In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 2007 WL 1453705 (Del. May 18, 2007), the Delaware Supreme Court, in a case of first impression, provided some clarity on the controversial issue of whether and to what extent creditors have the ability to assert fiduciary duty claims against directors.

For some participants in the debt and credit markets, insider trading risks seem like a problem for someone else. There is some statistical basis for that assumption; the law of insider trading has been developed largely through cases involving the equity markets. There is no basis, however, for a sense of immunity. The Securities and Exchange Commission’s recent settlement involving Barclays Bank PLC and Steven J. Landzberg, a former proprietary trader for Barclays’ U.S.

Directors and officers of Delaware corporations face no liability to corporate creditors from direct claims for breach of fiduciary duty, under the Delaware Supreme Court’s recent ruling in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, (May 18, 2007) (“North American Catholic”).

The Court of Appeals for the Fourth Circuit recently held that a bankruptcy court did not have jurisdiction to hear a chapter 11 debtor's breach of contract and tortious interference claims, which the debtor filed after its chapter 11 plan had been confirmed and substantially consummated. Valley Historic Limited Partnership v. Bank of New York, No. 06-1571,___ F.3d ___, WL 1439734 (4th Cir. May 17, 2007). This decision delineates the limits of bankruptcy court's jurisdiction over claims filed by the debtor after plan confirmation.

Background

In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, the Delaware Supreme Court, in a case of first impression, addressed the ability of creditors to assert claims for breach of fiduciary duty against directors of a Delaware corporation that is insolvent or operating within the zone of insolvency.

The U.S. Court of Appeals for the Eleventh Circuit has held that the bankruptcy court’s exclusive jurisdiction to dispose of estate property did not preclude the enforcement of an arbitration provision.

On May 18, 2007, in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla (“Gheewalla”),1 the Delaware Supreme Court affirmed the Delaware Court of Chancery’s decision2 in which the Court of Chancery precluded creditors from filing direct suits for breach of fiduciary duty against directors of corporations that are either in the zone of insolvency or are actually insolvent. With its decision, the Delaware Supreme Court has limited creditors’ ability to sue directors for breach of fiduciary duty.

In re Foamex Int’l, Inc., et al.,1 the United States Bankruptcy Court for the District of Delaware held that the damage cap contained in section 502(b)(6) of the Bankruptcy Code applies not only to rental payments, but also to damages from the breach of any lease covenants, including maintenance and repair obligations. In doing so, the Court reduced a specific landlord’s claim and recovery by more than $700,000 and established precedent that could diminish the claims of landlords in other cases pending and filed in Delaware.

Background

In Diamond Z Trailer, Inc. v. JZ, LLC (In re JZ, LLC), No. 07-1011 (9th Cir. B.A.P., June 18, 2007), the Ninth Circuit Bankruptcy Appellate Panel affirmed a Bankruptcy Court decision holding that an unscheduled executory contract rides through the bankruptcy if not assumed or rejected during the bankruptcy. Further, a debtor has standing to sue for a breach of that executory contract when the breach occurred after the closure of the bankruptcy case.

The U.S. Court of Appeals for the First Circuit has held that a debtor’s interest in its liquor license constitutes property of the estate pursuant to section 541 of the Bankruptcy Code.

The First Circuit further held that the debtor’s rejection of its lease ended the debtor’s contractual right to continued use of its liquor license, and left the landlord with ordinary remedies for breach of contract—such as specific performance to obtain recovery of the license. See In re Ground Round, Inc. (Abboud v. Ground Round), 482 F.3d 15 (1st Cir. 2007).