Law.com Subscribers SAVE 30%
Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.
Production Resources Decision
In the current environment of increasing scrutiny of corporate behavior after corporate scandals such as Enron and WorldCom, lawsuits brought by creditors for breach of the fiduciary duties owed to them by officers and directors have increased significantly. The suits are taking center stage on the dockets of bankruptcy courts and state courts alike, and receive much public attention across the country. Against this backdrop, the Delaware Court of Chancery's November opinion in Production Resources Group, L.L.C. v. NCT Group, Inc., __ A.2d __ (Del. Ch. 2004); C.A. No. 114-N, 2004 Del. Ch. LEXIS 174 (Del. Ch. Nov.) is likely the most important pronouncement on the nature of fiduciary duty claims brought by creditors since the Court of Chancery's 1991 opinion in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., C.A. No. 12150, 1991 WL 277613 (Del. Ch. Dec. 30, 1991). Certain to be widely cited, this lengthy and scholarly opinion also is likely to be misconstrued by many bankruptcy practitioners as signaling a retreat from settled law that directors and officers of insolvent Delaware corporations owe fiduciary duties to creditors. This article demonstrates that such a reading of Production Resources is incorrect. We also discuss the holding of Production Resources that directors of a Delaware corporation can be exculpated from personal liability pursuant to ' 102(b)(7) of the Delaware General Corporation Law even in suits commenced by creditors. This holding, which has already been followed by the United States District Court for the District of Delaware in Continuing Creditors' Comm. of Star Telecommunications Inc. v. Edgecomb, No. Civ. A. 03-278-KAJ, 2004 WL 2980736 (D. Del. Dec. 21, 2004) is the first such holding in Delaware and is contrary to cases from other jurisdictions.
Fiduciary Duties Owed to Creditors and Standing to Maintain Suit
Ordinarily, a corporation's directors and officers only owe fiduciary duties to the company's stockholders (Production Resources, 2004 Del. Ch. LEXIS 174, at *40-41). However, it is well established that once a Delaware corporation becomes insolvent, regardless of whether the corporation has filed for bankruptcy protection, the fiduciary duties of the corporation's directors expand and allow them to take into account the interests of the company's creditors as well as the interests of stockholders. See Production Resources, 2004 Del. Ch. LEXIS 174, at *50; Credit Lyonnais, 1991 WL 277613, at *34; Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784, 787 (Del. Ch. 1992). Moreover, in its famous passage in Credit Lyonnais, the Court of Chancery stated that even if a company is not insolvent, directors can consider the interests of creditors if a company is in the “zone” or the “vicinity” of insolvency (Credit Lyonnais, 1991 WL 277613, at *34). It should be noted that some cases and commentators improperly state or imply that upon insolvency, directors and officers of a corporation only owe fiduciary duties to creditors, not stockholders. See, e.g., Federal Deposit Insurance Corp. v. Sea Pines Co., 692 F.2d 973, 976-977 (4th Cir. 1982); Millner RB: What Does It Mean for Directors of Financially Troubled Corporations to Have Fiduciary Duties to Creditors? 9 J. Bankr. L. & Prac. 201 (Jan./Feb. 2000). That has never been the law in Delaware even before Production Resources. Rather, under Delaware law, the officers' and directors' duties expand upon insolvency to include the interests of stockholders and creditors.
This premium content is locked for Entertainment Law & Finance subscribers only
ENJOY UNLIMITED ACCESS TO THE SINGLE SOURCE OF OBJECTIVE LEGAL ANALYSIS, PRACTICAL INSIGHTS, AND NEWS IN ENTERTAINMENT LAW.
- Stay current on the latest information, rulings, regulations, and trends
- Includes practical, must-have information on copyrights, royalties, AI, and more
- Tap into expert guidance from top entertainment lawyers and experts
Already a have an account? Sign In Now Log In Now
For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473
Major Differences In UK, U.S. Copyright Laws
This article highlights how copyright law in the United Kingdom differs from U.S. copyright law, and points out differences that may be crucial to entertainment and media businesses familiar with U.S law that are interested in operating in the United Kingdom or under UK law. The article also briefly addresses contrasts in UK and U.S. trademark law.
Strategy vs. Tactics: Two Sides of a Difficult Coin
With each successive large-scale cyber attack, it is slowly becoming clear that ransomware attacks are targeting the critical infrastructure of the most powerful country on the planet. Understanding the strategy, and tactics of our opponents, as well as the strategy and the tactics we implement as a response are vital to victory.
The Article 8 Opt In
The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.
Removing Restrictive Covenants In New York
In Rockwell v. Despart, the New York Supreme Court, Third Department, recently revisited a recurring question: When may a landowner seek judicial removal of a covenant restricting use of her land?
The Benefits of Blockchain for e-Discovery and Data Preservation
As businesses across various industries increasingly adopt blockchain, it will become a critical source of discoverable electronically stored information. The potential benefits of blockchain for e-discovery and data preservation are substantial, making it an area of growing interest and importance.