CDX Liquidating Trust v. Venrock Associates

Cadant was incorporated in 1998. In early 2000, Venrock Associates (Venrock) and J.P. Morgan (JPM) (lenders) invested in Cadant in exchange for preferred stock. By autumn 2000, Cadant experienced financial problems, leading it to take an $11 million short-term loan from the lenders. Cadant quickly spent that money and took a second short-term loan from the lenders, who would receive double the outstanding principal plus accrued interest if Cadant were liquidated. At the time, four Cadant directors (lender-directors) (defendants), including Venrock’s Eric Copeland, were or recently had been affiliated with a lender. Copeland may have conspired with JPM to induce Cadant to take the second loan, even though Cadant likely could have obtained a loan elsewhere on better terms. Cadant’s independent directors approved the second loan but did not retain external financial advisers. Cadant defaulted on the second loan and filed for bankruptcy. In January 2002, Cadant’s assets were sold for $55 million, enough to pay Cadant’s creditors and preferred shareholders, including the lenders. Several months later, a similar company, River Delta, sold its assets for $300 million. The CDX Liquidating Trust (CDX) (plaintiff), a trust holding Cadant’s common stock, sued the lender-directors for breaching their fiduciary duties of loyalty to Cadant with respect to the second loan. The lender-directors moved for judgment as a matter of law, arguing that (1) CDX failed to prove that their alleged breaches—rather than external market forces—proximately caused Cadant’s demise and (2) they were not disloyal because they fully disclosed their conflicts of interest. The district court granted the lender-directors’ motion. CDX appealed.