Cantor v. Perelman
| Decision Date | 12 July 2005 |
| Docket Number | No. 04-2896.,No. 04-1790.,04-1790.,04-2896. |
| Citation | 414 F.3d 430 |
| Parties | Ronald CANTOR; Ivan Snyder; James A. Scarpone, as Trustees of the MAFCO Litigation Trust, Appellants v. Ronald O. PERELMAN; MAFCO Holdings, Inc.; MacAndrews & Forbes Holdings, Inc.; Andrews Group Incorporated; William C. Bevins; Donald G. Drapkin. |
| Court | U.S. Court of Appeals — Third Circuit |
Edward A. Friedman (Argued), Andrew W. Goldwater, Robert D. Kaplan, Daniel B. Rapport, Friedman, Kaplan, Seiler & Adelman, New York, N.Y. and Emily A. Stubbs, Friedman, Kaplan, Seiler & Adelman, Newark, NJ and Lawrence C. Ashby, Philip Trainer, Jr., Ashby & Geddes, Wilmington, DE, for Appellants.
Robert E. Zimet (Argued), Skadden, Arps, Slate, Meagher & Flom, New York, NY, for Appellees.
Before SLOVITER, ALDISERT and STAPLETON, Circuit Judges.
The trustees of the MAFCO Litigation Trust ("plaintiffs")1 appeal an order denying their motion for partial summary judgment against defendant Ronald O Perelman and granting cross-motions for summary judgment in favor of defendants Perelman, MAFCO Holdings, Inc., MacAndrews & Forbes Holdings, Inc., Andrews Group, Incorporated, William C. Bevins, and Donald G. Drapkin. The District Court held that plaintiffs had failed to tender sufficient evidence to support a finding of a breach of fiduciary duty on the part of defendants. We will reverse in part, affirm in part, and remand for further proceedings.
Financier Ronald O. Perelman ("Perelman") was at all relevant times a director of Marvel Entertainment Co., Inc. ("Marvel"), and Chairman of Marvel's board. Through a chain of wholly-owned corporations (the "Marvel Holding Companies"), Perelman also owned a controlling interest in Marvel. The Marvel Holding Companies consisted of Mafco Holdings Inc. ("Mafco"), which owned 100% of MacAndrews & Forbes Holdings Inc. ("MacAndrews & Forbes"), which in turn owned 100% of Marvel III Holdings Inc. ("Marvel III"), which owned 100% of Marvel (Parent) Holdings Inc. ("Marvel Parent"), which owned 100% of Marvel Holdings Inc. ("Marvel Holdings"). Marvel Parent and Marvel Holdings together held 60% to 80% of Marvel's publicly traded, outstanding shares during the relevant period.
Bevins was a director and CEO of Marvel, a director of each of the Marvel Holding Companies, and Vice-Chairman of MacAndrews & Forbes. Drapkin was a director of Marvel, a director of each of the Marvel Holding Companies, and Vice-Chairman of MacAndrews & Forbes. Perelman, Bevins and Drapkin were three of the four members of the Executive Committee of the Marvel board. Perelman, Bevins and Drapkin also together comprised the entire board of each of the Marvel Holding Companies. Because the individual defendants hold these positions and Perelman's control of the Marvel Holding Companies is acknowledged, Perelman, Bevins, Drapkin and the Marvel Holding Companies in most instances are referred to collectively as "the defendants" in the following discussion.
During 1993 and 1994, the defendants caused the Marvel Holding Companies to issue three tranches of notes. The first tranche was issued by Marvel Holdings in April 1993 (the "Marvel Holdings Notes"). The second tranche was issued by Marvel Parent in October 1993 ("Marvel Parent Notes"). The third tranche was issued by Marvel III in February 1994 ("the Marvel III Notes", and collectively with the Marvel Holdings Notes and the Marvel Parent Notes, the "Notes"). All of the defendants' stock in Marvel was pledged as collateral for the Notes. The Notes were non-recourse debt.
The defendants received $553.5 million from the three issuances. None of the proceeds went to Marvel or were used for Marvel's benefit. The defendants used Marvel resources to market and sell the Notes. They caused Marvel's senior management, for example, to participate in "road shows" to market the Notes to potential investors. App. at 1593, 1603, 1840-65.
In each of the Note Indentures, the issuing company commits itself to prevent Marvel from taking certain actions ("the restrictions"):
1. Restriction on issuing debt: Section 4.04 of each Indenture provides that, with the exception of seven categories of debt listed in the section, the issuing company "shall not permit Marvel or any Subsidiary of Marvel to issue, directly or indirectly, any debt, unless" a certain financial ratio is met.
2. Restriction on issuing equity: Section 4.04(c) of each Indenture provides that the issuing company "shall not permit Marvel to issue any preferred stock," except under specified circumstances;
3. Restriction on share ownership: Section 4.09(a) of each Indenture provides that the Marvel Holding Companies shall continue to hold a majority of Marvel's voting shares (i.e., restricting Marvel's ability to issue stock that might dilute Perelman's stake); and
4. Restriction on making "Restricted Payments": Section 4.05 of each Indenture provides that the issuing company "shall not permit" any of its subsidiaries (including, e.g., Marvel) to make Restricted Payments as defined by the Indenture (including dividends and stock buybacks).
The defendants' underwriter advised that these restrictions were "necessary to market the" Notes. App. at 1628.
Marvel filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on December 27, 1996. The Note holders have not been repaid.
Plaintiffs brought this action, claiming that the defendants breached their fiduciary duty to Marvel by agreeing to impose the restrictions of the Notes on Marvel. They sought "disgorgement" of the $558 million obtained by the defendants in the Notes transactions as well as damages.
The District Court referred this action to a Magistrate Judge under 28 U.S.C. § 636(b). The plaintiffs moved for partial summary judgment against defendant Perelman, and the defendants moved for summary judgment on all claims against them. The Magistrate Judge issued a Memorandum and Order (the "Report") recommending that the District Court deny plaintiffs' motion and grant summary judgment to the defendants on all of plaintiffs' claims.
In her Report, the Magistrate Judge found that:
(a) the Marvel Holding Companies were acting at the direction of Perelman when they issued the Notes;
(b) in the Indentures, the Marvel Holding Companies agreed to impose restrictions on certain corporate actions of Marvel, including limitations on Marvel's ability to engage in debt and equity financing;
(c) Marvel did not receive any of the proceeds of the Note transactions; and
(d) Perelman at all relevant times owed a fiduciary duty to Marvel and its minority stockholders.
The Magistrate Judge nevertheless concluded that the defendants did not breach their duty of loyalty. Relying on Bragger v. Budacz, 1994 WL 698609 (Del.Ch. Dec.7, 1994), the Magistrate Judge accepted the defendants' contention that the Note transactions merely amounted to "potential conflicting loyalties" and that an actual conflict "never materialized" because Marvel "did not attempt to perform or refrain from one of the prohibited acts." App. at 19.
The District Court adopted the Magistrate Judge's Report "in all respects." App. at 6-9. Relying upon Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del.1971), the District Court agreed with the Magistrate Judge that under Delaware law it was the Plaintiff's burden to show that "Perelman had caused Marvel `to act in such a way' that he benefitted at Marvel's expense," App. at 8, and that "Perelman's potential conflicting loyalties between Marvel and the holding companies `never materialized and cannot form the basis for a breach of fiduciary duty.'" App. at 9.2
Applying Delaware law, the District Court held that to succeed plaintiffs "must show that Perelman caused Marvel to act in such a way that he benefitted at Marvel's expense." App. at 8, citing Sinclair Oil Corp., 280 A.2d at 717. We agree that such a showing would justify an award for breach of fiduciary duty, but this is an unduly restrictive view of the duty of loyalty imposed by the Delaware corporation law.3 Where, as here, the record will support a finding that the defendants exploited their fiduciary position for personal gain, summary judgment is inappropriate. Such exploitation would constitute a breach of fiduciary duty and that breach would justify an unjust enrichment award without regard to whether the fiduciary caused the beneficiary to act to its detriment.
The record before us would support a finding that Perelman's companies received $553.5 million in financing they would not otherwise have been able to secure by committing to prevent Marvel from taking certain actions and by utilizing Marvel's corporate resources to market that financing. And, given the nature of the restrictions imposed, the commitment was one that could be effectuated only by exercising the defendants' control of Marvel's board of directors. This is thus not a case in which a fiduciary allegedly sold stockholder votes that it was entitled to cast in its own interest. This is a case involving an alleged sale of director votes.
A corporate fiduciary receiving a "personal benefit not received by the shareholders generally" is a "classic" example of a breach of the duty of loyalty. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 362 (Del.1993). As the Supreme Court of Delaware explained in a similar situation in Thorpe By Castleman v. CERBCO, Inc., 676 A.2d 436 (Del.1996):
Delaware law dictates that the scope of recovery for a breach of the duty of loyalty is not to be determined narrowly. Although this Court in In re Tri-Star Pictures, Inc., Litig., Del.Supr., 634 A.2d 319 (1993). was...
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