Official Committee of Unsecured Creditors v. National Amusements, Inc. (In re Midway Games Inc.)

Midway Games Inc. (Midway) (debtor) filed for bankruptcy. Midway’s official unsecured-creditors’ committee (the committee) (plaintiff) brought an adversary action against the members of Midway’s board of directors (the board members), National Amusements, Inc. (NAI), Sumner Redstone, and various Redstone-affiliated entities (defendants). Among other things, the committee alleged that the board members had breached their fiduciary duties. Specifically, the committee claimed that when Midway was in severe financial distress, the board members did nothing to assist Midway and instead approved and acquiesced in a $90 million loan to Midway from Redstone’s affiliates (the NAI loan) and a $40 million factoring agreement with NAI (the factoring agreement). The transactions’ terms were fair and at market rates, and there was no evidence that the board members personally profited from the transactions. However, the committee alleged that the challenged transactions were more beneficial to the Redstone-affiliated entities than to Midway and that, as a result of the transactions, Midway acquired additional debt instead of trying to restructure or seek bankruptcy relief. According to the committee, the board members had put their own interests and the interests of the Redstone-affiliated entities above Midway’s interests, thus breaching their duties of care, loyalty, and good faith. The board members moved to dismiss for failure to state a claim, arguing that their business decisions were protected by the business-judgment rule and that Midway’s certificate of incorporation contained a provision exculpating them from personal liability for breaches of the duty of care. The bankruptcy court determined that the breach-of-fiduciary-duty claims concerned Midway’s internal affairs and thus were governed by the law of Delaware, Midway’s state of incorporation.