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<i>Trenwick America</i>

By Luis Salazar
October 30, 2006

The issue of directors' and officers' liability for deepening insolvency has been the source of a significant number of judicial opinions over the past few years with little consensus being reached on the viability of these claims. This may have changed however. Despite the Delaware Bankruptcy Court's recent decision, In re: Scott Acquisition Corp., 2006 WL 1732277 (Bankr. D. Del. 2006), which ruled that directors and officers of insolvent subsidiary companies owe fiduciary duties to both its creditors and the subsidiary itself. The Delaware Chancery Court, Vice Chancellor Leo E. Strine presiding, subsequently and resoundingly waded into the breach of fiduciary duty and zone of insolvency arena with its decision in Trenwick America Litigation Trust v. Ernst &Young, L.L.P., et al., 906 A. 2d 168 (Del. Ch. 2006).

This decision strongly upholds the business-judgment protection for directors and officers who appropriately exercise their duties, even in the face of subsequent and complete business failure, and eviscerates deepening insolvency as a viable cause of action under Delaware law, continuing the recent case law trend in this direction.

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