Recently, the First District of the Illinois Appellate Court reversed the trial court's dismissal of an action for breach of fiduciary duty because it found that corporate directors and officers, in certain circumstances, owe a fiduciary duty to the corporation's creditors. This decision clarified an earlier First District opinion relating to officers and directors' duties to creditors and may provide additional protection to creditors from unscrupulous corporations which attempt to hide assets in order to avoid payment. Corporations and its officers and directors should take certain steps to minimize the liability the entity's directors and officers may be exposed to with respect to its creditors, even where guaranties are not executed by the officers and directors.
Workforce Solutions v. The Services Group, LLC, consisted of the consolidated appeal of two actions by the plaintiff and judgment creditor, Workforce Solutions, to collect on a judgment obtained via a default judgment on a breach of contract action. In one of the underlying cases, the plaintiff-creditor filed a complaint directly against the debtor corporation and its directors and officers (hereinafter the "Officers"). Among other things, the plaintiff-creditor alleged that the Officers breached their fiduciary duty to the plaintiff by failing to manage the corporate assets for the benefit of the plaintiff-creditor. The plaintiff premised this argument on a number of questionable transactions between a complex "matrix of entities," which were controlled by the Officers. Pursuant to section 2-615 of the Illinois Code of Civil Procedure, the defendants successfully moved the trial court to dismiss the breach of fiduciary count on the basis that the plaintiff could not establish proximate cause. The plaintiff appealed the dismissal.
On appeal, the First District reversed the trial court's dismissal of the breach of fiduciary count and remanded the case for further proceedings. In reaching this result, the Court acknowledged its holding in an earlier case that generally, "directors do not owe creditors duties beyond the relevant contractual terms." In that earlier case, the Court found that Delaware recognizes an exception to the general rule in situations of fraud, insolvency, or where a statute had been violated. In Workforce Solutions, the First District held that the exceptions it had previously recognized which exist in Delaware are equally viable in Illinois. Based on the Court's finding that in certain situations corporate officers and directors could owe a fiduciary duty to corporate creditors, the Court then considered whether the plaintiff-creditor had sufficiently alleged an action for breach of fiduciary duty. The Court found that the plaintiff-creditor had alleged each of the elements of a breach of fiduciary duty action: (1) that the Officers had a duty to manage corporate assets for the creditor's benefit due to the corporation's insolvency; (2) that the Officers breached that duty by making fraudulent transfers to related entities under their control; and that (3) due to the fraudulent transfers, the plaintiff-creditor was unable to collect on its judgment. Accordingly, the Court found that the trial court erred in dismissing the breach of fiduciary duty action, and the appellate court reversed the dismissal and remanded the case for further proceedings.
The First District's holding in Workforce Solutions v. The Services Group, LLC, is relevant to both corporate debtors and corporate creditors. Turning first to business creditors, the decision is significant because it may provide additional protection to business creditors. In recognizing that Illinois allows an exception to the general rule that corporate officers do not owe a fiduciary duty to corporate creditors, the Court expanded the remedies available to creditors of delinquent debtors. Conversely, the Court made clear that officers and directors may owe a very limited duty in certain situations to corporate creditors to manage corporate assets for the benefit of creditors.