During this time of economic upheaval amidst the COVID-19 pandemic, many corporate borrowers are faced with the inability to service debt obligations, and creditors may seek to hold corporate officers and directors accountable as a result. In these uncertain times, it is wise to review the fiduciary duties of corporate directors and officers and the effects of financial distress on such duties.[1] The following Q&A provides guidance on this issue from a Delaware law perspective, as Delaware is the most commonly cited jurisdiction for corporate governance.

As American individuals, employers, and governments are implementing various restrictions from social distancing to quarantines to reduce the rate of new COVID-19 infections, each of these decisions results in an increasingly negative impact on the American economy. Even with the recent financial aid package passed by Congress, with greater credit constraints and a heightened sensitivity to weak consumer demand, small businesses are among those hit the hardest by COVID-19 restrictions.

The United States Supreme Court (the “Court”) recently issued a long-awaited decision in Czyzewski v. Jevic Holding Corp. (“Jevic”), which limits the use of “structured dismissals” in Chapter 11 bankruptcy cases, requiring structured dismissals pursuant to which final distributions are made to comply with the Bankruptcy Code’s priority scheme, or the consent of all affected parties to be obtained.1

What is a Structured Dismissal?

As electronic discovery has become more prevalent and voluminous, national standards for the preservation of evidence have evolved dramatically in the past decade. Through a proliferation of electronic discovery orders involving discovery compliance, courts have addressed when the duty to preserve evidence arises, signifying a party’s duty to issue a “litigation hold.” Courts have not answered, however, whether a party can withhold documents generated before issuing a litigation hold on the basis of work product protection.