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Summary
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 Fiduciary
duties can shift when company
is near insolvency
- Directors can be required to consider interests
of creditors
- Never directly addressed by Delaware Supreme
Court
Concept
has been invoked by bank regulators
in context of failing banks
- Who argue that a failing bank shouldn't
"swing for the fences" when it's close to failing
- Directors should instead consider interests of
creditors
- Which will primarily be the FDIC, as deposit
insurer
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Notable Cases
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 Production Resources v NCT Group
Del Ch 2004
- Opinion
- Limits application of zone of insolvency
theory
- More of a shield for director decisions when they
take less risk on behalf of equity holders when company is near insolvency
- Duty is to corporate entity, not to creditors
directly
- Doesn't support direct claims against directors
- Zone of insolvency claims are subject to DGCL §102(b)(7)
exculpatory provisions
- 863 A2d 772
- Commentary
Credit
Lyonnais v Pathe Del Ch 1991
SEC_CODE_REF_0090001192884
- Chancellor Allen
- "[a]t least where a corporation is operating in
the vicinity of insolvency, a board of directors is not merely the
agent of the residue risk bearers, but owes its duty to the corporate
enterprise."
- Footnote 55: "The directors will recognize that in managing
the business affairs of a solvent corporation in the vicinity of insolvency,
circumstances may arise when the right (both the efficient and the fair) course
to follow for the corporation may diverge from the choice that the stockholders
(or the creditors, or the employees, or any single group interested in the
corporation) would make if
given the opportunity to act."
- Full title: Credit
Lyonnais Bank Nederland, N V v Pathe Communications Corp No 12150 1991 Del
Ch LEXIS 215 Del Ch 1991
Adlerstein
v Wertheimer Del Ch 2002
- "While it is true that a board of directors of an
insolvent corporation or one operating in the vicinity of insolvency has
fiduciary duties to creditors and others as well as to its stockholders, it is
not true that our law countenances,
permits, or requires directors to conduct the affairs of an insolvent
corporation in a manner that is inconsistent with principles of fairness or in
breach of duties owed to the stockholders."
- No. 19101, 2002 Del Ch LEXIS 13, at *35
Del Ch Jan 25, 2002
Harff
v Kerkorian Del Ch 1974
- aff'd in part rev'd in part on other grounds 347 A2d 133
LaSalle
National Bank v Perelman D Del 2000 Brandt v Hicks
Muse & Co
In re Healthco Int'l 208 BR 288 Steinberg
v Kendig In re Ben Franklin Retail Stores
US Brptcy ND IL ED 1998
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Related Topics
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