Richards Layton & Finger
 

OHC Liquidation Trust v. Credit Suisse First Boston, et al.

June 12, 2008

In OHC Liquidation Trust v. Credit Suisse First Boston, et al., C.A. No. 07-799 (D. Del. June 9, 2008), the United States District Court for the District of Delaware granted summary judgment to a financial services provider facing claims for damages arising out of the provision of securitization and financial advisory services to a modular homes manufacturer in an opinion that is of interest to banks and financial institutions that provide securitization services and to bankruptcy professionals alike. The Court found that the plaintiff’s claims were barred by the common law doctrine of in pari delicto , an equitable defense whereby a plaintiff’s recovery may be barred by its own wrongdoing.

The plaintiff, a liquidating trust established in connection with the Chapter 11 bankruptcy plan confirmed by Oakwood Homes Corporation, brought an action against Credit Suisse for negligence, breach of fiduciary duty, and breach of implied contract. Prior to Oakwood’s bankruptcy, Credit Suisse acted as lead underwriter, warehouse lender, and advisor on securitization matters for Oakwood. The plaintiff contended that the securitization and other financial transactions used by Oakwood upon the advice of and with the assistance of Credit Suisse were “value destroying and unreasonable” and contributed to diminution in the value of its assets. In essence, plaintiff argued a variant of “deepening insolvency” (without calling it that): that once Oakwood became insolvent, it should have ceased engaging in securitization transactions and liquidated, and that by delaying the inevitable liquidation, the continued securitizations caused Oakwood to lose value before it ultimately liquidated.

In determining that the defense of in pari delicto barred these claims, the Court analyzed Oakwood’s own participation in the alleged wrongdoing. Finding that the decisions to engage in the securitization and warehouse transactions were made by Oakwood as part of its corporate strategy, the Court went on to consider whether the conduct of Credit Suisse amounted to that of a corporate insider such that the defense of in pari delicto would be unavailable. The Court rejected the notion that the superior bargaining power held by Credit Suisse due to its knowledge of non-public information and Oakwood’s precarious financial position was sufficient to establish insider status. Of significance to the Court was evidence that, although Credit Suisse gave advice to and structured the transactions for Oakwood, the decisions to enter into such transactions were informed decisions made by Oakwood’s board and management. As a result, the Court found insufficient evidence to establish that Credit Suisse exercised control over Oakwood’s decisions.

In light of the current pressures on the securitization industry, this decision provides useful guidance to banks and other financial institutions and serves as a gentle reminder of the importance of maintaining arms-length relationships with clients seeking financial services and advice in today’s market.

The opinion also should serve as some comfort to financial institutions and others faced with claims by a bankruptcy trustee seeking a “deep pocket” that courts will closely scrutinize, in pre-trial motions, whether to bar such claims because the board, rather than the financial institution, was the decision maker.