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Victory: January 2016: Quinn Emanuel Prevails in Bet-The-Company Trial

January 2016

After a five-day Delaware trial, the firm secured a complete defense verdict for its clients Vincent Vertin, Michael Sullivan, Patrick B. Gonzalez, Brandon Jundt, J. Eric Wagoner (the “Athilon Board”), Athilon Capital Corp. (“Athilon”), and Athilon Structured Investment Advisors LLC (“ASIA”). The firm defeated claims brought by derivative plaintiff debtholder Quadrant Structured Products Company, Ltd. (“Quadrant”) that sought $200 million in damages and attempted to force Athilon to liquidate its assets and shut down its business.  The Delaware Court of Chancery denied all requested relief, and permitted Athilon to continue executing the long- term business strategy that Quadrant challenged at trial.

Quadrant alleged that (1) the 2008 financial crisis left Athilon, which had operated as a credit derivative products company (“CDPC”), insolvent, and, (2) that Athilon’s current equity holders, a series of funds managed by Merced Capital, L.P. (“Merced”), were operating Athilon solely to benefit themselves as owners of the Athilon junior notes, the equity, and ASIA, while the company had no business or prospect of returning to solvency.

We first challenged Quadrant’s claims based on failure to comply with the no-action clause in Athilon’s indentures, which limited debtholders’ ability to bring claims that affected all debtholders ratably. Following multiple appeals over three years, this defense pared back Quadrant’s action, and, on Athilon’s motion to dismiss, the court rejected Quadrant’s assertion that Athilon’s governing documents prevented it from entering into transactions outside of the CDPC business.

Following these adverse rulings, Quadrant amended its complaint in April of last year to challenge Athilon’s purchase of so-called XXX securities (a type of securitization of life insurance) from the Merced funds and Athilon’s repurchase of $194.6 million of debt held by the Merced funds in January at 92 percent of the face amount. The trial focused on these claims.

After five days of trial, Vice Chancellor Laster rejected Quadrant’s claims across the board.  First, the Vice Chancellor found that the Athilon indenture imposed no restrictions on Athilon’s business activities so long as the company followed the proper procedures, which it had. Second, the Vice Chancellor found that the debt repurchase did not violate the indenture. Third, the Vice Chancellor held that Athilon’s XXX investments, combined with strategic debt cancellation (including of the junior notes that were the subject of some of Quadrant’s claims) and the improvement of Athilon’s book, had rendered the company solvent no later than July 2014. Thus, by the time Quadrant filed its amended complaint in April 2015, it lacked standing to assert derivative claims as a creditor and could not challenge the transactions as fraudulent transfers.

In all respects, this was a true bet-the-company case for Athilon. Quadrant not only sought an order requiring Athilon to shut down, but also sought findings of breach of fiduciary duty against each member of the Athilon Board personally. Quadrant got neither.  Instead, we secured a complete victory by vindicating Athilon’s business strategy—XXX investments and strategic management of its insider debt—which Quadrant had made the centerpiece of its suit.