warranted. And, given that lenders
cannot expect to find recourse through
breach of fiduciary duty claims against
borrowers’ officers or directors, an
aggressive pursuit of contractual rights
and remedies is all the more justified.
Stated differently, the standard dance
Lenders’ Primary Remedy
frequently engaged in by borrowers
and lenders is outdated. The customary
“breach of fiduciary duty” letter an
agent lender’s counsel often sends
to borrower’s counsel in the midst of
restructuring negotiations rings hollow
under current precedent. Similarly
hollow is the typical threat of “lender
liability” that a borrower’s counsel raises
when the lender raises the specter
of “enforcing remedies.” And it all
makes sense, if we are appropriately
taking our cues from recent Delaware
precedent. Lenders should not rely on
their borrower’s directors and officers
to protect creditor interests, and
borrowers should not expect lenders
to treat them with any restraint. In
other words, it is every man/woman/
lender/borrower for themselves.
As Quadrant II teaches, lenders’
primary remedy is to enforce their
contractual rights — whether against
a distressed borrower or a guarantor.
Lenders should discount any statutory
forms of recovery and, particularly,
should disregard potential recovery
on an alleged breach of fiduciary duty
claim. Similarly, Delaware courts have
recently begun narrowing parties’ ability
to recover on account of breaches
of an implied covenant of good faith
and fair dealing. In light of these
developments, lenders should feel more
comfortable in aggressively pursuing
and enforcing their contractual rights. J
1 See, e.g., Official Comm. of Unsec. Creds.
of Buckhead Am. Corp. v. Reliance Capital
Grp., Inc. (In re Buckhead Am. Corp.), 178
B. R. 956, 968-69 (D. Del. 1994); Blackmore
Partners, L. P. v. Link Energy LLC, No. Civ.
A. 454-N, 2005 WL 2709639, at 3 (Del. Ch.
Oct. 14, 2005) (“[W]hether [the corporation]
was insolvent or in the zone of insolvency
. . . controls whether the board of directors
owed fiduciary duties to [n]ote holders.”).
2 See Quadrant Structured Products Co.
v. Vertin, 115 A.3d 535, 545 n. 4 (Del. Ch.
2015) (Quadrant I ) (recognizing historical
precedent suggested a creditor may bring
direct claim against directors of an insolvent
corporation for breach of fiduciary duty,
but noting recent Delaware case law
viewed those as derivative claims).
3 Id. at 545.
4 Id. at 546.
5 N. Am. Catholic Educ. Programming Found.,
Inc. v. Gheewalla, 930 A.2d 92, 99 (Del. 2007).
6 Quadrant I at 545.
7 Gheewalla, 930 A.2d at 99–103.
8 Id. at 101. The court based that conclusion
on the following reasoning. First, directors
owe fiduciary duties to the corporation.
When the corporation is solvent, those duties
may be enforced by the shareholders, who
have derivative standing to bring breach-of-fiduciary-duty claims on behalf of the
corporation because they are the ultimate
beneficiaries of the corporation’s growth.
When a corporation is insolvent, its creditors
take the place of the shareholders as residual
beneficiaries of any increase in value. Id.
9 Quadrant I at 554.
10 Gheewalla did not address whether creditors of
a Delaware limited liability company (LLC) (as
opposed to a Delaware corporation) may bring
such derivative claims for breach of fiduciary
duty against the LLC directors and managers.
The default rule in Delaware is that LLC
directors and managers owe default fiduciary
duties to the LLC and its members, which
can be expanded, restricted, or eliminated
by the LLC operating agreement, subject to
the implied covenant of good faith and fair
dealing. See CMS Investment Holdings,
LLC v. Castle, C.A. No. 9468-VCP, 2015 WL
3894021, 18 (Del. Ch. June 23, 2015) (“In the