While at Zuckerman Spaeder, Mr. Macauley was the lead attorney for several former substantial holders of preferred stock in PHP Healthcare Corporation ("PHP"). Relatively soon after repurchasing a significant number of its preferred and common stock shares, PHP commenced a chapter 11 case and ultimately liquidated its assets. PHP's liquidating plan created PHP Liquidating LLC, which then sought to recover the PHP funds used to redeem the shares from the former stock owners. The U.S. District Court for the District of Delaware dismissed the suit, and the plaintiff appealed to the U.S. Court of Appeals for the Third Circuit.
With respect to the former holders of preferred stock, the Third Circuit addressed whether the plaintiff could assert a cause of action - either as successor to PHP or as assignee of individual creditors - to recover amounts paid by PHP to redeem the stock on the basis that Delaware corporate law prohibits redemption of stock by a corporation when its capital is impaired.
After easily determining that the claim was a general one not available to the plaintiff by individual assignment, the Third Circuit reached the issue addressed by Mr. Macauley at oral argument: whether the plaintiff could assert the claim as a successor to PHP. The Court acknowledged that Section 174 of the Delaware General Corporation Law, which addresses liability of directors for illegal stock redemptions, might conceivably provide for a cause of action against former shareholders. Nevertheless, the Court noted that any such cause of action would require shareholder knowledge of the illegal redemption, but nothing in the record suggested that the former preferred shareholders had any such knowledge. Accordingly, the Third Circuit affirmed the dismissal as to the former preferred shareholders.
The Third Circuit's written opinion is unpublished. Click here for a copy of the opinion from the Court's website.