Francis Pileggi offers Mark Saltzburg's summary of a speech by Delaware Supreme Court Chief Justice Myron Steele, in which Steele notes:
... that the Delaware Supreme Court had just heard argument in the Trenwick America Litigation Trust litigation that may result in a decision on whether creditors may bring a cause of action for violation of fiduciary duty where a company deepens its insolvency in a way that further damages creditors after any residual interest of shareholders is out of the picture. Typically, fiduciary duties are only owed by directors to shareholders and not to creditors. Steele noted, however, that in an earlier decision by former Delaware Court of Chancery Chancellor William Allen in the Credit Lyonnais case, the court commented that directors may owe creditors a fiduciary duty where a company is in the vicinity of insolvency.
One hopes that Steele doesn't let the Supreme Court make the same mistake Allen made in Credit Lyonnais. As I explained in Much Ado about Little? Directors' Fiduciary Duties in the Vicinity of Insolvency:
Where the contract between a corporation and one of its creditors is silent on some question, should the law invoke fiduciary duties as a gap filler? In general, the law has declined to do so. There is some precedent, however, for the proposition that directors of a corporation owe fiduciary duties to bondholders and other creditors once the firm is in the vicinity of insolvency.
Courts embracing the zone of insolvency doctrine have characterized the duties of directors as running to the corporate entity rather than any individual constituency. This approach is incoherent in practice and insupportable in theory. Courts should focus on whether the board has an obligation to give sole concern to the interests of a specific constituency of the corporation.
Concern that shareholders will gamble with the creditors' money is the principal argument for imposing a duty on the board running to creditors when the corporation is in the vicinity of insolvency. On close examination, however, this argument proves unpersuasive. It is director and manager opportunism, rather than strategic behavior by shareholders that is the real concern. Because bondholders and other creditors are better able to protect themselves against that risk than are shareholders, there is no justification for imposing such a duty.
This article also argues that the zone debate is much ado about very little. The only cases in which the zone of insolvency debate matters are those to which the business judgment rule does not apply, shareholder and creditor interests conflict, and a recovery could go to directly to those who have standing to sue. In those cases, as this Article explains, there is a strong policy argument that creditors should be limited to whatever rights the contract provides or might be inferred from the implied covenant of good faith.
Vice Chancellor Strine was kind enough to consider my argument (which he called "incisive" -ahem!) in the Chancery Court opinion.