Plaintiff, the trustee of the Chapter 7 estate of Security Asset Capital Corporation (SACC), a corporate debtor, brought an action against the debtor’s officers and directors, alleging that they breached their fiduciary duties by failing to commence Chapter 7 liquidation once SACC became insolvent. Plaintiffs asserted that defendants continued to operated SACC even after it was hopelessly insolvent and without business prospects in order to continue to receive compensation and consulting fees from SACC’s remaining assets and to oppose a potential SEC enforcement action against certain individual defendants.
The court held that the defendants did not breach their fiduciary duties. While recognizing that such a duty applies to creditors once a company is in the “zone of insolvency,” the court nevertheless ruled that the officers and directors of an insolvent corporation are not obligated, as a matter of law, to liquidate the corporation for the benefit of unsecured creditors and may, in accordance with the normal application of the “business judgment rule,” pursue risky restructuring plans in good faith attempts to regain solvency.
The court ruled that the defendants’ pursuit of a more risky and, ultimately, unsuccessful strategy than an immediate Chapter 7 liquidation was reasonable. In support of its ruling, the court found that the “defendants operated SACC professionally and responsibly, that they properly sought and relied on the advice of counsel, and that they acted with due regard for the interest of all SACC’s constituencies.” The court further found that there was no evidence that defendants’ compensation was inappropriate or that they were otherwise motivated by self-interest to the detriment of SACC. (Security Asset Capital Corporation v. Tenney, No. 04-32889, 2008 WL 4811394 (Bankr. D.Minn. Nov. 5, 2008))