Richards Layton & Finger

Was ATP Oil Correctly Decided? Fifth Circuit Affirms Dismissal of Challenges to Dividends Declared on Eve of Bankruptcy

February 2018

Consider this situation: A corporation is actively considering bankruptcy, yet it nevertheless asks counsel whether it can dividend $7 million to Series B stockholders. Counsel advises against the dividend, but the board of directors approves it anyway, and the company pays it only six weeks before filing a bankruptcy case.

This sounds like a bad idea, right? Surprisingly, perhaps not. The Fifth Circuit Court of Appeals recently affirmed dismissal of all counts of a complaint based on this fact pattern in its recent opinion in Tow v. Bulmahn (In re ATP Oil & Gas Corp.).

The result seems to be almost unthinkable. Dividends paid even years before a bankruptcy filing typically are viewed with suspicion. The bankruptcy here was not a huge surprise: The company was in a two-year death spiral from the highly public Deepwater Horizon environmental disaster. Nor was this solely a liquidity crisis where, with the breathing spell of chapter 11, creditors would be paid in full, so dividends did not affect creditor recoveries. To the contrary, the company was in such bad financial shape that it could not restructure in chapter 11 and converted its bankruptcy case to a chapter 7 liquidation. How could claims concerning the approving of dividends on the eve of bankruptcy not even survive a motion to dismiss?

This article briefly sets forth the facts of the case, then explores what seems (on its face) to be the causes of action that might have provided the easiest path to claims that should have survived dismissal, but appear not to have been raised. Finally, the article explores and critiques the court’s holding that the dividends did not state a claim for breach of fiduciary duty.