Duties owed by Directors of Insolvent Entities

Occasionally reading one case sends me off in an unexpected direction to another case and then another.  Such was the case, so to speak, recently.

While skimming a run-of-the-mill breach of fiduciary duty case I eventually ended up reading North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A 2d 92 (Del. 2007) and Trenwick America Litigation Trust v. Ernst & Young et al, 906 A 2d (Del. Ch. 2006).

North American Catholic reminds us that when a corporation is solvent the shareholders may enforce the directors' fiduciary duties owed to them and the corporation by derivative action.  When a corporation is insolvent the creditors "take the place of the shareholders" and have standing to bring a derivative claim against the directors for breaches of fiduciary duty.  North American Catholic, 930 A 2d at 101.  This case stands for the additional proposition that creditors do not have a direct claim against directors for breaches of fiduciary duty.  Id. at 94.

Trenwick nips in the bud another cause of action creditors have tried to advance lately; the claim of "deepening insolvency."  Trenwick, 906 A 2d at 174.  As Judge Strine put it in a delightful, if lengthy, 36 page opinion, "Put simply, under Delaware law, 'deepening insolvency' is no more of a cause of action when a firm is insolvent than a cause of action for 'shallowing profitability' would be when a firm is solvent."  Id.

I recommend both opinions to those interested in the impact of insolvency on the duties of directors.

-Marc Ward