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Fiduciary Duties Owed to Subsidiary
On June 23, 2006, the jurisdiction that invented the 'zone of insolvency' delivered its latest lesson on the fiduciary duties of directors and officers of insolvent companies. The Delaware Bankruptcy Court, in In re Scott Acquisition Corp., ___ B.R. at ____, 2006 WL 1731277 (Bankr. D.Del. 2006), ruled that directors and officers of insolvent subsidiary companies owe fiduciary duties to both its creditors and the subsidiary itself. Before this, leading cases on this issue held that fiduciary duties were owed only to creditors and the single-shareholder, parent companies. Though the decision stands on some firm legal ground, it is sure to create more uncertainty and doubt in the boardroom.
Background
Scott Acquisition Corp. and Scotty's, Inc., its wholly owed subsidiary, were retailers of building materials and home improvement products for the do-it-yourself home-improvement market. Scotty's and its subsidiary filed for bankruptcy protection on Sept. 10, 2004; their case was later converted to Chapter 7, and a Trustee was appointed. The court's opinion arises out of the Trustee's lawsuit against the officers and directors of Scotty's, Inc., the subsidiary. In his complaint, the Trustee alleged that the directors and officers breached their duties of loyalty and care in connection with Scotty's pre-bankruptcy workout with its lenders.
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