ABI Commission to Study the Reform of Chapter 11
IV. Proposed Recommendations: Commencing the Case 25
The Commissioners also discussed the potential conflicts in duties that could result from federalizing the fiduciary duties of directors, officers, and similar managing persons. For example, most state laws provide that directors, officers, and similar managing persons owe a fiduciary duty to the company, which is enforceable by its shareholders when the company is solvent and also by its creditors when it is insolvent.92 Some courts have suggested that this allocation of rights between shareholders and creditors shifts as a company approaches insolvency (i.e., the “zone of insolvency”), but many courts tend to maintain the status quo until the company becomes insolvent.93 If the Bankruptcy Code imposed separate duties on a debtor in possession’s directors, officers, or similar managing persons, those duties might differ from the duties owed by those individuals under state law. Although federal preemption principles might resolve such conflicts from a legal perspective, the conflict could cause substantial confusion and uncertainty for directors, officers, and similar managing persons. The Commission agreed that state law adequately governs fiduciary duties and should continue to govern the fiduciary duties of directors, officers, and similar managing persons in bankruptcy.
92 See United States v. Byrum, 408 U.S. 125, 138 (1972) (“[T]he directors . . . have a fiduciary duty to promote the interests of the corporation.”); N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 99 (Del. 2007) (“It is well established that the directors owe their fiduciary obligations to the corporation and its shareholders.”); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 179 (Del. 1986) (“[T]he directors owe fiduciary duties of care and loyalty to the corporation and its shareholders.”); Woodward v. Andersen, 627 N.W.2d 742, 751 (Neb. 2001) (“An officer or director of a corporation . . . occupies a fiduciary relation toward the corporation and its stockholders, and is treated by the courts as a trustee.”). See, e.g., N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) (“When a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.”); Quadrant Structured Prods. Co. v. Vertin, 2014 Del. Ch. LEXIS 193, at *58 (Del. Ch. Oct. 1, 2014) (“In a solvent corporation, the standard of conduct for directors requires that they strive in good faith and on an informed basis to maximize the value of the corporation for the benefit of its residual claimants, the ultimate beneficiaries of the firm’s value. In a solvent corporation, the residual claimants are the stockholders. Consequently, in a solvent corporation, the standard of conduct requires that directors seek prudently, loyally, and in good faith to manage the business of a corporation for the benefit of its shareholder owners.”); In re Bear Stearns Litig., 23 Misc. 3d 447, 475 (N.Y. Sup. Ct. 2008) (“The directors still have the ‘duty to maximize the value of the insolvent corporation for the benefit of those having an interest in it’ and are required to ‘engage in vigorous, good faith negotiations with individual creditors for the benefit of the corporation.’”) (citing N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 103 (Del. 2007)); Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919) (“A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.”). See also James Gadsden, Enforcement of Directors’ Fiduciary Duties in the Vicinity of Insolvency, Am. Bankr. Inst. J., Feb. 2005, at 16 (“The corporation laws of all states agree that directors owe fiduciary duties to the corporation.”); Royce de R. Barondes, Fiduciary Duties of Officers and Directors of Distressed Corporations, 7 Geo. Mason L. Rev. 45, 63 (1998) (explaining that when the corporation reaches insolvency, “[t]he majority rule, and the law in Delaware, is that . . . a board’s duties are owed to the creditors of the enterprise”); Bruce A. Markell, The Folly of Representing Insolvent Corporations: Examining Lawyer Liability and Ethical Issues Involved in Extending Fiduciary Duties to Creditors, 6 Norton J. Bankr. L. & Prac. 403, 404 (1997) (“Indeed, [when a company is solvent], most states impose fiduciary duties of loyalty and care on the directors and officers in favor of shareholders.”); Ramesh K.S. Rao, et al., Fiduciary Duty a la Lyonnais: An Economic Perspective on Corporate Governance in a Financially-Distressed Firm, 22 J. Corp. L. 53, 64 (1996) (explaining that “[a]s the firm slides into insolvency,” fiduciary responsibilities are “extended to creditors in order to ensure adequate protection of their interests”); Jeffrey N. Gordon, Corporations, Markets, and Courts, 91 Colum. L. Rev. 1931, 1977 (1991) (shareholder wealth maximization is “the bedrock of corporate law”). But see Margaret M. Blair & Lynn A. Stout, Specific Investment: Explaining Anomalies in Corporate Law, 31 J. Corp. L. 719, 731 (2006) (“There is very little in corporate law that supports [shareholder wealth maximization] and much that cuts against it.”). 93 See, e.g., Berg & Berg Enters., LLC v. Boyle, 100 Cal. Rptr. 3d 875, 894 (Ct. App. 2009) (“[W]e hold that there is no fiduciary duty prescribed under California law that is owed to creditors by directors of a corporation solely by virtue of its operating in the ‘zone’ or ‘vicinity’ of insolvency.”) (using the trust fund doctrine to determine the directors’ fiduciary duties); N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007). But see Geiger & Peters, Inc. v. Berghoff, 854 N.E.2d 842, 850 (Ind. Ct. App. 2006) (“Indiana does not adhere to the ‘trust fund’ theory. . . .”); St. James Capital Corp. v. Pallet Recycling Assocs. of N. Am., Inc., 589 N.W.2d 511, 516 (Minn. Ct. App. 1999) (“‘Corporate property is not held in trust’. . . . [C]reditors have the right to be repaid, [but] it is equally true that they do not have the right, absent an agreement to the contrary, to dictate what course of action the directors and officers of a corporation shall take in managing the company. . . .”) (citation omitted).