## Facts

- Harbinger Capital Partners Master Fund I, Ltd. beneficially owned about 38.6% of Granite Broadcasting Corp.’s 12.75% cumulative exchangeable preferred stock.
- The preferred stock’s certificate of designation required redemption on April 1, 2009 at a fixed price plus accumulated dividends, but only “to the extent of funds legally available.”
- If Granite failed to redeem, the preferred holders’ exclusive remedy was expanded voting power to elect designated directors; the terms did not provide a direct right to sue for payment.
- Granite experienced financial distress and agreed to sell its Detroit and San Francisco television stations to special-purpose buyer entities for about $150 million, including non-compete provisions for five years.
- Harbinger sued to enjoin the sales, alleging (i) the sales violated covenants in Granite’s senior note indenture and (ii) the sales were fraudulent transfers harming present and future creditors.
- Harbinger asserted it had creditor standing because GAAP (FAS 150) treated mandatorily redeemable preferred stock as debt and Granite’s financial statements classified the preferred stock as debt.
- Granite and the buyer entities moved to dismiss for lack of standing, arguing Harbinger was an equity holder rather than a creditor.

## Issues

1. Whether a holder of mandatorily redeemable preferred stock has standing as a “creditor” to assert fraudulent transfer claims when the instrument provides no enforceable right to payment and limits remedies to voting rights upon non-redemption.
2. Whether GAAP/FAS 150 accounting treatment (and issuer financial statement classification) can convert preferred stockholders into legal creditors for purposes of fraudulent conveyance and related creditor remedies.
3. Whether a preferred stockholder may assert claims based on alleged violations of a senior note indenture to which it is not a party or beneficiary, or alternatively proceed on a derivative theory without satisfying demand requirements.

## Decision

- The court granted defendants’ motion to dismiss for lack of standing.
- Harbinger was not a creditor for purposes of fraudulent conveyance law and could not pursue creditor-based claims to enjoin the asset sales.
- GAAP/FAS 150 balance-sheet classification of the preferred stock as “debt” did not change Harbinger’s legal status or confer creditor standing.
- Harbinger lacked standing to enforce the senior note indenture because it was neither a party nor an intended third-party beneficiary.
- Any derivative theory was not properly pleaded and did not satisfy demand or demand-futility pleading requirements.

## Legal Principles

- Creditor standing under fraudulent transfer law depends on legal rights—especially an enforceable right to payment—not on financial accounting classifications.
- Mandatorily redeemable preferred stock does not create creditor status where redemption is contingent on legally available funds and non-redemption yields only control-based remedies (e.g., altered voting rights) rather than a monetary claim.
- GAAP rules and issuer financial statements serve reporting functions and do not alter contractual rights or recharacterize equity as debt for purposes of creditor remedies.
- A non-party to an indenture generally cannot sue for alleged covenant breaches absent intended third-party beneficiary status.
- A plaintiff attempting to proceed derivatively must satisfy applicable demand or demand-futility pleading standards and clearly plead a derivative claim.

## Conclusion

The court dismissed an effort by a preferred stockholder to block asset sales on creditor theories, holding that GAAP’s treatment of mandatorily redeemable preferred stock as “debt” does not confer legal creditor status where the governing instruments provide no enforceable right to payment and limit remedies to voting control.


Harbinger Cap. Partners Master Fund I, Ltd. v. Granite Broad. Corp., 906 A.2d 218 (Del. Ch. 2006)