## Facts

- Color Tile, Inc. and affiliates operated a floor-covering retail business and carried over $300 million in unsecured debt to banks and trade creditors.
- In 1992, Color Tile issued preferred stock to replace about $48 million in outstanding notes as part of a restructuring; the preferred stock paid dividends at a lower rate than the notes’ interest.
- Beginning in 1994, Color Tile paid regular dividends on the preferred stock, totaling more than $10 million to preferred shareholders.
- Color Tile later filed Chapter 11 bankruptcy in the District of Delaware.
- The Official Committee of Unsecured Creditors (acting for the estates) sued to avoid and recover the prepetition dividend payments as constructive fraudulent transfers under the Delaware Fraudulent Transfer Act (DFTA), asserted through 11 U.S.C. § 544(b).
- The Committee alleged Color Tile received no reasonably equivalent value for the dividends and was insolvent (or became insolvent) or was left with unreasonably small capital when the dividends were paid.
- Dividend recipients argued creditor remedies were limited to Delaware corporate law—particularly DGCL § 174 governing unlawful dividends—rather than the DFTA.

## Issues

1. Whether prepetition dividend payments by a Delaware corporation may be challenged as fraudulent transfers under the DFTA (via § 544(b)), or whether DGCL § 174 supplies the exclusive creditor remedy for unlawful dividends.
2. Whether the bankruptcy estate may pursue avoidance and recovery under the DFTA directly from shareholder recipients of dividends, rather than being limited to director-focused remedies under DGCL § 174.

## Decision

- The court held the DFTA applies to dividend payments and permits creditors, and a bankruptcy estate proceeding under § 544(b), to challenge dividends as fraudulent transfers.
- The court rejected the argument that DGCL § 174 is an exclusive remedy that displaces fraudulent-transfer law for dividend payments.
- The Committee’s DFTA avoidance and recovery claims against the dividend recipients were allowed to proceed.

## Legal Principles

- Dividend payments constitute “transfers” under the DFTA’s broad definition because they involve parting with corporate assets.
- DGCL § 174 and the DFTA address different concerns and may operate concurrently: § 174 focuses on internal corporate-law limits and related liability, while the DFTA provides creditor protection against value-depleting transfers made without reasonably equivalent value when the debtor is insolvent or inadequately capitalized.
- A bankruptcy estate may use 11 U.S.C. § 544(b) to assert state-law fraudulent-transfer claims that an actual unsecured creditor could have asserted outside bankruptcy.
- Payments to equity holders are not insulated from constructive fraudulent-transfer scrutiny merely because they are labeled dividends; liability depends on statutory elements such as lack of reasonably equivalent value and insolvency or inadequate capitalization.

## Conclusion

The court permitted the bankruptcy estate to pursue DFTA constructive fraudulent-transfer claims to avoid and recover prepetition preferred-stock dividends from the shareholder recipients, holding that DGCL § 174 does not preempt or limit creditors to an unlawful-dividend remedy.


In re Color Tile, Inc., No. 96-360-SLR, 2000 WL 152129 (D. Del. Feb. 9, 2000)