Gavin v. Tousignant et al

Filing 23

MEMORANDUM OPINION regarding Objections to the 1 Proposed Findings Of Fact And Conclusions Of Law. Signed by Judge Richard G. Andrews on 2/23/2016. (nms)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
INRE:

Chapter 11

ULTIMATE ESCAPES HOLDINGS, LLC, et al.,

Bankr. Case No. 10-12915-BLS
(Jointly Administered)

Debtors.
EDWARD T. GAVIN, Trustee of the
UE Liquidating Trust, on behalf of the Estates of
Ultimate Escapes Holdings, LLC, et al.,

Civ. No. 15-241-RGA
Adv. No. 12-50849-BLS

Plaintiff,

v.
JAMES M. TOUSIGNANT and RICHARD KEITH, :
Defendants.

MEMORANDUM OPINION
Todd H. Bartels, Esq., Shanti M. Katona, Esq., Christopher A. Ward, Esq., Polsinelli PC,
Wilmington, DE, attorneys for Appellant Edward T. Gavin, Trustee of the UE Liquidating Trust, on
behalf of the Estates of Ultimate Escapes Holdings, LLC, et al.
Marc S. Casarino, Esq., Michael N. Onufrak, Esq., White & Williams, LLP, Wilmingtqn, DE,
attorneys for Appellee, James M. Tousignant.

John J. Barrett, Jr., Esq., Arthur D. Kuhl, Esq., Louis J. Rizzo, Jr., Esq., Reger, Rizzo & Darnall,
LLP, Wilmington, DE, attorneys for Appellee, Richard Keith.

February

23, 2016

1

/~ JUDGE:
ATES DISTRICT
This matter arises from a complaint for breach of fiduciary duty brought by Edward T.
Gavin, Trustee of the UE Liquidating Trust, on behalf of the estates of Ultimate Escapes Holdings,
LLC, et al. ("UE"), against UE's former officer and director James M. Tousignant and former
director Richard Keith ("Defendants"). Trustee contends that Tousignant and Keith breached their
fiduciary duties of care, loyalty, and good faith owed to UE and its creditors by entering into an
Agreement between UE and Club Holdings, LLC ("CH"), dated August 6, 2010 ("Agreement").
Prior to the commencement of the chapter 11 cases, Tousignant served as UE's President
and Chief Executive Officer and was a member of the board of directors ("Board"). Keith served as
chairman of the Board. In addition to Tousignant and Keith, the Board also included C. Thomas
McMillen, Mark A. Frantz, and Stephen Griessel ("Outside Directors"). UE was a luxury
destination club offering a portfolio of 119 high-end vacation residences and related services to
about 1,250 members. Members gained access to the vacation properties and travel services by
entering into membership agreements, which involved a one-time initiation fee ranging from
$100,000 to $300,000 and annual membership dues ranging from $5,000 to over $30,000.
Members were also charged ad hoc fees for certain add-on services, such a ski lift tickets or a
personal chef. The combination of initiation fees, membership dues, and ad hoc fees was UE's
primary source ofrevenue. Club members were generally high net-worth or high-income
individuals, and UE maintained a proprietary database of club members' information (the
"Membership Information"), which was valued at over $14.5 million in the company's mid-2010
10-Q Report filed with the SEC. (See D.I. 4 at p. 57). The Membership Information, together with
the most of UE's real estate, served as collateral for a revolving loan issued by UE's principal
lender, CapitalSource, Inc. ("CapSource"). Tousignant and Keith also each personally guaranteed
the loan. As of June 30, 2010, the balance on the CapSource loan was $89.8 million.
2

In early 2010, less than six months after its creation, UE faced significant financial
difficulties. UE began merger discussions with its direct competitor CH, whose secured lender was
also CapSource. Pursuant to a Confidentiality Agreement dated March 1, 2010, UE and CH started
due diligence and agreed to exchange confidential business information, including their respective
"member lists and information" for the exclusive purpose of evaluating a possible merger. (See D.I.
4 at pp. 810-15). UE and CH also executed a Confidential Letter oflntent ("LOI") on April 30,
2010, in which CH proposed a transfer to UE of the assets and liabilities of CH in exchange for an
equity interest in UE under a contribution agreement. (See id. at pp. 1043-49). The contribution
agreement that evolved was a 75-page merger document, which was executed by the parties on July
2, 2010, with signature pages placed into escrow. The parties intended to complete due diligence
and close the merger transaction by the end of July, 2010. (See id. at p. 1044,

~

5 (LOI provision

regarding closing); see also D.I. 7 at p. 84 (contribution agreement was signed and escrowed July 2,
2010)). Together, these documents bound the parties to keep the terms of the confidential
transaction confidential. Merger discussions continued throughout the spring and summer of2010.
During this period, UE continued to face financial difficulties. In late spring 2010, UE
entered into a factoring agreement with Monterey Financial Services, in which UE agreed to repay
Monterey approximately $2 million from anticipated receivables in exchange for a cash advance.
(See D .I. 7 at 109-12). The factoring agreement had the effect of cutting off cash flow to UE

through the end of July. During the summer months, certain cash shortfalls were covered by
personal advances from Tousignant and Keith, as they attempted to keep the company alive long
enough to close the merger with CH. Keith contributed $100,000 for mortgage payments on certain
properties, and Tousignant contributed $50,000 to cover an interest payment to CapSource. (See
D.I. 4 at pp. 461-63, 616; see also D.I. 7 at p. 78).
As spring 2010 transitioned into summer, the UE Board viewed a merger with CH-referred

3

to by the Board as "Project Bond" - as the best route forward. (See D.I. 4 at p. 1027 (Minutes of
June 10, 2010 Board meeting); D.I. 7 at pp. 88, 107-08; see also D.I. 7 at p. 340, ir 52 (noting
merger with CH was referred to as "Project Bond")). In the minutes of the June 10, 2010 Board
meeting, under the subheading "Project Bond," UE's Board adopted the following resolutions:
RESOLVED, that the company and Mr. Tousignant as CEO is authorized to proceed
to finalize and execute the contribution agreement for Project Bond, with the signatures to
be held in attorney escrow.
RESOLVED, FURTHER, that the Authorized Officers of the Corporation be, and
each hereby is, authorized and empowered, for and on behalf of the Corporation, to take
such action and to incur such expenses as is or may be reasonably necessary in connection
with the consummation of the transaction[.]
(See D.I. 4 at p. 1027). As the primary secured lender to both UE and CH, CapSource's approval

was essential because the planned merger would require each company's debt to be restructured.
CapSource initially appeared to be in support of the merger, and numerous term sheets were
exchanged among the parties and CapSource in late July and early August. (See D.I. 7 at pp. 12729; 135-37 (Schuppe deposition); 151 (July 30, 2010 email from CapSource to Tousignant and
Peter Estler, CH's CEO, containing draft term sheet for "the consolidation, extension and long term
renewal" of both companies' existing credit facilities); 159 (Aug. 2, 2010 email from CapSource to
Tousignant, Estler, and others conta!ning updated draft term sheet); 168 (Aug. 4, 2010 email from
CapSource to Tousignant and Alex Preiser at CH containing another revised term sheet). The
parties were in the thick of negotiating the merger as August 6 approached.
In late July 2010, the Board became aware that UE had insufficient cash to meet payroll and
other urgent obligations due by August 6. (See D.I. 7 at pp. 83-84). Tousignant initially
approached CapSource for funds to support UE until the merger closed, but CapSource refused.
Tousignant also sought a cash advance from CH, which CH agreed to, but only ifthe loan was
asset-backed. UE thus entered into negotiations with CH to develop additional transactions that

4

would allow UE to meet its short-term obligations while the two companies continued their merger
discussions. The parties eventually agreed to the sale of one ofUE's properties ("1600 Broadway")
to CH, but due to unanticipated sale closing costs, the proceeds from that sale were insufficient to
cover UE's cash shortfall. Even with the net proceeds from the sale of 1600 Broadway, UE was
still $115,000 short on its immediate operating cash needs, particularly payroll.
To cover that shortfall, Tousignant negotiated with CH to develop another transaction-the
Agreement - to cover the shortfall. On August 9, 2010, Tousignant, acting on behalf of UE,
executed the Agreement with CH. (See D.I. 4 at p. 806). The Agreement provided:
WHEREAS, UE has requested that CH provide to UE the amount of ONE
HUNDRED FIFTEEN THOUSAND DOLLARS (US $115,000) (the "Infusion") for the
payment of certain operating expenses ofUE and has offered to CH in exchange therefor,
the covenants, assets, representations and agreements herein contained (the
"Consideration").
(Id.) The Agreement provided that in exchange for the cash infusion, UE agreed to use its best

efforts to: (1) negotiate with CapSource for the sale of a certain CapSource-financed Maui property
· to CH, (2) secure an assignment and extension of leases on two other Maui properties, and (3)
transfer 30 members (900 member nights) to carry the costs of the leases. (See id. at pp. 806-07).
At the center of this dispute, Trustee contends that the paragraph of the Agreement in which UE
agreed to use its best efforts to transfer 30 UE members essentially transferred all of UE's
Membership Information to CH. The paragraph at issue states as follows:
900 NIGHTS - 30 FTE Membership Transfers. UE agrees that it shall work in good
faith and provide its best efforts to contact and work with current members of UE
Clubs (Premier, Signature, and Elite) in order to encourage members to transfer their
respective memberships to CH immediately. Further, UE shall work with and
provide its best efforts to CH to allow employees and representatives of CH to gain
access to members of UE such that they may be informed as to the specific terms of
CH membership. . . . UE agrees to provide its best efforts with regard to as many
members as possible until such a time as membership nights, in aggregate, of no less
than nine hundred (900) per annum have been agreed to by members transferring
into CH memberships from UE. UE hereby knowingly and voluntarily waives
any restrictions contained in the [Confidentiality Agreement] and LOI that may
be construed as limiting or inconsistent with the rights of CH under this
5

Section. . . . VE shall in no way or manner hold CH liable for any actions with
respect to the direct solicitation of its members as set forth herein and CH
reserves the right to accept any number of member nights either over or above the
nine hundred (900) set forth above in its sole and absolute discretion.
(See id at p. 807, § 1.3 (emphasis added)).
The Agreement was negotiated between Tousignant and Pete Estler, CH's CEO, over the
weekend of August 6 through August 8. At 7:09 p.m. on Friday, August 6, 2010, Estler emailed
Tousignant a draft of the Agreement. Estler's accompanying email stated:
Jim,
The following agreement basically says we will provide $115,000 for you to provide best
efforts to provide us the following 3 [sic] things:
1.
Work with CapSource to sell Maui to us
2.
Use best efforts to transfer 2 Maui leases to us
3.
Work with us to transfer 10 member [sic] per home to help us carry cost
4.
We both agree to waive non solicit and non compete
The $115,000 will approximately (the final number is still moving around ... We just got
another $500 bill from a HVAC contractor) provide the total to cover payroll as requested.
Pete
(See D.I. 7 at pp. 192-96). Discussion regarding close of the 1600 Broadway sale and the potential
merger continued throughout the weekend, as UE's leadership struggled to keep the company afloat
in the short term and figure out a comprehensive solution for the long term. (See D.I. 4 at pp. 1030,
1039; D.I. 7 at pp. 200-13). On Saturday, August 7, Tousignant spent the day interviewing
restructuring consultants. Although UE was hopeful about the merger with CH, UE was also
exploring the prospect of a standalone financing or reorganization. CRG Partners was ultimately
selected as UE's restructuring consultant (see D.I. 7 at p. 274), but did not begin working with UE
until the week of August 9.
Email communications continued among the parties on the morning of Sunday, August 8
concerning closing the 1600 Broadway sale, the Maui leases, and the potential merger. (See id at
pp. 223-25). At 2:44 p.m. that day, Estler emailed a revised version of the Agreement to
Tousignant. (See id at p. 226). At 7:04 p.m., UE's general counsel Jeff Sparks requested a copy ·
6

(D.I. 4 at p. 819), and Tousignant forwarded the latest version of the Agreement to Sparks at 7:18
p.m. (See D.I. 7 at p. 226). Sparks expressed some concerns about the Agreement, and Tousignant
responded and requested a redline version at 2: 11 a.m. on August 9. (See D.I. 4 at p. 1079). The
record reflects that no redline of the document was emailed or provided when Sparks met with
Tousignant at UE's office the following morning. At 8:30 a.m. on Monday, August 9, 2010, Sparks
and Tousignant had a call with CapSource and made one last request for funding, which was
denied. 1 (See id. at pp. 604-05, 608-09). Thereafter, Tousignant executed the Agreement on behalf
ofUE. While Sparks and Tousignant were at UE's office in Florida on Monday, Keith was at CH's
office in Colorado for the closing of the 1600 Broadway sale. Once both transactions closed,
money flowed from CH to UE, and payroll checks were issued to employees the afternoon of
Monday, August 9.
In late August, CRG began marketing the company. By mid-September, the prospects of a
merger with CH had dimmed. On September 14, 2010, a CRG representative accidentally sent an
email to CH that discussed potential bidders for UE' s assets. On September 16, 2010, presumably
alerted that the merger prospects had dimmed, CH began mass soliciting UE's members to switch
over to CH. (See id. at p. 1256). Later that day, UE, through its outside counsel, sent a cease and
desist letter to CH. (Id at p. 837). CH responded with a letter on September 17, 2010, pointing to
the solicitation provision in the Agreement as justification for the solicitation. (Id. at p. 839).
On September 20 and 23, 2010, UE and various affiliates filed voluntary petitions for relief
under chapter 11 of the Bankruptcy Code, in part to stop the solicitation of its members. On
September 21, 2010, UE filed a motion to reject the Agreement as an executory contract and
requested a temporary restraining order ("TRO") enjoining the solicitation of UE's members by

1

The Trustee objects to this finding of fact. (See D.I. 2 at p. 5). As set forth herein, the Court
overrules Trustee's objection.

7

CH. (See In re Ultimate Escapes Holdings, LLC, et al., No. 10-12915-BLS (Banla. D. Del.), D.I.
(hereinafter "B.D.I.") 17, 22). The Bankruptcy Court entered an order granting the motion to reject
on October 7, 2010, but it denied the request for TRO on the basis that UE was not likely to succeed
on the merits. (See D.I. 4 at 1016-18; B.D.I. 126). On December 8, 2011, the Bankruptcy Court
confirmed UE's chapter 11 liquidating plan. (See B.D.I. 935). The plan approved the transfer of
UE's assets to a liquidating trust and authorized Trustee to pursue causes of action on behalf of the
liquidating trust. On September 19, 2012, Trustee filed the complaint against Defendants.

II.

CONTENTIONS
The complaint alleges that Defendants breached their fiduciary duties of loyalty and care by

entering the Agreement on behalf of UE. Trustee alleges that the Agreement "lifted any restrictions
that the [Confidentiality Agreement] and LOI placed on [CH's] use of the highly confidential
Membership Information," and essentially transferred UE's Membership Information, a multimillion dollar asset, to CH, a direct competitor, for a mere $115,000. (See D.I. 7 at pp. 348, if 95;
354, if 128(a)). Trustee alleges that Defendants' acts and omissions were motivated in part by their
personal financial exposure arising from their advances and guarantees on UE' s mortgage
obligations. (Id. at p. 344, ifif 75-77; p. 354, if 128(e)). To the extent that Defendants did not know
of the Agreement or its relevant provisions, Trustee asserts Defendants breached their fiduciary
duties by "failing to adequately inform themselves of the provisions of the Agreement" and "failing
to prudently manage [UE's] business operations and engaging in gross negligence in connection
thereto." (Id. at p. 354, ifif 128(c), (f)). Trustee contends that Defendants traded UE's most valuable
asset for a de minimis cash infusion under the Agreement, which "caused or contributed to the filing
of the chapter 11 bankruptcy by [UE]" and "prohibited [UE] from conducting a full marketing
process in order to maximize value for all creditors via a sale of substantially all of [UE' s] assets
pursuant to section 363 of the Bankruptcy Code." (Id. at p. 355, ifif 132-33). Trustee alleges that as
8

a result of these breaches of fiduciary duties by Defendants, UE and its creditor constituencies
sustained significant damages. (Id. at p. 355, ~ 135).2
Tousignant argues that he acted in good faith and with undivided loyalty when he entered
into the Agreement. Tousignant argues that the Agreement was not intended to lift all restrictions
on CH's use of the Membership Information, but was intended only for the limited purpose of
transferring approximately thirty UE members to CH. Tousignant argues that the decision to enter
into the Agreement is protected by the business judgment rule. Tousignant argues that the
Agreement provided UE with critical financing in the face of an otherwise imminent bankruptcy
filing and thus the decision can be attributed to a rational business purpose. While Defendant Keith
concedes that he was generally aware of how UE was going to cover its $115,000 shortfall, he
contends that his direct role was limited to closing the 1600 Broadway sale. Keith argues that
Trustee presented no direct evidence to support Keith's knowledge of and involvement in the
negotiation and execution of the Agreement.
Following the trial, the Bankruptcy Court filed its Proposed Findings of Fact and
Conclusions of Law Pursuant to 28 U.S.C. § 157(c)(l) and Federal Rule of Bankruptcy Procedure
9033(a) ("FFCL") (D.I. 1). The Bankruptcy Court found that the Agreement only intended for the
transfer of member information for the limited purpose of converting approximately thirty UE
members to CH. (D.I. 1 at p. 2). The Bankruptcy Court found that Trustee had failed to articulate
or prove facts sufficient to prove that Tousignant, in entering into the Agreement, had breached his
duty ofloyalty or duty of care and thus Trustee had not met the burden necessary to rebut the
presumption that the business judgment rule applied. (See id. at pp. 19-26 (finding insufficient
evidence to support a breach of the duty ofloyalty); pp. 26-30 (finding insufficient evidence to

2

The Complaint contained a second count against Keith for aiding and abetting breach of fiduciary
duty, which was dismissed by the Bankruptcy Court by Order dated April 23, 2013.
9

support a breach of the duty of care). Having found that Tousignant's actions in negotiating and
executing the Agreement were protected by the business judgment rule, the Bankruptcy Court
further found that Tousignant's decision to enter into the Agreement was attributable to a rational
business purpose. (See id at p. 31 ). The Bankruptcy Court found no evidence that Keith had actual
knowledge of the terms of the Agreement and the record reflected that it was negotiated and
executed without his approval. (See id at p. 32).
On March 12, 2015, Trustee filed his objections to the proposed FFCL (D.I. 2), along with
suggestions in support of his objections (D.I. 3). On April 2, 2015, Defendants filed their response
in opposition to the Objections (D.I. 6). The proposed FFCL are now properly before me to render
final judgment. The Bankruptcy Court recommends that I adopt its findings and conclusions and
hold that the business judgment rule applies and that Defendants did not breach their fiduciary
duties. (See D.I. 1 at p. 32). For the reasons set forth below, I adopt the proposed FFCL.

III.

STANDARDS OF REVIEW

A. 28 U.S.C. § 157(c)(l) and Federal Rule of Bankruptcy Procedure 9033(d)
Once a bankruptcy court determines that a pending matter is not a core proceeding under 28
U.S.C. § 157(b)(2), but is nonetheless related to a case under title 11, it shall submit proposed
findings of fact and conclusions oflaw to the district court. See 28 U.S.C. § 157(c)(l). Thereafter,
"any final order or judgment shall be entered by the district court judge after considering the
bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to
which any party has timely and specifically objected." Id The Federal Rules of Bankruptcy
Procedure provide that:
The district judge shall make a de novo review upon the record or, after additional
evidence, of any portion of the bankruptcy judge's findings of fact or conclusions of
law to which specific written objection has been made in accordance with this rule.
The district judge may accept, reject or modify the proposed findings of fact or
conclusions of law, receive further evidence, or recommit the matter to the
bankruptcy judge with instructions.
10

Fed. R. Bankr. P. 9033(d). "In conducting a de novo review, the Court must consider all of the
Bankruptcy Court's findings and conclusions and afford them no presumption of validity." In re

Montgomery Ward & Co., 2004 WL 323095, at *1 (D. Del. Feb. 13, 2004), rev'd on other grounds,
428 F.3d 154 (3d Cir. 2005). 3

B. Breach of Fiduciary Duty Claims
These claims arise under Delaware law. See Edgar v. MITE Corp., 457 U.S. 624, 645
(1982) (holding that state of incorporation is the appropriate state to regulate corporation's internal
affairs, including fiduciary relationships between or among corporation and its directors, officers,
and shareholders). A director's breach of fiduciary duty constitutes a matter of corporate internal
affairs appropriate for regulation under governing state law. See, e.g., In re Topps Co. S'holder

Litig., 924 A.2d 951, 960 (Del. Ch. 2007). Here, UE is a Delaware corporation, and Defendants
served as directors ofUE. Tousignant was also an officer. Thus, Delaware law must be applied to
the claims asserted in the complaint.
Breach of fiduciary duty claims are evaluated under well-established standards of review
and conduct. In re Trados Inc. S'holder Litig., 73 A.3d 17, 35 (Del. Ch. 2013). "The standard of
conduct describes what directors are expected to do and is defined by the content of the duties of
loyalty and care. The standard of review is the test that a court applies when evaluating whether
directors have met the standard of conduct. It describes what a plaintiff must first plead and later
prove to prevail." Id. at 35-36. Under Delaware law, the standard of review depends initially on

3

Trustee states that "it is objecting tu the Bankruptcy Court's Proposed Findings of Fact and
Conclusions of Law in their entirety." (See D.I. 2 at p. 1). Federal Rule 9033 requires my de novo
review of "findings of fact or conclusions of law to which specific objection has been made ... "
Fed. R. Bankr. P. 9033 (emphasis added). This Memorandum Opinion will therefore address the
Trustee's thirty specific objections to the Bankruptcy Court's proposed FFCL. In my opinion, any
unspecified objections are waived.

11

whether the corporate fiduciaries (1) were disinterested and independent (the business judgment
rule), (ii) faced potential conflicts of interest because of the decisional dynamics present in a
particular recurring and recognizable situation (enhanced scrutiny), or (iii) confronted actual
conflicts of interest such that the directors making the decision did not comprise a disinterested and
independent board majority (entire fairness). See id. at 36.
"Delaware's default standard ofreview is the business judgment rule." Id. at 43 (internal
· quotations omitted). Under the business judgment rule, a court will not second-guess the
fiduciary's decision as long as it has any rational business purpose, even ifthe decision ends up
being flawed in hindsight. See In re Dollar Thrifty S'holders Litig., 14 A.3d 583, 598 (Del. Ch.
2010); Kahn v. Roberts, 1995 WL 745056, *4 (Del. Ch. 1995). "The business judgment rule is not
actually a substantive rule of law, but instead it is a presumption that in making a business decision
the directors of a corporation acted on an informed basis and in the honest belief that the action
taken was in the best interests of the company [and its shareholders]." In re Walt Disney Co.

Derivative Litig., 907 A.2d 693, 746-47 (2005) ("Walt Disney!') (internal quotation marks and
citations omitted). "This presumption applies when there is no evidence of fraud, bad faith, or selfdealing in the usual sense of personal profit or betterment on the part of the directors." Id. at 747
(internal quotation marks and citations omitted). When a plaintiff fails to rebut the presumption of
the business judgment rule, the plaintiff is not entitled to any remedy, be it legal or equitable, unless
the transaction constitutes waste. Id. (citing In re JP. Stevens & Co., Inc. S'holders Litig., 542
A.2d 770, 780 (Del. Ch. 1988)).
Under the business judgment rule, the burden is on the party challenging the decision to
establish facts rebutting the presumption. Orman v. Cullman, 794 A.2d 5, 20 (Del. Ch. 2002)
(citing Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)). To rebut the business judgment
presumption, the party challenging the transaction must present evidence "to demonstrate by a
12

preponderance of the evidence that the defendants violated their fiduciary duties and/or committed
waste." Walt Disney, 907 A.2d at 756. "More specifically, in the area of director action [as
opposed to inaction], plaintiffs must prove by a preponderance of the evidence that the presumption
of the business judgment rule does not apply either because the directors breached their fiduciary
duties, acted in bad faith or that the directors made an unintelligent or unadvised judgment, by
failing to inform themselves of all material information reasonably available to them before making
a business decision." Id (internal quotation marks and citations omitted). If plaintiff succeeds in
rebutting the presumption, the burden shifts to the defendants to prove by a preponderance of the
evidence that the challenged transaction was "entirely fair" to the corporation and its shareholders.

Id. at 757. Unless one of its elements is rebutted, the business judgment rule applies, and "the court
merely looks to see whether the business decision made was rational in the sense of being one
logical approach to advancing the corporation's objectives." Trados, 73 A.3d at 43 (quoting Dollar

Thrifty, 14 A.3d at 598). Only when a decision lacks any rationally conceivable basis will a court
infer bad faith and a breach of duty. In re Orchard Enters., Inc. S'holder Litig., 88 A.3d 1, 34 (Del.
Ch. 2014).

IV.

DISCUSSION
Objections 1-2: Determination of Standard of Review
Trustee objects on the basis that the Bankruptcy Court "incorrectly decided whether

Tousignant and Keith breached their fiduciary duties of loyalty and care before determining what
standard ofteview to apply." (See D.I. 3 at pp. 11-12; see also D.I. 2 at p. 2). Trustee argues that
the Bankruptcy Court "inverted the legal analysis and put the cart before the horse" in failing to
determine the appropriate standard of review before determining whether Defendants met their
standard of conduct. (See D.I. 3 at p. 11). Trustee argues that "Delaware law is clear that the Court
is to make a threshold determination of the standard ofreview to which the facts of the case are to
13

be viewed." (See id at p. 2). Trustee further states "Delaware courts have repeatedly held that the
standard ofreview is a 'threshold' or 'ab initio' question for the purpose of determin[ing] the 'lens'
through which the facts are viewed." (See id. at p. 16).
As noted above, the business judgment rule is Delaware's default standard ofreview. See

Trados, 73 A.3d at 43. To rebut the presumption, it is Trustee's burden to demonstrate by a
preponderance of the evidence that Defendants violated their fiduciary duties and/or committed
waste. See Walt Disney, 907 A.2d at 756. In determining that the business judgment rule applied to
the Agreement, the Bankruptcy Court carefully considered the evidence adduced by Trustee in
support of his allegations that Defendants breached their fiduciary duties and found that Trustee did
not carry his evidentiary burden to rebut the presumption. Trustee appears to argue, however, that it
was improper for the Bankruptcy Court to engage in any analysis of the facts adduced by Trustee in
support of his breach of fiduciary duty claims prior to determining the correct standard of review.

(See D.I. 3 at pp. 2, 12.) This objection forms the basis of Trustee's further objections that entire
fairness review should have been applied ab initio based on evidence of Defendants' lack of
disinterestedness and independence. (See D.I. 3 at pp. 12-13 (standard ofreview must be
determined ab initio); D.I. 2 at pp. 4-6 (arguing entire fairness review triggered ab initio because (i)
the Agreement conferred unique benefit on Defendants not shared by stakeholders generally; (ii)
Defendants perceived it would lessen the chance that a legal action would be brought against them;
and (iii) Defendants were driven to preserve their jobs, compensation, and titles). Alternatively,
Trustee argues that enhanced scrutiny should have applied ab initio based on evidence that a
fundamental change of corporate control occurred or was contemplated by the Agreement. (See
D.I. 2 at p. 7; D.I. 3 at p. 31). Trustee cites two cases - Walt Disney II and Trados - in support of
his contention that the Bankruptcy Court was required to determine the standard of review ab initio,
as a threshold matter, before considering evidence supporting the breach of fiduciary duty claims
14

against Defendants. (See D.I. 3 at p. 12 (citing In re Walt Disney Co. Derivative Litig., 906 A.2d
27, 52-53 (Del. 2006) ("Walt Disney IF') and Trados, 73 A.3d at 21)).
Defendants argue that there is no requirement under Delaware law that a threshold
determination of the standard or review must be made before the court may engage in any analysis
of the conduct which allegedly violated a fiduciary duty, and that neither Walt Disney If nor Trados
stand for such a rule. (See D.I. 6 at p. 3). Defendants argue that not only is such an ab initio
determination not required under Delaware law, but such a determination would be impossible in
most cases because the key trigger for a heightened level of scrutiny is director interest, which often
cannot be determined on the face of the challenged conduct or transaction. (See id.) Defendants
argue that the Bankruptcy Court simply could not have been required, as argued by Trustee, to
blindly accept Trustee's assertion that Defendants suffered actual or potential conflicts of interest,
and apply a heightened standard of scrutiny to Defendants' conduct ab initio, without analyzing
whether the record supported the Trustee's assertion. (See id. at p. 4).
Despite Trustee's reliance on the Walt Disney II case, I find the Bankruptcy Court's analysis
is in accordance with the analysis conducted by the Court of Chancery in Walt Disney I and upheld
by the Delaware Supreme Court in Walt Disney II. At the outset of its analysis, the Court of
Chancery noted:
Plaintiffs must now rely on the evidence presented at trial to demonstrate by a
preponderance of the evidence that the defendants violated their fiduciary duties
and/or committed waste. More specifically, in the area of director action, plaintiffs
must prove by a preponderance of the evidence that the presumption of the business
judgment rule does not apply either because the directors breached their fiduciary
duties, acted in bad faith or that the directors made an unintelligent or unadvised
judgment by failing to inform themselves of all material information reasonably
available to them before making a business decision ... If plaintiffs cannot rebut the
presumption of the business judgment rule, the defendants will prevail.

Walt Disney I, 907 A.2d at 756 (internal citations and quotations omitted). In determining whether
plaintiffs had rebutted the business judgment presumption, the Court of Chancery carefully
15

considered evidence of defendants' conduct presented at trial, including whether various defendants
participated in the decisions at issue (see id at 757 (finding defendant did not play a part in decision
at issue and thus did not breach fiduciary duty ofloyalty)); whether defendants committed waste
(see id at 759 (finding "record does not support those assertions in any conceivable way")); and
whether the decision at issue was a violation of the duty of care (i.e., grossly negligent) or made in
bad faith (see id at 760-79 (finding no evidence of gross negligence or bad faith)). Finding that
plaintiffs had failed to demonstrate by a preponderance of the evidence a breach of fiduciary duty or
corporate waste, the Court of Chancery found that the business judgment presumption was not
rebutted and entered judgment for the defendants. See id at 779. Thus, the Court of Chancery's
determination of the standard of review necessarily included a consideration of whether the
evidence supported a finding of breach of fiduciary duty.
In their appeal to the Delaware Supreme Court, appellants in Walt Disney 11 argued that the
Court of Chancery erred by (i) failing to make a "threshold determination" of the violation of the
duty of care in the form of gross negligence, and (ii) conflating the appellants' burden to rebut the
business judgment presumption with an analysis of whether the directors' conduct fell within
Delaware's statute precluding exculpation of directors for monetary liability "for acts or omissions
not in good faith." See Walt Disney JI, 906 A.2d at 53. The Delaware Supreme Court found no
merit in appellants' argument. See id (noting appellants' argument ignores distinction between (i)
determination of bad faith for the "threshold purpose" of rebutting business judgment rule
presumptions and (ii) bad faith determination for purposes of evaluating availability of a charterauthorized exculpation, and that Delaware law "clearly permits a judicial assessment of director
good faith for the former purpose [of rebutting the business judgment rule])." Id. While Walt
Disney II may refer to the Court of Chancery's determination of bad faith as having been made for a
"threshold purpose," that threshold purpose was not an ab initio determination of the standard of
16

review, but rather "rebutting the business judgment rule." See id. Thus, Walt Disney II does not
preclude consideration of evidence of breach of fiduciary duty for the purpose of determining
whether the business judgment rule has been rebutted, nor does it set any other parameters for what
evidence may be considered in determining the correct standard of review. Walt Disney II provides
no support for Trustee's argument that the Bankruptcy Court was required to make a determination
of the standard of review ab initio before considering evidence of alleged breach.
Trustee also cites Trados in support of the contention that "the threshold inquiry into the
standard ofreview is an ab initio question." (See D.I. 3 at p. 12 (citing Trados, 73 A.3d at 21)).
However, in Trados, the Court of Chancery simply noted that, in that particular case, entire fairness
review did not apply ab initio (although it was ultimately chosen as the appropriate standard of
review). See Trados 73 A.3d at 21. The Court of Chancery went on to say that because entire
fairness did not apply to that particular case ab initio, the burden of proof rested on the plaintiff to
adduce evidence to rebut the presumption. Id. Much like the Bankruptcy Court here, before
reaching the conclusion that entire fairness was the correct standard of review, the Court of
Chancery carefully considered the evidence adduced by plaintiff to show that defendants were not
independent and disinterested. See id. at 45-55 (considering evidence of whether defendants
received personal benefits). It is difficult to see how Trados supports Trustee's objection simply
because the court found a higher standard of re_view did not apply, in that particular case, "ab

initio."
The Delaware Supreme Court and Court of Chancery have certainly had occasion to find
that certain transactions, on their face, warranted application of a higher standard of review ab initio
and without further analysis. "The category of transactions that require judicial review pursuant to
the entire fairness standard ab initio do so because, by definition, the inherently interested nature of
those transactions [is] inextricably intertwined with issues ofloyalty." Emerald Partners v. Berlin,
17

787 A.2d 85, 93 (Del. 2001); see also, Emerald Partners v. Berlin, 726 A.2d 1215, 1222 (Del.
1999) (holding complaint "made a sufficient showing through factual allegations that entire fairness
should be the standard by which the directors' actions are reviewed" at trial); In re Emerging
Commc 'ns, Inc. S'holders Litig., 2004 WL 1305745, at *30 (Del. Ch. May 3, 2004) ("Both sides

agree that because the [transaction] is a self-dealing transaction of which the majority stockholder
stands on both sides, entire fairness is the standard of review ab initio"); In re Cornerstone
Therapeutics Inc. S'holder Litig., 2014 WL 4418169, *5 (Del. Ch. Sept. 10, 2014), rev'd on other
grounds, 115 A.2d 1173 (Del. 2015) (transaction was subject to entire fairness review ab initio

because controlling stockholder stood on both sides of the transaction and because complaint
adequately alleged that merger was not entirely fair to the minority).
However, unlike cases where a director defendant stands on both sides of a transaction, the
Agreement at issue in this case is not of an "inherently interested nature" such that enhanced
scrutiny or entire fairness review could have been determined as the appropriate standard of review
ab initio. Here, a heightened standard ofreview was simply not warranted on the face of the

transaction, and the Bankruptcy Court was required to consider the evidence adduced by Trustee to
rebut the business judgment presumption. The Bankruptcy Court could not have determined
whether Defendants' conduct in entering the Agreement was subject to heightened scrutiny without
first determining whether Defendants were disinterested and independent. Absent this analysis, the
Bankruptcy Court would be blindly accepting Trustee's asse11ion that Defendants were interested in
the transaction without analyzing whether the record supported the Trustee's assertion.
Neither Walt Disney JI nor Trados stand for the rule that a threshold or ab initio
determination of the standard of review must be made before a court may engage in any analysis of
the conduct which allegedly violated a fiduciary duty. While the nature of certain transactions may
dictate heightened scrutiny ab initio, such a determination was not possible with respect to the
18

Agreement. I conclude that the Bankruptcy Court's analysis was entirely consistent with Delaware
law.
The Bankruptcy Court looked first to the evidence adduced by Trustee to support a finding
of breach of the duty ofloyalty. (See D.I. 1 at pp. 20-22 (finding Tousignant did not receive a
personal benefit from the transaction not equally shared by the stockholders upon entering the
Agreement; finding "no evidence" that Tousignant's decision to enter the Agreement was based on
extraneous considerations or influences or that Tousignant acted with a purpose other than that of
advancing the best interests of the corporation; finding "no evidence" Tousignant's actions were
driven by naked self-preservation; and finding "no evidence" Tousignant was on both sides of the
transaction)). Having determined that Defendants were not interested in the Agreement such that
entire fairness was required, the Bankruptcy Court considered whether the nature of the Agreement
was such that enhanced scrutiny should be applied._ (See id. at 23-24). After considering evidence
adduced by the Trustee in support of his argument, the Bankruptcy Court concluded that the
Agreement did not effectuate a change of control, was not a merger agreement, a final stage
transaction or any of the specific, recurring, and readily identifiable situations in which courts apply
enhanced scrutiny. (See id. at pp. 23-24). Despite finding that the nature of the Agreement did not
warrant enhanced scrutiny, the Bankruptcy Court went on to consider Trustee's argument that
Defendants committed corporate waste by entering the Agreement. (See id. at 24). The Delaware
Supreme Court has clarified that good faith is no longer a separate fiduciary duty but rather a
subsidiary element or condition of the duty of loyalty. See Stone ex rel. AmSouth Bancorporation v.
Ritter, 911A.2d362, 370 (Del. 2006). As committing waste is an act of bad faith (see White v.
Panic, 783 A.2d 543, 553-55 (Del. 2001) (implicit holding)), the Bankruptcy Court's consideration
of the Trustee's waste argument in connection with the duty of loyalty allegations was appropriate.
(See D.I. 1 at 24). Finally, the Bankruptcy Court considered the evidence presented by Trustee to
19

demonstrate a breach of the duty of care. (See id. at pp. 26-30 (finding that the "record is clear that
all parties worked diligently over the course of multiple months to close the merger transaction";
finding Trustee's argument that Tousignant did not adequately inform himself of the substance of
the Agreement was "contradicted by the record"; and finding "the record is clear" that Tousignant
pursued other alternatives, was in constant contact with UE' s officers and directors, pursued the
transaction in light of all material information reasonably available, and acted with the honest belief
that the Agreement was the only means to provide the necessary cash infusion)).
After a thorough consideration of facts cited by Trustee to rebut the business judgment
presumption, the Bankruptcy Court found that evidence presented was not sufficient to support a
finding of a breach of fiduciary duty such that the burden could be shifted to Defendants to show
the fairness of the transaction. (See id. at pp. 25, 30). 4 Having found that Trustee failed to carry his
evidentiary burden, the Bankruptcy Court determined that the business judgment standard should
apply. (Id. at p. 30). The Bankruptcy Court then turned to its substantive analysis in applying the
business judgment rule to the challenged conduct. (See id. at pp. 30-31). In applying the business
judgment rule to Tousignant's decision to enter into the Agreement, the Bankruptcy Court

4

The Bankruptcy Court stated: "In order to defeat the presumption that the business judgment rule
applies, the Trustee must point to 'sufficient facts to support a reasonable inference' that the
decision to enter into the [Agreement] was a breach of Tousignant's duty of loyalty or duty of care."
(See D.I. 1 at 18 (citing Jn re Autobacs Strauss, Inc., 473 B.R. 525, 562 (Bankr. D. Del. 2012)).
However, in Autobacs, the Bankruptcy Court considered the evidence of breach of fiduciary duty in
the context of a motion to dismiss. See Autobacs, 473 B.R. at 562 (citing In re Bridgeport
Holdings, Inc., 388 B.R. 548, 567 (Bankr. D. Del. 2008) (considering motion to dismiss) and Globis
Partners, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, *7 (Del.Ch. 2007) (same)). Delaware
courts have held that preponderance of the evidence is the correct standard. See Walt Disney I, 907
A.2d at 756 ("To rebut the business judgment presumption, the party challenging the transaction
must present evidence to demonstrate by a preponderance of the evidence that the defendants
violated their fiduciary duties and/or committed waste.") (internal citations omitted) (emphasis
added)). However, because the Bankruptcy Court found insufficient evidence of breach of fiduciary
duty, even under the lower standard applied to a motion to dismiss, any error had no impact on the
outcome.
20

considered whether the decision could be "attributed to any rational business purpose" or whether it
was "so blatantly imprudent that it was inexplicable." (See id. at p. 31 ). Following a three-day
trial, the Bankruptcy Court found that Tousignant's decision to enter the Agreement was
attributable to a rational business purpose. (See id.) For the reasons set forth above, I find that the
Bankruptcy Court properly determined the standard of review before determining whether the
standard of conduct was met, and that the Bankruptcy Court's analysis was consistent with
Delaware law. 5
Objections 3-4: Authority to Enter the Agreement

Trustee contends that Tousignant breached his duty of care because he was grossly negligent
in failing to adequately inform himself of the Agreement's provisions, failing to seek the advice or
approval of the Outside Directors prior to entering the Agreement, and failing to prudently manage
UE's business operations. (See D.I. 7 at p. 354,

~

128). Trustee therefore objects to the Bankruptcy

Court's findings regarding Tousignant's authority to enter the Agreement. (See D.I. 2 at p. 2).
Trustee objects to the following finding: "As a baseline the Court notes that Tousignant was vested
with authority to operate the business generally." (See D.I. 1 at p. 26). In support of his objection,

5

Apart from Walt Disney II and Trados, Trustee's argument that the Bankruptcy Court's legal
analysis was improper relies solely upon the order and wording of the Bankruptcy Court's
subheadings. Specifically, Trustee cites the following subheadings in his Objection: "2. The
Evidence Does Not Support a Breach of The Duty of Loyalty" and "3. The Evidence Does Not
Support a Duty of Care Violation", and "4. Tousignant Is Entitled to the Protections of the Business
Judgment Rule." (See D.I. 2 at p. 1). Notwithstanding Trustee's misplaced emphasis on mere
subheadings, it is clear that the Bankruptcy Court properly began its analysis with a careful
consideration of the evidence adduced by Trustee and whether that evidence was sufficient to
demonstrate a breach of any fiduciary duty such that the business judgment rule was rebutted.
Trustee further cites to the following sentence in support of the objection: "Having disposed of the
Trustee's argument that Tousignant breached his duties of loyalty and care, the Court must now
apply the business judgment rule to the challenged conduct." (See id. at pp. 1-2). This transitional
sentence does not undermine the Bankruptcy Court's analysis, as it is clear that all the Bankruptcy
Court "disposed of' in its prior analysis was whether the evidence offered by Trustee was sufficient
to carry Trustee's burden of demonstrating a breach of fiduciary duty such that the business
judgment presumption was rebutted.
21

Trustee argues that "[t]he authority to conduct the business and affairs of a corporation is vested
with the board of directors." (See D.I. 2 at p. 2; D.I. 3 at p. 13 (citing Trados, 73 A.3d at 36)). This
argument is of no moment, however, because the Bankruptcy Court further found that Tousignant
was granted authority by the Board at the June 10, 2010 Board meeting. (See D.I. 1 at p. 26).
The Bankruptcy Court found that Tousignant "had authority - either apparent or actual - to
enter into the Agreement as [UE' s] board of directors 'authorized and empowered' him in June
2010 'to take such actions and to incur such expenses as is or may be reasonably necessary in
connection with the consummation of the [CH merger] transaction.' With this authority, the record
is clear that all parties worked diligently over the course of multiple months to close the merger
transaction." (See id; see also D.I. 4 at p. 1027 (minutes of June 10, 2010 Board meeting)).
Trustee argues that the Board resolutions only authorized Tousignant to incur such expenses and
take such actions as reasonably necessary to close the contribution agreement. (See D.I. 3 at pp. 1415 (citing D.I. 4 at pp. 1027)). However, the contribution agreement embodied the merger, and the
Board resolutions clearly authorized Tousignant to take actions "reasonably necessary in connection
with the consummation of the [Project Bond merger] transaction." (See D.I. 4 at p. 1027).
Granting Tousignant authority to take actions necessary to consummate the merger is not
inconsistent with the concept that authority to conduct the business and affairs of a corporation is
vested with the board of directors. See Trados, 73 A.3d at 36. The CH merger comprised the
business and affairs ofUE, and the decision to pursue the merger, and take such actions reasonably
necessary in connection with the consummation of the merger, was made under the direction of
UE's Board. This is supported by the resolutions adopted by the Board on June 10, 2010 and also
by witness testimony. As noted by the Bankruptcy Court, the record is clear that "[UE's] Outside
Directors and counsel believed that the best result for all stakeholders, including shareholders, was
to continue along the path to a Club Holdings merger." (See D.I. 1 at p. 21 (citing testimony of
22

Sparks (D.I. 7 at pp. 98-99); Frantz (id at pp. 178-79); and McMillen (id at pp. 120))). The
Bankruptcy Court further found that "Tousignant's decision to enter into the Agreement was simply
an act in furtherance of this transaction, seen at that moment, as the best possible outcome for the
company." (See D.I. 1 at p. 21).
The record also belies the argument that the Agreement was a transaction that typically
required Board approval. In addressing whether Board approval was necessary prior to entering
into the Agreement, the Bankruptcy Court found relevant Tousignant's view, as he testified at trial,
that the company "had a very strict practice typically governed by our counsel and financial
executives as to whether in any given case [a transaction] required shareholder approval, board
approval. And in this particular case, it was clearly in our minds something that was a fairly
straight-forward agreement and didn't require any notice, any approvals of any of those parties."

(See id at pp. 28-29; see also D.I. 4 at p. 591 (Tousignant's testimony, regarding whether he sent a
draft of the Agreement to the Outside Directors, that "[i]t normally would not have been my
practice ... [W]e were in the real estate business. We did, probably in a given year, 50 to 100
transactions, in terms of the purchase and sale of real estate, the leasing and re-leasing ofreal estate.
And often, it was either Bill [Callaghan] or Jeff Sparks, who would, depending on the nature of the
transaction, determine who would and did get copies of drafts."). "This view is supported by an
email from the company's general counsel Jeff Sparks to Tousignant in which Sparks noted that
signing the agreement 'didn't fall within the approval authority for the Board.'" (See D.I. 1 at 29;
D.I. 7 at p. 420 (Sept. 1, 2010 email from Sparks to Tousignant in response to question from
Tousignant as to whether Sparks circulated the Agreement to the full board)). I agree "[t]he record
belies the Trustee's allegations that board approval was necessary prior to entering into the
[Agreement]." (Id. at p. 29). For the foregoing reasons, I agree with the Bankruptcy Court that the

23

evidence did not support a finding of a violation of the duty of care based on a lack of authority to
enter into the Agreement. 6

Objections 5-7: Defendant Keith's Knowledge and Participation
The Bankruptcy Court found that: "As to Mr. Keith, the Court finds that there is no evidence
he had actual knowledge of the terms of the [Agreement] as he did not sign the agreement and the
record reflects that it was negotiated and executed without his or full board approval." (See D.I. 1 at
p. 18).
U pan review of the record, I find no evidence in the record to contradict this finding. The
Agreement was drafted by CH and was emailed to Tousignant on Friday evening, August 6. (See
D.I. 7 at p. 192-96). Tousignant shared it with Phil Callaghan, UE's CFO, and Jeff Sparks, UE's
general counsel, on Sunday, August 8. (See D.I. 4 at p. 1079; D.I. 7 at p. 226). After
communications between Tousignant and Sparks on Monday, August 9 (see id at p. 1079), Sparks
emailed a copy of the Agreement, signed by Tousignant, to CH. (See D.I. 7 at p. 436}. There is no
direct evidence in the record that the Agreement was circulated to Keith or anyone else on the
Board prior to its execution, other than Callaghan and Sparks. (See id. at p. 420 (email from Sparks
to Tousignant noting that the Agreement was not circulated because it "didn't fall within the
approval authority of the board")). Moreover, Keith testified that he neither saw the Agreement nor
learned ofits specific language until after the mass solicitation by CH. (See D.I. 4 at p. 530; D.I. 7
at p. 442).

6

Trustee also objects to the Bankruptcy Court's conclusion that Tousignant had apparent authority
to enter the Agreement (See D.I. 2 at p. 2). Trustee objects to this finding on the basis that the
concept of apparent authority "only applies to bind a corporation by a third-party who relied on the
appearance that an officer had authority to bind the corporation." (See D.I. 3 at p. 14, n.10
(emphasis in original)). Because I adopt the Bankruptcy Court's finding that Tousignant had actual
authority to enter into the Agreement based the Board's June 10, 2010 resolutions, I do not address
the Bankruptcy Court's conclusion that Tousignant had apparent authority to enter into the
Agreement.
24

Absent direct evidence, Trustee relies on circumstantial evidence of Keith's knowledge of
the specific provisions of the Agreement. Trustee cites Tousignant's testimony that he "absolutely"
told Keith about the Agreement, and that Keith was "very aware" of the Agreement's terms. (See
D.I. 2 at p. 3; D.I. 3 at p. 18 (citing D.I. 4 at p. 614)). Because Keith conceded that he was
"generally aware of how [UE] was going to cover its $115,000 shortfall" and that he participated in
considering alternatives to the Agreement, Trustee argues that Keith has "admit[ted] his own
contemporaneous knowledge of the Agreement." (See D.I. 3 at p. 18). I am not persuaded this
testimony supports a finding of Keith's knowledge of the specific terms of the Agreement. Rather,
the cited testimony confirms that Keith, along with the rest of the Board, was generally aware that
the shortfall was being made up by UE's agreement to use its best efforts to cause the assignment of
two Maui home leases, cause CapSource to approve the sale of a third Maui property, and assist in
causing the transfer of a limited number of UE' s members necessary to carry the costs of the Maui
properties. (See D.I. 4 at pp. 614-15).
In support of his contention that Keith participated in negotiating the Agreement and had
knowledge of the specifics of the Agreement, Trustee further cites Keith's prior relationship with
CH CEO Estler and argues that Keith was in regular contact with Estler as part of a "tag team
approach" with Tousignant. (See D.I. 3 at pp. 18-19; D.I. 4 at p. 477). Trustee notes that on the
morning of August 9, 2010, Keith personally picked up and exchanged legal documents at CH's
outside counsel's office in Boulder, Colorado and then personally delivered legal documents to
CH's office in Broomfield, Colorado. (See D.I. 3 at p. 19). However, the record supports a finding
that those documents related to the 1600 Broadway sale transaction. (See D.I. 4 at pp. 518-28). To
the extent that Trustee insinuates that Keith knowingly or unknowingly gave the Agreement signed
by Tousignant to CH on August 9 (see D.I. 3 at p. 19), that was specifically denied by Keith. (See

25

D.I. 7 at pp. 441-42 ("I can tell you what was not in there [the documents delivered to CH]. That
[August 6 Agreement] was not in there.")).
In absence of evidence that Keith had knowledge of the specifics terms of the Agreement or
that it was executed with his approval, I find no error with the Bankruptcy Court's proposed
finding. Because Keith had no actual knowledge of the specific provision of the Agreement that
Trustee contends gave CH the right to mass solicit UE's members, which is the foundation of
Trustee's complaint, there is no basis for finding that Keith breached a fiduciary duty.

Objection 8: Keith's Interest in the Transaction
Trustee objects on the basis that the Bankruptcy Court "incorrectly ignored Keith's interests
when determining the standard of review." (See D.I. 3 at p. 20; see also D.I. 2 at p. 3). Trustee
argues that Keith had $12 to $14 million in personal guarantees on UE's owned properties and no
ability to pay off this debt. (See D.I. 3 at p. 20). The record also reflects that Keith also made two
mortgage payments on behalf of UE in the amount of $56,000 and $44,000, respectively. (See D.I.
4 at p. 461-62). Trustee cites Keith's testimony that he would be "better served, in a combined
company involving [CH], to dismantle the debt over time than to try to unwind it inside UE." (D.1.
4 at p. 785). Keith also testified at trial that "get[ting] out from under this debt" was part of his
desire to close a merger with CH. (See id. at p. 458). Thus, Trustee argues the Agreement, which
"was designed to lockup the merger with [CH]," conferred a unique benefit on Keith in the form of
a heightened potential to get out from under $12-$14 million in personal guarantees. (See D .I. 3 at
p. 21). Because shareholders did not share equally in this potential benefit, Trustee argues that
entire fairness should have applied as the standard of review. (See id.) Defendants argue that,
contrary to the position asserted by Trustee in his Objections, there is no evidence that contradicts
the Bankruptcy Court's findings. (See D.I. 6 at p. 40).

26

As set forth above, I adopt the Bankruptcy Court's finding that "there is no evidence that
Mr. Keith participated in or was aware of the specifics of the August 6th Agreement." (D.I. 1 at p.
2). Because Keith had no actual knowledge of the specific provisions of the Agreement that Trustee
contends gave CH the right to mass solicit UE's members, which is the foundation of Trustee's
complaint, Trustee's breach of fiduciary duty claims against Keith must fail. Therefore the
Bankruptcy Court did not "incorrectly ignore" Keith's interest in determining the appropriate
standard ofreview.

Objections 9-12: Personal Advances
Trustee contends that Tousignant was interested in the transaction and thus entire fairness
review was triggered. (See D.I. 2 at p. 4). Trustee. therefore objects to the Bankruptcy Court's
findings that Tousignant "did not receive a personal benefit from [the Agreement] which was not
equally shared by the stockholders" and that there was "no evidence that Tousignant's decision was
based on extraneous considerations or influences." (See D.I. 1 at p. 21; D.I. 2 at p. 4). In support
of his objections, Trustee cites evidence that Tousignant personally advanced $50,000 to CapSource
on behalf ofUE. 7 (See D.I. 2 at p. 4; D.I. 4 at pp. 96, 463-64). Trustee also cites to email
communications and deposition testimony evidencing that Tousignant expected to be repaid his
personal advance through the CH merger. (See D.I. 3 at pp. 22-23 (citing D.I. 4 at pp. 101, 791,
798)). Because the Agreement was "designed to lockup the merger with [CH]," Trustee argues that
the Agreement conferred a unique benefit on Tousignant that was not shared by the stockholders
generally - namely the heightened chance of getting repaid his $50,000 personal advance - and thus
entire fairness review was triggered. (See D.I. 2 at 4; D.I. 3 at p. 23).

7

Trustee's objections relating to the Bankruptcy Court's consideration of Tousignant's personal
guarantees are addressed separately below with respect to objections 19-21.
27

The duty of loyalty requires that a corporate fiduciary act with "undivided and unselfish
loyalty to the corporation" and that "there shall be no conflict between duty and self-interest."

Weinberger v. UPO, Inc., 457 A.2d 701, 710 (Del. 1983) (citing Guth v Loft, Inc., 5 A.2d 503, 510
(1939). As set forth by the Delaware Supreme Court in Aronson: "from the standpoint of interest,
this means that directors can neither appear on both sides of a transaction nor expect to derive any
personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which
devolves upon the corporation or all stockholders generally." See Aronson, 473 A.2d at 812. "[A]
director is interested in a transaction if he or she will receive a personal financial benefit from a
transaction that is not equally shared by the stockholders .... for purposes of fiduciary review, the
benefit received by the director and not shared with stockholders must be of a sufficiently material
importance, in the context of the director's economic circumstances, as to have made it improbable
that the director could perform her fiduciary duties ... without being influenced by her overriding
personal interest." Trados, 73 A.3d at 45 (internal citations omitted).
I find no evidence that Tousignant stood on both sides of the Agreement or derived a
personal financial benefit from the Agreement not shared by shareholders equally. I am not
persuaded by Trustee's argument that the Agreement conferred a unique benefit upon Tousignant in
the form of "a heightened chance of getting repaid" the personal advance. Under these facts, I do
not find this constitutes a "personal financial benefit in the sense of self-dealing" that is sufficient to
trigger entire fairness review under Aronson. The record reflects that multiple witnesses (including
Trustee's own witnesses) rejected the proposition that Tousignant had personally profited or
realized any pecuniary gain from the Agreement. (See D.I. 1 at p. 21 (citing depositions of Sparks
(D.I. 7 atp. 105); Schuppe (id atp. 150); Frantz (id atp. 181); Wolf(id atp. 391)); and Griessel

(id at p. 394). The Bankruptcy Court found no evidence that Tousignant's decision to enter into the
Agreement was based on "extraneous considerations or influences" or that Tousignant
28

"intentionally acted with a purpose other than that of advancing the best interests of the
corporation." (D.I. 1 at pp. 21-22). I find no evidence in the record to contradict the Bankruptcy
Court's proposed findings.

Objections 13-14: Potential Liability for Missed Payroll
Trustee argues that Tousignant suffered from a conflict of interest in entering the Agreement
because Tousignant did not want to face potential liability for missing payroll. (See D.I. 2 at 4).
The Bankruptcy Court found that this assertion unsupported by the evidence. "Trustee's allegation
that Tousignant suffered from a conflict of interest ... is attenuated. Other than a single mention of
the statutory obligation to pay employees, there is simply no evidence to support the Trustee's
contention that Mr. Tousignant's actions were driven by naked self-preservation." (D.I. 1 at p. 22).
The Bankruptcy Court therefore declined to apply entire fairness review on this basis. (Id at pp.
22-23).
Trustee cites evidence and case law in support of his objection. Trustee argues that it is
undisputed that Defendants knew about their potential civil and criminal liability and that, without
the cash necessary to make payroll generated by the Agreement, Defendants would have been
exposed to such liability. (See D.I. 2 at p. 5). Trustee cites testimony from UE's general counsel
that he had warned the officers and directors of potential liability (see D .I. 3 at p. 24 (citing D .I. 4 at
p. 139)), and also cites Keith's testimony that he was aware that officers and directors could be held
liable for the payroll obligations (see D.I. 3 at p. 24 (citing D.I. 4 at pp. 620-21, 790)). Trustee
argues that "[i]t is difficult to imagine a more powerful personal motivation than avoiding imminent
civil and criminal liability." (See D.I. 3 at p. 24). However, the testimony and communications
cited by Trustee demonstrate Tousignant's knowledge of his potential liability and nothing more. I
do not view Tousignant's knowledge of his potential liability in connection with making payroll - a
potential liability shared by the rest of the officers and directors at UE and, indeed, by all officers
29

and directors of corporations with employees - sufficient to support a finding of a conflict of
interest. Nor does the record support a finding of divided loyalty. I agree with the Bankruptcy
Court that the record supports a different explanation for Tousignant's efforts to close the
transaction and fund payroll:
Tousignant's unrebutted and credible testimony at trial reflected
legitimate concern about the need to keep the company afloat and to
avoid having to notify the employees and the public of the missed
payroll in the company's filings with the Securities and Exchange
Commission. This disclosure would have had a damaging effect on
Ultimate Escapes' business and put the proposed merger with Club
Holdings at risk.
(See D.I. I at p. 22). Additional evidence in the record also supports this explanation. "This
scenario was discussed in a meeting of the Ultimate Escapes audit committee on August 6." (See

id. (citing D.I. 7 at pp. 220-22)). "It was also the subject of email communication between various
members of [UE's] board and management on August 7, 2010." (D.I. I at p. 22 (citing D.I. 4 at p.
1030)). In light of these concerns, the Bankruptcy Court found Tousignant's decision to enter the
Agreement and thereby make payroll upheld his corporate responsibility to affirmatively protect the
interests of the corporation committed to his charge, but also to refrain from doing anything that
would work injury to the corporation." (See D.I. I at p. 22 (citing Guth, 5 A.2d at 510 (internal
quotations omitted))).
In further support of the objection, Trustee cites case law holding that "[e]ntire fairness is
triggered when a director or officer enters into an agreement because he or she perceives that the
agreement will lessen the chances that a legal action is brought against them." (See D.I. 2 at 5; see
also D.I. 3 at 25 (citing Jn re Primedia, Inc. S'holders Litig., 67 A.3d at 455, 486-87 (Del. Ch.
2013)). In Primedia, the Court of Chancery applied the entire fairness standard because "it [wa]s
reasonably conceivable that [a fiduciary] received a unique benefit in the Merger not shared with
other shareholders" because the merger partner would be "reluctant to antagonize" the fiduciary and
30

pursue a derivative action against it. See id at 486-87. Trustee argues that "[i]f perception of
lessening the chances of litigation trigger entire fairness review, then certainly entering into an
agreement knowing it will eliminate the risk of civil and criminal liability does too." (See D.I. 3 at
p. 25). Primedia addressed the potential liability of a fiduciary under very different facts, and I
disagree that Primedia supports Trustee's contention that an agreement that generates cash for a
troubled company is necessarily subject to entire fairness review whenever that cash was necessary
to fund the company's payroll obligations. Neither the record here nor case law cited by Trustee
support a finding that Tousignant suffered from a conflict of interest by virtue of potential liability
for missing payroll. There is no error with the Bankruptcy Court's finding.

Objections 15-17: Preservation of Job, Compensation, and Corporate Title
Trustee objects to the Bankruptcy Court's findings that Tousignant's decision to enter the
Agreement was not "based on extraneous considerations or influences" and that Tousignant "did not
receive a personal benefit from the transaction that was not equally shared by the stockholders" (see
D.I. 1 at p. 21) on the basis that "[i]t is undisputed that [Defendants] were simultaneously driven to
preserve their jobs, generous salary and compensation packages, and the prestige tethered to their
corporate titles." (See D.l. 2 at p. 5). Trustee cites Trados in support of his contention that
"compensation from employment is generally material" in considering the personal interests of
fiduciaries. (See D.I. 3 at p. 25). Trustee also cites an email from Tousignant to CH's CEO in
which Tousignant communicated:
I will not accept a role of SVP of Business Devt. [in a merged
company]. With all due respect, been there many years ago and done
that. If you want my involvement, the role needs to be meaningful
(no less than President of the overall club business, with you as CEO).
Otherwise you will need to provide for negotiated settlements for the
3 existing employment agreements with me, Phil [Callaghan] and
Rich [Keith].

31

(See id at p. 26 (citing D.I. 4 at pp. 794-95, 1044). Trustee argues that Tousignant had negotiated a
"soft landing" for himself with CH, and he therefore strongly preferred the CH merger to other
alternative mergers. (See D.I. 1 at p. 12; D.I. 3 at p. 26-27). Trustee argues that Tousignant, as "a
fiduciary who engineer[ed] a soft landing" was therefore not independent in entering the Agreement
with CH. (See D.I. 3 at p. 27).
I find no evidence that Tousignant put his own personal interests ahead of that ofUE in
entering the Agreement. (See D.I. I at p. 22 (citing Beam v. Stewart, 845 A.2d 1040, 1049 (Del.
2004) (internal quotations omitted))). The Agreement did not include any provisions concerning
Tousignant's salary, compensation, or title. (See D.I. 4 at p. 806). Trustee cites to no evidence that
a "soft landing" agreement was ever reached with CH, despite Tousignant's apparent attempts to
negotiate his future position in the merged company or some settlement of his rights under his
employment agreement. (See id. at p. I 044). Tousignant's efforts to negotiate a future position in
the event of a merger does not support a finding that the decision to enter the Agreement was
"based on extraneous considerations or influences" or provided any personal financial benefit not
equally shared by the stockholders. The record does not support a finding that Tousignant put any
potential personal benefits ahead of the corporate merits of the challenged transaction. I find no
error in the Bankruptcy Court's decision not to apply entire fairness on this basis.

Objection 18: Request for Funding from CapSource
Trustee argues that Tousignant reached his decision to enter into the Agreement by a grossly
negligent process that failed to consider all material facts reasonably available. (See D.I 3 at p. 28).
Trustee therefore objects to the Bankruptcy Court's finding that Tousignant made a last request for
funding from CapSource before signing the Agreement. (D.I. I at p. IO; D.I. 2 at pp. 5-6). Trustee
argues that the call with CapSource to request funding was actually scheduled for I :30 p.m. on
August 9, after Tousignant had signed the Agreement, and therefore the Bankruptcy Court's finding
32

of fact was incorrect. (D.1. 2 at p. 5; D.I. 3 at p. 30, n.22). In support of this objection, Trustee cites
an invitation to a conference call between Tousignant, Sparks, and Walter Schuppe at CapSource,
which reflects that a call between those parties and others was scheduled for Monday, August 9,
2010 at 1:30 p.m. (See D.I. 4 at p. 1078).
Evidence of a scheduled conference call does not contradict Tousignant's testimony at trial
that he and Sparks had a telephone call with Walter Schuppe from CapSource at 8:30 a.m. on
August 9, prior to signing the Agreement, in order to make a last request for funding, and that their
request was denied. (See D.I. 4 at pp. 604-05, 608-09). Other evidence in the record supports this
finding as well. (See D.I. 4 at p. 1079 (Tousignant's email to Sparks on Monday, August 9, at 2:11
a.m., referring to call scheduled with Schuppe at 8:30 a.m. the following day)). I find no error with
the Bankruptcy Court's finding.

Objections 19-21: Personal Loan Guarantees
Trustee argues that Tousignant was not disinterested in the Agreement because he
personally guaranteed a loan provided by CapSource, which had a balance of $89.8 million as of
June 30, 2010, and that one of the triggers for liability under the personal guarantee was a
bankruptcy filing. (See D.I. 2 at p. 6). Because funding generated in part by the Agreement
allowed UE to temporarily avoid the otherwise imminent bankruptcy filing, Trustee argues entering
the Agreement also avoided imminent liability on the $89 million guarantee. (See id) Trustee
argues this was a benefit or potential benefit that triggered entire fairness review. (See id) On this
basis, Trustee objects to the Bankruptcy Court's findings that the decision to enter into the
Agreement was not based on "extraneous considerations or influences" and Tousignant did not
receive a personal benefit from the transaction that was not shared equally by the stockholders when
he entered into the Agreement. (See id)

33

The Agreement did not confer any personal financial benefit upon Tousignant. (See D.I. 4
at p. 806). Multiple witnesses (including Trustee's own witnesses) rejected the proposition that
Tousignant had personally profited or realized any pecuniary gain from the Agreement. (See D.I. 1
at p. 21 (citing depositions of Sparks (D.I. 7 at p. 105); Schuppe (id. at p. 150); Frantz (id at p.
181); Wolf (id at p. 391)); and Griessel (id at p. 394)). Moreover, the Bankruptcy Court noted "it
is not at all clear that Tousignant would have been able to escape from under his personal guarantee
if a merger was consummated." (D.I. 1 at p. 21). Rather, as noted by the Bankruptcy Court, the
record supports a finding that "Tousignant would likely have been required to personally guarantee
the debt of the combined company if Club Holdings and Ultimate Escapes ultimately merged." (Id
at p. 21, n.33 (citing D.I. 7 at pp. 151-58, 358-74, 375-84 (drafts of merger term sheet
contemplating guarantee))). The record supports these findings.
The record supports a finding that in entering the Agreement, Tousignant acted in the best
interests of the corporation in progressing toward the proposed merger and avoiding imminent
bankruptcy and the negative consequences that would flow from such a filing. (See D.I. 1 at p. 31
(noting "a bankruptcy filing would have killed the merger with Club Holdings and wiped out all
shareholders")). The funding generated by the Agreement- in addition to the funding generated by
the 1600 Broadway sale -temporarily averted UE's financial crisis and gave it time to consummate
the merger, which the Board agreed was the right path forward. (See id at p. 21). The fact that the
funding generated in part by the Agreement had the additional effect of delaying a bankruptcy filing
- which would have triggered the personal guarantee but would have had many other negative
consequences for UE - does not itself support a finding of divided interests. I agree with the
Bankruptcy Court's conclusion that Trustee failed to adduce evidence that Tousignant "intentionally
acted with a purpose other than that of advancing the best interests of the corporation" and that

34

entire fairness review was not warranted on this basis. (See id. at pp. 21-22 (citing Walt Disney,
906 A.2d at 67)).

Objections 22-25: Grossly Negligent Process
Trustee argues that Tousignant's decision to enter the Agreement was made by a grossly
negligent process, and thus entire fairness is the correct standard of review. (See D.I. 3 at p. 28). In
support of this, Trustee argues that Tousignant breached his duty of care because: he failed to
proactively contact general counsel, outside counsel, financial professionals, or investment bankers
regarding the Agreement; he failed to consult UE's Outside Directors regarding the Agreement; and
UE's general counsel, upon first hearing about the Agreement, advised Tousignant not to sign it.
(See id. at pp. 28-29; D.I. 2 at pp. 6-7). In support of these contentions, Trustee objects to several of

the Bankruptcy Court's related findings in connection with Tousignant's decision to enter into the
Agreement.
Trustee argues that Tousignant never consulted UE's Outside Directors about the Agreement
(see D.I. 2 at p. 6) and objects to the Bankruptcy Court's finding that Tousignant "was in constant

contact with Ultimate Escapes' officers and directors about the state of the company's affairs." (See
D.I. 1 at p. 30). However, the record supports the finding that Tousignant was in constant contact
with UE' s officers and directors regarding UE' s state of affairs in the days leading up to the
Agreement. (See e.g., D.I. 7 at p. 411 (Aug. 6, 2010 email from Tousignant to members ofUE's
Board, general counsel, and outside counsel attaching draft term sheet for a $15 million senior
secured term loan from a third party investment firm); D.I. 4 at p. 1030 (Aug. 7, 2010 emails
between Tousignant and members ofUE's Board discussing current state of negotiations of CH
merger and missed payroll)).
Trustee contends that Tousignant breached his duty of care because he did not proactively
contact UE's general counsel or outside counsel about the Agreement. (See D.I. 2 at 6-7). Trustee
35

therefore objects to the Bankruptcy Court's finding that Tousignant shared the Agreement with the
UE's CFO Callaghan and general counsel Sparks on August 8, 2010 because that finding ignores
the fact that Tousignant did not initiate the communication. (See D.I. 3 at p. 29). The record,
however, supports the Bankruptcy Court's finding that Tousignant shared the Agreement with
Sparks and Callaghan on Sunday, August 8, 2010 and requested redline changes. (See D.I. 1 at p.
28, n.53 (citing Aug. 9, 2010 emails from Tousignant to Callaghan asking for his interpretation of
the Agreement, and from Tousignant to Sparks asking him to redline the Agreement to remove
some of the more difficult language); see also D.I. 4 at pp. 140-42 (Sparks' deposition testimony)).
Trustee further objects to the Bankruptcy Court's conclusion not to draw a negative
inference from Tousignant's delay in communications regarding the Agreement, based on the fact
that Tousignant, Callaghan, and Sparks worked throughout the weekend interviewing restructuring
consultants and finalizing documents for the close of the sale of 1600 Broadway - the key generator
of cash to satisfy UE's funding needs - and that these responsibilities were equally as important to
UE's survival. (See D.I. 1 at p. 28). The record supports a finding that Tousignant was engaged in
these efforts the weekend of August 6 through August 8. (See e.g., D.I. 7 at pp. 209-12, 416-19
(Aug. 8 emails between Tousignant, Callaghan, Sparks, and chief operating officer Bob Glinka).
Trustee further objects to the Bankruptcy Court's finding that "the record does not reflect
that [UE's general counsel] emailed a redline of the document or provided one when he met Mr.
Tousignant at the Ultimate Escapes' office Monday morning" (see D.I. 1 at p. 10) because that
finding: (i) does not reflect that Tousignant was grossly negligent in requesting redline changes "for
the first time in the middle of the night at 2:11 a.m .... only a few hours before he had to sign the
Agreement and without any time to renegotiate it after already having agreed to it" (see D.I. 3 at
30); (ii) "wholly ignores that the General Counsel only learned of the Agreement hours before it had
to be signed to effect payroll" (see id.); and (iii) "wholly ignores that the General Counsel expressed
36

his serious reservations about the Agreement to Tousignant on two separate occasions" (see id).
However, the record does not reflect that any redline version of the Agreement was sent to
Tousignant.
I observe that the Agreement was badly drafted. Tousignant's understanding of the
Agreement was consistent, however, with the email sent by Estler on August 6, in which he
confirms that UE will work with CH to "transfer 10 members per home to help us carry costs."

(See D.I. 4 at p. 1072). As the Bankruptcy Court observed, "[g]iven competing interpretations of
the [Agreement], Estler's contemporaneous statements regarding the purpose behind this section of
the Agreement are dispositive." (See D.I. 1 at 25). I find no evidence in the record that Sparks had
a different understanding of the intent of the Agreement. The record reflects that the concerns
raised by Sparks to Tousignant upon his review of the Agreement on August 8 related to the
business aspects of the Agreement, as opposed to any legal implications the Agreement may have
with respect to the confidentiality and permitted use of the Membership Information. (See D.I. 4 at
p. 1080 (Sparks' email to Tousignant and Callaghan, stating "I think we should redline this to
remove the provisions that are unacceptable ... It doesn't make sense to take such a hit on the leases,
and lose members, and agree to sell our elite home when we could get the same dollars from
[CapSource] without all of this.")). The record does not reflect that Tousignant was a lawyer, and
unless he read the Agreement with a keen legal eye, he also would not have recognized the poorly
drafted language that CH later relied upon as a basis for its mass solicitation of UE's members.
Overall, Trustee does not appear to dispute the substance of the Bankruptcy Court's
findings, which tend to undermine Trustee's arguments that the decision to enter into the Agreement
resulted from a grossly negligent process and that Tousignant failed to consider material facts when
making that decision. Rather, Trustee's objections focus on findings that the Bankruptcy Court

37

should have made in addition to the above findings. (See D.I. 2 at pp. 6-7; D.I. 3 at pp. 29-30). The
record, however, supports the Bankruptcy Court's specific findings.
Objection 26: Enhanced Scrutiny

"[I]t is Trustee's first and primary position that the [Agreement] was not a merger and was
not a transaction that contemplated a later merger. Therefore entire fairness review applies." (See
D.I. 3 at 31). Because the Bankruptcy Court has proposed findings of fact that directly conflict on
this issue, however, Trustee argues "in the alternative only" that enhanced scrutiny should apply
because the Agreement related to a sale with CH. (See id) Trustee argues that enhanced scrutiny
applies in every case in which a fundamental change of corporate controls occurs or is
contemplated. (See id (citing Paramount Commc 'ns v. QVC Network Inc., 637 A.2d 34, 46 (Del.
1994)). Thus, Trustee argues, enhanced scrutiny review applies to both a sale transaction and a
transaction related to a sale. (See id) Trustee further argues that courts apply enhanced scrutiny to
lock up agreements entered into during a sale process, including sale of a company's 'crown jewel'·
assets to a favored bidder. (See id (citing Mills Acquisition Co. v. Macmillan, 559 A.2d 1261,
1285-86 (Del. 1989) (when lockup agreements involve "crown jewel" assets, careful board scrutiny
attends the decision)). Trustee argues enhanced scrutiny applies here because the Agreement sold
or compromised UE's crown jewel (its Membership Information) in an attempt to lockup the
merger with CH. (See id at p. 32).
In support of this alternative argument, Trustee objects to the Bankruptcy Court's finding

that it was inappropriate to apply enhanced scrutiny because the Agreement was not a transaction
related to a sale such "that a fundamental change of control occurs or is contemplated." (See D.I. 1
at p. 20 (citing Paramount, 637 A.2d at 46). Trustee argues that this finding is contrary to the
Bankruptcy Court's finding that Tousignant had authority to enter the Agreement because the
Agreement was an act "in connection with the consummation of the [CH merger] transaction" as
38

authorized by the Board resolutions on June 10, 2010. (See id. at p. 21, 26). Trustee argues that the
Agreement cannot constitute a step to consummate the CH merger for purposes ofTousignant's
authority to enter into the Agreement, but not constitute part of a sale or contemplated change of
control for purposes of enhanced scrutiny. (See D.I. 3 at pp. 32-33).
I disagree that enhanced scrutiny is warranted on this basis. First, the Bankruptcy Court
found that the Agreement intended to transfer thirty UE members to fund the carrying costs of the
leased properties - not the "crown jewel" Membership Information. (See D.I. 1 at 25). As set forth
in greater detail below, the record supports this finding. Second, the Bankruptcy Court found that,
by its terms, the Agreement did not effectuate a change of control, is not a merger agreement, a final
stage transaction, or any of the "specific recurring, and readily identifiable situations" in which
courts apply enhanced scrutiny. (See D.I. 1 at p. 23 (citing Trados, 73 A.3d at 43)). While the
Agreement, which generated a portion of the cash necessary to keep UE alive pending the merger,
was certainly an act taken "in connection with the consummation of the [CH merger] transaction"
(see id at p. 26), it was not an action related to a sale or merger such that a fundamental change of
control occurred or was contemplated. See Paramount, 637 A.2d at 46. As the Bankruptcy Court
observed, it is undisputed that the parties continued negotiating the merger for weeks following
execution of the Agreement. (See D.I. 1 at p. 24). I find no error in the Bankruptcy Court's
conclusion that enhanced scrutiny was not appropriate on this basis.

Objection 27: Corporate Waste Argument
As summarized by the Bankruptcy Court, "[d]espite this being an atypical case for enhanced
scrutiny, the Trustee argues that the standard is appropriate as the [Agreement] constituted
corporate waste because the company's membership information was sold for disproportionately
small consideration." (See D.I. 1 at p. 24). Trustee objects on the basis that the Bankruptcy Court
based it analysis on an incorrect understanding of Trustee's position - that Trustee sought enhanced
39

scrutiny review in the alternative because the Agreement constituted waste. (See D.I. 2 at p. 8).
Trustee argues that I should reject this reference and disregard Trustee's waste argument when
considering whether enhanced scrutiny review was appropriate. (See id) This is the only mention
of the waste argument in Trustee's papers, and Trustee does not argue that the Bankruptcy Court's
consideration of corporate waste in this context affected its overall findings and conclusions.
Under Delaware law, when a plaintiff fails to rebut the presumption of the business
judgment rule, the plaintiff is not entitled to any remedy, be it legal or equitable, unless the
transaction constitutes waste. See Walt Disney, 907 A.2d at 747 (citing JP. Stevens, 542 A.2d at
780). Because the Bankruptcy Court ultimately concluded that Trustee failed to carry the
evidentiary burden of rebutting the business judgment presumption, it was appropriate for the
Bankruptcy Court to consider Trustee's waste claim. "To prevail on a waste claim ... plaintiff must
overcome the general presumption of good faith by showing that the board's decision was so
egregious or irrational that it could not have been based on a valid assessment of the corporation's
best interests." (See D.I. 1 at p. 24 (citing Kauftnan v. Allemang, 2014 WL 4954333 at *IO (D. Del.
Sept. 30, 2014)).
I agree that the record does not support a finding of waste. Like the Bankruptcy Court, I am
not convinced that the Agreement constituted a sale ofUE's Membership Information. As an initial
matter, nowhere in the Agreement is the sale of an asset, tangible or intangible, discussed. (See D.I.
4 at pp. 806-09). Rather, the Agreement appears only to modify the confidentiality restrictions
contained in the Confidentiality Agreement and LOI. (See id at p. 807). I agree "it is more
reasonable and consistent with the evidentiary record to interpret the Agreement as providing for a
limited solicitation of [UE's] members." (See D.I. 1 at p. 25). The modification of confidentiality
restrictions allowed for the transfer ofUE's members, which would support the costs of the
transferred leased properties contemplated under the Agreement; otherwise, as noted by the
40

Bankruptcy Court, CH would have taken on the lease liability without any stream of revenue to pay
the operating costs on those properties. (See id.).
I find that this interpretation is supported by the Agreement itself, witness testimony, and
other communications in the record. Estler's email to Tousignant on August 6, 2010 regarding the
draft Agreement noted that UE would work with CH to "transfer 10 members per home to help us
carry costs." (See id. at p. 1072). Tousignant also testified credibly that "it was customary in the
industry to aim to occupy a new property with 10 members in order to have sufficient income to pay
property operating costs" and that "he viewed the waiver of Confidentiality Agreement to be in the
-

context of the transfer of 30 members." (See D.I. 4 at pp. 625-27, 648). I agree with the
Bankruptcy Court that the record supports a reading of the Agreement as providing for the
modification of the parties' confidentiality restrictions for the limited purpose of allowing the
transfer of approximately thirty UE members to CH, as opposed to the sale of the Membership
Information. The record does not support a finding that Tousignant's decision to enter the
Agreement for $115,000 consideration was "so egregious or irrational that it could not have been
based on a valid assessment of the corporation's best interests." See Kaufman, 2014 WL 4954333
at *10.
Objection 28: Inconsistent Rulings

Trustee objects to the Bankruptcy Court's conclusion that "the [Agreement] only intended
for the transfer of member information for the limited purpose of converting approximately thirty
(30) [UE] members to CH" (D.I. 1 at p. 2) and to similar statements throughout the proposed FFCL.
(See D.I. 2 at p. 8). Trustee argues that the Bankruptcy Court erred in reaching this conclusion

because it cannot be reconciled with the Bankruptcy Court's previous interpretation of the
Agreement. (See id. at pp. 8-9). On September 21, 2010, after filing for protection under chapter
11 of the Bankruptcy Code, UE filed a complaint against CH, along with a motion for TRO and
41

preliminary injunctive relief, which sought to enjoin CH from further solicitation ofUE's members.
(See Ultimate Escapes Holdings, LLC, et al. v. Club Holdings, LLC, Adv. No. 10-53064-BLS, D.I.

1, 3). At a hearing held on September 29, 2010, the Bankruptcy Court entered a bench ruling
denying the TRO on the basis that UE had not carried its burden in establishing a likelihood of
success on the merits. This holding was based on the Bankruptcy Court's finding that the
Agreement contemplated CH's right to use the Membership Information to solicit UE's members
and that the Agreement provided that such use would not give rise to a violation under the
Confidentiality Agreement or LOI. (See D.I. 4 at pp. 1016-18).
An analysis of Trustee's breach of fiduciary duty claims is far different from the TRO

analysis undertaken by the Bankruptcy Court pursuant to Federal Rule of Bankruptcy Procedure
7065. With respect to UE's request for TRO, the Bankruptcy Court was required to review the
Agreement after CH had already solicited UE's members and to balance UE's probability of
success on the merits against the consequences of immediate irreparable injury. 8 Here, in a
completely different exercise, the Bankruptcy Court reviewed Tousignant's decision to enter the
Agreement under the business judgment standard and looked to what Tousignant reasonably knew
at the time. "Regardless of the fact that Club Holdings eventually mass solicited Ultimate Escapes'
members in September ... , the Court must focus on what Tousignant 'knew and did at the time' of
the challenged transaction." (See D.I. 1 at 30 (citing Chen v. Howard-Anderson, 87 A.3d 648, 665
(Del. Ch. 2014)). The Bankruptcy Court found that the intent of the Agreement was to convert

8

A party seeking a TRO or preliminary injunction must demonstrate: (i) a reasonable likelihood of
success on the merits; (ii) a likelihood that it will suffer irreparable harm if relief is denied; (iii) that
the nonmoving party will not suffer even greater harm if the injunction is granted; and (iv) that the
public interest favors such relief. See Kos Pharm., Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir.
2004). In deciding whether to issue an injunction, the Court must engage in "a delicate balancing of
the probabilities of ultimate success at final hearing with the consequences of immediate irreparable
injury." See GlaxoSmithKline Consumer Healthcare, L.P. v. Merix Pharm. Corp., 2006 WL
1792856 at *3 (3d Cir. 2006).
42

approximately thirty UE memberships to CH to cover carrying costs on the leases. (See D.I. 1 at p.
2). Because the Agreement provided UE with a necessary cash infusion at a critical juncture, the
Bankruptcy Court found Tousignant's decision to enter into the Agreement was attributable to a
rational business purpose. (See id. at p. 31). I do not find the Bankruptcy Court's findings
inconsistent with its ruling at the September 29, 2010 hearing. 9
Objection 29: Membership Information Value

Trustee objects on the basis that, aside from finding that "[t]he combination of initiation
fees, membership dues, and ad hoc fees was Ultimate Escapes' primary source of revenue" (D.I. 1
at p. 3), the Bankruptcy Court failed to address the value of the Membership Information in its
FFCL. (See D.I. 2 at p. 9; D.I. 3 at 37). Specifically, Trustee argues that the Bankruptcy Court
failed to consider that the Membership Information was UE's most valuable asset and ignored "five
insider and independent expert valuations that all valued the Membership Information at
approximately $40 million." (See D.I. 3 at 37). Trustee argues that "[b ]ecause the Membership
Information value is important for calculating damages and understanding the factual dynamics of
this case, the District Court should supplement the Findings to reflect that the Membership
Information was worth approximately $40 million." (See id. at p. 38) Alternatively, Trustee argues
that the District Court should request further briefing or hold further evidentiary proceedings on
damages that were also the subject of expert testimony. (See id.) Because I adopt the Bankruptcy
Court's determination that the business judgment rule applies, I do not require further briefing or
evidentiary proceedings on the value of the Membership Information or related damages.

9

I also note that even if they were inconsistent, that would not be a reason to reject the Bankruptcy
Court's decision on the merits. Decisions on injunctive relief are not binding on merits decisions.
43

Objection 30: 8 Del. C. § 102(b)(7)
Trustee objects to the Bankruptcy Court's silence regarding the parties' arguments under 8
Del. C. ·§ 102(b)(7). 10 Trustee argues that "[t]he Bankruptcy Court's silence may be excused if the
District Court finds that Defendants did not breach any standard of conduct under any standard of
review." (See D.I. 2 at p. 9). I agree there was no need for the Bankruptcy Court to reach the issues
raised by the parties under 8 Del. C. § 102(b)(7) because the Bankruptcy Court found no evidence
that Defendants breached their fiduciary duty of care.

V.

CONCLUSION
For the foregoing reasons, I overrule the Trustee's objections and adopt the Bankruptcy

Court's February 5, 2015 proposed findings of fact and conclusions of law. An appropriate order
shall issue.

10

The parties submitted post-trial briefing addressing whether the § 102(b)(7) defense was available
to Defendants. Defendants argued that if the Bankruptcy Court determined that Trustee had
rebutted the business judgment presumption and that Defendants had breached their fiduciary duty
of care to UE, then the exculpatory provision in UE's Certificate oflncorporate barred any
monetary recovery for such a breach. Trustee argued that (i) Defendants waived their § 102(b)(7)
defense because they failed to plead the defense in their answer; (ii) the exculpatory provision did
not apply to Tousignant because he was acting only as an officer; and (iii) the exculpatory provision
did not apply to Keith because he acted in bad faith.

44