In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, the Delaware Supreme Court settled a nagging question about corporate directors’ duties and liabilities to creditors, holding that “the creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against the corporation’s directors.”  The court explained:

[D]irectors owe their fiduciary obligations to the corporation and its shareholders. . . .  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.

The Court therefore rejected Vice Chancellor Strine‘s conclusion in Production Resources Group v. NCT Group, Inc. that creditors of an insolvent companies may bring direct claims against directors for breach of fiduciary duties.  However, the Court concluded that “the creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties.”

In reaching these conclusions, the Court’s position was closer to the one espoused by me and and Kelli Alces in our article, Directors’ Duties in Failing Firms, than to the theory espoused by Steve Bainbridge in Much Ado About Little? Directors’ Fiduciary Duties in the Vicinity of Insolvency.

Because I think that the differences between the papers help in understanding the Gheewalla opinion, I think it’s worth laying out our respective positions.

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