Some of the plaintiff's strongest evidence of the disloyalty of the conflicted directors concerns Copeland's actions during the negotiation of the first loan, and the plaintiff argues that that loan initiated the events which led to the desperation sale of the company to Arris. Apart from the board's refusal to sell the company to ADC Telecommunications, moreover—an act squarely governed by Maryland law and exempted from liability by that law because it was concluded before reincorporation was resolved upon, let alone accomplished—most of the disloyal acts of which the plaintiff complains occurred while Cadant was a Delaware corporation, and most that occurred earlier occurred after the board had decided that Delaware law made a better fit with Cadant than Maryland law did.
We cannot apply both states' law to the first bridge loan, and so we fall back (as did the court in the only factually similar case we've found, Demoulas v. E.2d 159, 169 (Mass.1997)) to general choice of law principles, see Restatement, supra, §§ 309, 6, and ask which state's law governing the duties of directors the parties would have expected to govern Cadant's internal affairs in the critical period, and which state had the greater regulatory interest in the corporation's internal affairs then. So Delaware had a greater regulatory interest than Maryland in the governance of Cadant's internal affairs in the critical period in which the events giving rise to this lawsuit occurred.
The first point—that the burden of proof on the issue of causation was on the defendants—is counterintuitive.
Ordinarily the burden of proving causation is on the plaintiff, since without an injury caused by the defendant there is no tort no matter how wrongful the defendant's behavior was. Mc Neil Consumer Healthcare, 615 F.3d 861, 865–66 (7th Cir.2010).
It was later that year that the board proposed and the shareholders approved the reincorporation of Cadant in Delaware, effective January 1, 2001. The defendants attribute this to the deflating—beginning in the spring of 2000 and continuing throughout the year and into the next year—of the dot-com bubble of the late 1990s. The million bridge loan to Cadant was for only 90 days, at an annual interest rate of 10 percent; it also gave the lenders warrants (never exercised) to buy common stock of Cadant. Morgan then made a second bridge loan, in May, this one for million, again negotiated on Cadant's behalf by Copeland. She sued the railroad; it would have been unthinkable for her to sue the scale's manufacturer, even though if heavy metal scales did not exist she would not have been injured.
The suit involves decisions by Cadant's board made both when Cadant was incorporated in Maryland and when it was reincorporated in Delaware. We'll return to the question of what caused Cadant's financial distress, but whatever the cause the company needed fresh investment. The terms of the loan were negotiated on Cadant's behalf by Copeland. Cadant ran through the entire loan, which had been made in January 2001, within a few months. The loan agreement provided that in the event that Cadant was liquidated the lenders would be entitled to be paid twice the outstanding principal of the loan plus any accrued but unpaid interest on it; as a result, little if anything would be left for the shareholders. No one would think the scale's manufacturer should be liable, because no one would think that tort law should try to encourage manufacturers of scales to take steps to prevent the kind of accident that befell Mrs. The railroad was a more plausible defendant; its conductor had tugged the passenger aboard while the train was already moving.
The negotiations leading up to the first bridge loan took place in the fall of 2000 and the loan was approved by Cadant's board on January 10, 2001—nine days after Cadant's reincorporation in Delaware took effect. The board would have assumed that, certainly from that day forward, the duties of the directors relating to both that loan and the second bridge loan would be governed by Delaware law.They brought this case initially as a freestanding suit in federal district court. The first was that there was insufficient evidence of proximate cause to allow a reasonable jury to render a verdict for the plaintiff, and the second was that there was likewise insufficient evidence of a breach of fiduciary duty. (Ordinarily the issue of duty would precede that of cause, but no matter.)The term “proximate cause” is pervasive in American tort law, but that doesn't mean it's well understood. The plaintiff had bought a building in Houston in reliance on what he claimed was the defendant's misrepresentation of its value.But in an earlier decision in this long-running litigation, Kennedy v. A common definition is that there must be proof of “some direct relation between the injury asserted and the injurious conduct alleged.” Hemi Group, LLC v. Had it not been for the misrepresentation he would not have bought it.There may have been a crossover effect; the collapse of stock values, and the recession (mild though it was) that accompanied it, reduced the amount of venture capital available for technology companies generally, and so may have made it difficult for Cadant to obtain needed investment on reasonable terms.Our point is only that the effect of the bubble's bursting on Cadant was a jury issue, not an issue that the judge could resolve because the effect was incontestable.
Illinois choice of law principles, which govern this case because it was filed in Illinois, makes the law applicable to a suit against a director for breach of fiduciary duty that of the state of incorporation. The board considered a proposal from a group of Chicago investors and a joint proposal from Venrock and J. Morgan, and eventually decided on an $11 million loan from Venrock and J. The board of directors had grown to seven members, of whom four, including Copeland, were employees of Venrock or J. The disinterested directors of Cadant (the directors who had no affiliation with Venrock or J. Morgan) who voted for the loan were engineers without financial acumen, and because they didn't think to retain their own financial advisor they were at the mercy of the financial advice they received from Copeland and the other conflicted directors. But “direct” is no more illuminating than “proximate .” Both are metaphors rather than definitions. But how could he have foreseen that his act would have triggered an explosion, as distinct from a possible injury to the boarder?