Page 109 - Bankruptcy and Reorganization Services

and liabilities were approximately equal and where, with traditional financing, there appeared a
prospect for viability. fn 75

Breach of Fiduciary Duty and Insolvency

A recent Illinois bankruptcy case, In re John Netzel, fn 76 discussed, in the context of financial frauds
perpetrated upon debtors, the fiduciary duties owed to shareholders and creditors by a company’s offic-
ers and directors. In its decision, the court discussed whether an individual creditor may bring an action
for alleged breach of fiduciary duty against an officer or director for claims specific to an individual
creditor, or whether such a claim can only be brought by a trustee in bankruptcy, on behalf of the gen-
eral creditor body. fn 77 The court noted that, generally, fiduciary duty is owed to the shareholders and
not the creditors and that a creditor may not sue an officer or director for a breach of fiduciary duty.
However, insolvency creates an exception to the general rule because, when it occurs, the fiduciary owes
a duty to the general creditor body as well as the shareholders. Even so, the court found that "individual
creditors lack standing to bring a direct action against directors of an insolvent corporation for breach of
fiduciary duty." fn 78

Is the "Zone Of Insolvency" Relevant to Valuation Analysts?

A topic that has received much attention in the courts since the mid-2000s is the so-called "zone of in-
solvency" and related claims brought against a debtor’s officers and directors. Basically, a deepening in-
solvency claim is brought against officers and directors when their actions caused an already insolvent
company to incur additional losses that drove the debtor company deeper into insolvency and further
damaged the company. A significantly debated question dealt with whether deepening insolvency was
its own independent cause of action, a theory of damages, or neither. This matter was addressed in Del-
aware when the Delaware Supreme Court affirmed the Delaware Chancery Court’s decision in Tren-
wick, fn 79 holding that Delaware did not recognize deepening insolvency as an independent cause of ac-
tion. However, Trenwick did not bar traditional claims for breach of fiduciary duty. In In re Brown
Schools, a Delaware bankruptcy case that involved a bankruptcy trustee’s claims against a board for al-
leged self-dealing, the bankruptcy court held that deepening insolvency was a viable theory of damages
for a claim based on breach of the duty of loyalty. fn 80

fn 75 See Production Resources Group, LLC, v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004).

fn 76 In re John H. Netzel et al., 442 B.R. 896 (Bankr. N.D. Ill. 2011).

fn 77 Kurt M. Carlson, "Breach of Fiduciary Duty in the Context of Insolvency: Can Individual Creditors Seek Recovery?" National
Law Review, April 22, 2011, www.natlawreview.com/article/breach-fiduciary-duty-context-insolvency-can-individual-creditors-seek-
recovery.

fn 78 In re John H. Netzel.

fn 79 See Trenwick Am. Litig. Trust v. Billet, No. 495, 2006, 2007 Del. LEXIS 357 (Del. Aug. 14, 2007), aff’g Trenwick Am. Litig.
Trust v. Ernst & Young L.L.P., 906 A.2d. 168 (Del. Ch. 2006).

fn 80 See McCown De Leeuw & Co., Inc. v. Miller (In re Brown Schools), No. 06-50861, B.R. 2008 WL 1849790 (Bankr. D. Del.
April 24, 2008).

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