In re Color Tile, Inc.
United States District Court for the District of Delaware
2000 WL 152129 (2000)
- Written by Heather Whittemore, JD
Facts
In 1992 Color Tile, Inc. (defendant) issued shares of preferred stock to replace approximately $48 million in notes. The preferred stock carried a lower dividend rate than the interest rate on the replaced notes. In 1994 Color Tile began making dividend payments to the preferred shareholders, eventually paying over $10 million in dividends. While it was making the dividend payments, Color Tile owed over $300 million to various unsecured creditors. A committee representing Color Tile’s unsecured creditors (the committee) (plaintiff) filed a lawsuit in federal district court against Color Tile, seeking to recover the dividend payments. The committee argued that the dividend payments were fraudulent transfers under the Delaware Fraudulent Transfer Act (DFTA), because Color Tile received less than a reasonably equivalent amount in exchange for the dividend payments and because Color Tile was insolvent before or as a result of making the dividend payments. Color Tile opposed the lawsuit, arguing that the committee had to proceed under § 174 of the Delaware General Commercial Law (DGCL). The DFTA allowed a creditor to avoid a fraudulent transfer to the extent that avoidance was required to satisfy the creditor’s claim. The DGCL allowed a plaintiff to seek damages from corporate directors who approved unlawful dividend payments.
Rule of Law
Issue
Holding and Reasoning (Robinson, J.)
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