The Delaware Supreme Court affirmed on May 18, 2007, the Delaware Chancery Court’s dismissal of a breach of fiduciary duty suit brought by a creditor against certain directors of Clearwire Holdings Inc. North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, C.A. No. 1456-N (May 18, 2007).
Whether a creditor may assert a direct claim against corporate directors for breach of fiduciary duty when the corporation is insolvent or in the so-called “zone of insolvency.”
Rationale: In declining to extend a creditor’s standing to include the right to bring direct claims against directors for harm caused by a breach of fiduciary duty, the court reasoned that “while shareholders rely on directors acting as fiduciaries to protect their interest, creditors are afforded protection through contractual agreements, fraud and fraudulent conveyance law, implied covenants of good faith and fair dealing, bankruptcy law, general commercial law and other sources of creditor rights.” (Opinion, at 15 (citing Production Res. Group v. NCT Group, Inc., 863 A.2d 772, 790 (Del. Ch. 2004).) Creditors of an insolvent corporation still may, however, bring direct non-fiduciary claims. (Opinion, at 23-24.)
Significance of Ruling: As a corollary to its ruling, the court expressly held that creditors do have standing to bring derivative1 actions for breach of fiduciary duty when a corporation is insolvent, but was silent on this point with respect to a corporation approaching insolvency (i.e., one operating in the zone of insolvency). The implication: creditors do not have standing to bring a derivative action against directors of a solvent corporation for breach of fiduciary duty. To the extent that directors of a solvent entity breach their fiduciary duty, “those duties may be enforced by its shareholders, who have standing to bring derivative actions on behalf of the corporation because they are the ultimate beneficiaries of the corporation’s growth and increased value.” (Opinion, at 20.) This implication casts doubt on Delaware Chancery Court holdings in Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004) and Credit Lyonnais Bank Nederland N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch. 12/30/91), among others, all of which held that directors may owe a fiduciary duty to creditors when the corporation is operating in the “zone of insolvency.”