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

February 2018

Publication| Bankruptcy & Corporate Restructuring

Consider this situation: A corporation isactively considering bankruptcy, yet it neverthelessasks counsel whether it can dividend$7 million to Series B stockholders. Counseladvises against the dividend, but the board of directorsapproves it anyway, and the company pays itonly six weeks before filing a bankruptcy case.

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

The result seems to be almost unthinkable.Dividends paid even years before a bankruptcy filingtypically are viewed with suspicion. The bankruptcyhere was not a huge surprise: The companywas in a two-year death spiral from the highlypublic Deepwater Horizon environmental disaster.Nor was this solely a liquidity crisis where, withthe breathing spell of chapter 11, creditors wouldbe paid in full, so dividends did not affect creditorrecoveries. To the contrary, the company was insuch bad financial shape that it could not restructurein chapter 11 and converted its bankruptcy case to achapter 7 liquidation. How could claims concerningthe approving of dividends on the eve of bankruptcynot even survive a motion to dismiss?

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

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