May 26, 2015

On May 4, 2015, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued an opinion in Quadrant Structured Products Company, Ltd. v. Vertin clarifying when a creditor gains standing to pursue derivative claims and why permanent insolvency is not necessary to maintain standing. In Quadrant, the Vice Chancellor held that a creditor must establish a corporation's insolvency at the time the creditor filed suit and need not demonstrate that the corporation remained insolvent through judgment.

The court also held that the traditional balance sheet test is sufficient to establish insolvency and a creditor is not required to show that the corporation had no reasonable prospect of returning to solvency. The court's ruling allows creditors of an insolvent corporation to more easily pursue claims for breaches of fiduciary duty against the corporation's directors and officers. Plaintiff Quadrant Structured Products Company, Ltd. ("Quadrant") asserted derivative claims for breaches of fiduciary duty against the directors of Athilon Capital Corporation (the "Company") and EBF & Associates ("EBF"), which held equity and certain junior debts of the Company. The Company returned to solvency while Quadrant's suit was still pending. Defendants moved for summary judgment, advocating for a continuous insolvency requirement, under which a creditor can only maintain a derivative claim during the time a corporation is insolvent. Defendants argued that summary judgment was appropriate because Quadrant was no longer a creditor "of an insolvent corporation" and lacked standing to pursue its claims.

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