Johnston v. Wolf

In 1975, Allied Artists Picture Corporation (Old Allied) merged into a new company (New Allied) with the same name. In connection with the merger, Old Allied redeemed all its preferred stock. New Allied filed for Chapter 11 bankruptcy in April 1979. Ernest Johnston and Woodrow Praught (plaintiffs) provided trade credit to New Allied in 1978 and 1979. Neither Johnston nor Praught was a creditor of Old Allied. John Baron (plaintiff) sued Old Allied in 1974. Approximately one year after the merger, Baron’s attorneys in the 1974 litigation petitioned for the award of attorneys’ fees and expenses. The chancery court, which found that the merger was prompted by Baron’s suit and accomplished Baron’s goals of obtaining the redemption of Old Allied’s preferred stock and the payment of accumulated preferred dividends, awarded fees and expenses to Baron’s attorneys. The chancery court did not award fees or expenses to Baron. Johnston, Praught, and Baron sued Emanuel Wolf and Old Allied’s other directors (collectively, directors) (defendants), challenging the directors’ approval of the preferred-stock redemption as having improperly impaired Old Allied’s capital. Per Johnston, Praught, and Baron, they had standing pursuant to § 174 of Delaware’s Corporation Law, which permitted a corporation’s creditors to sue directors for unlawfully redeeming the corporation’s stock. The chancery court ruled that (1) § 174 conferred standing only on Old Allied’s creditors (i.e., premerger creditors) with respect to the preferred-stock redemption, (2) Johnston and Praught were not creditors of Old Allied because they extended credit only to New Allied, and (3) Baron was not a creditor of Old Allied because the fees-and-expenses judgment was issued only in favor of his attorneys. Johnston, Praught, and Baron appealed. On appeal, Baron attempted to demonstrate that he should be treated as an Old Allied creditor under the fees-and-expenses judgment.