Delaware has long been the bellwether for law concerning the duties that corporate officers and directors owe to a company and its creditors, and Florida courts often look to Delaware cases and compelling authority in evaluating disputes alleging breaches of fiduciary duties by directors or officers. A recent significant Delaware opinion has helped clarify what duties officers and directors owe to whom and when. In Quadrant Structured Products Co. v. Vertin, 2015 WL 2062115 *1 (Del. Ch. May 4, 2015), the court established a standard for determining when creditors of a company may pursue a claim against the company’s directors or officers. In Delaware, officers and directors generally owe fiduciary duties only to the companies they serve and those companies’ shareholders, not the companies’ creditors, and such creditors only have a right to sue the company’s officers and directors on behalf of the company when the company becomes insolvent. In Quadrant, the court addressed the circumstance of when a company becomes insolvent, at which point creditors have the right to derivatively sue the officers and directors for breaches of fiduciary duty, and then later returns to solvency, while the fiduciary duty litigation is pending. The court found that a return to solvency does not divest creditors of the right to continue to pursue litigation commenced while the company was insolvent. The court also clarified that “insolvency” for purposes of creditor derivative standing is determined by “the balance sheet test,” which may from GAAP accounting principles by examining whether the company’s liabilities exceed the reasonable market value of the company’s assets, as opposed to the “book value” of those assets. Further, the court recognized that in certain circumstances where a company teeters between solvency and insolvency, both shareholders and creditors may have the simultaneous right to pursue breach of fiduciary duty claims.
Potentially as important, the court reaffirmed an evolution in Delaware fiduciary duty law. Prior to a landmark 2007 Delaware Supreme Court case, North American Catholic Education Programming Foundation, Inc. v. Gheewalla, 930 A. 2d 92 (Del. 2007), the generally prevailing theory was that officer and director duties shifted from the company and its shareholders to the company’s creditors when the company entered the vicinity or zone of insolvency. It was also generally understood that creditors could assert direct, as opposed to derivative claims against officers and directors, and that once a company was insolvent, directors owed a duty to both the company and its shareholders and the company’s shareholders. Further, officers and directors had the burden of establishing that decisions were entirely fair to various constituencies, and could be held liable for continuing to operate a company despite its “deepening insolvency.” However, the Gheewalla decision signaled the occurrence of a significant shift regarding these principles. Post-Gheewalla, as confirmed in the Quadrant decision, Delaware courts no longer consider the “zone of insolvency,” and fiduciary duties shift only upon the actual insolvency of a company. Quadrant also helped confirm that creditors never have the right to bring direct actions against officer and directors, but only the right to pursue such claims derivatively on behalf of the company, and that officers and directors do not owe any special duties to creditors. The decision further clarifies that Delaware does not recognize the theory of “deepening insolvency”, and officers and directors cannot be held liable simply because their decision to continue to operate a company once insolvent ultimately leads to greater losses for creditors.
Due to the historic deference shown to Delaware fiduciary duty law, the Quadrant decision is sure to be cited and relied upon by Florida courts, and, as such, is instructive regarding the duties officers and directors of Florida companies owe to the companies they serve, the companies’ shareholders, and potentially to their creditors as well.