On April 26, 2023, the U.S. Bankruptcy Court for the District of Delaware denied in part and granted in part motions to dismiss a chapter 7 trustee’s breach of fiduciary duty and aiding and abetting claims. The defendants included Black Diamond Capital Management and affiliated funds, Bayou Steel BD Holdings, LLC (“Bayou”) and affiliated chapter 7 debtors (collectively with bayou, the “Debtors”), and individuals who served on one of the debtor’s Board of Directors. At issue were three transactions that “round tripped” $30 million and allegedly contributed to the debtors’ demise. The transactions involved an allegedly ill-advised distribution from a debtor to Black Diamond, who, in turn, lent the debtor a substantially equal sum on a subordinated and secured basis. In exchange for the loan, the debtors granted Black Diamond a security interest in substantially all of their assets. While the court dismissed the trustee’s claim relating to the loan and subsequent grant of security interests, the trustee’s aiding and abetting claim against Black Diamond and breach of fiduciary duty claim against Bayou’s directors survived.

Under Delaware law, aiding and abetting requires proof of (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty, (3) knowing participation in that breach by the defendants, and (4) damages proximately caused by the breach. Black Diamond only challenged the second prong, arguing that the directors did not breach their fiduciary duties. After concluding that Bayou’s operating agreement did not disclaim fiduciary duties, the court, however, reasoned the trustee’s complaint plausibly alleged the directors breached their fiduciary duties and that the directors allegedly knew enough about the Debtors’ precarious financial position to caution against making the distribution. As a result of finding the breach of fiduciary duty claim against the directors plausible, the trustee’s claim against Black Diamond for aiding and abetting the directors’ breach of fiduciary duties survived the motion to dismiss.

The case is In re Bayou Steel BD Holdings, LLC, No. 19-121153 (Bankr. D. Del. Apr. 26, 2023). The trustee is represented by Kaufman, Coren & Ress, P.C. and Pachulski Stang Young & Jones LLP. The Black Diamond entities are represented by Kramer Levin Naftalis & Frankel LLP, Zaigler LLC, and Friedman Kaplan Seiler Adelman & Robbins LLP. The individual directors are represented by Benesch Friedlander Coplan & Aronoff LLP and Kaufman, Coren & Ress, P.C. The order is available here.