In COR Route 5 Co. v. Penn Traffic Co.1 (In re Penn Traffic Co), the United States Court of Appeals for the Second Circuit held that a non-debtor party to an executory contract may not, by fulfilling its contractual obligations post-petition, deprive the debtor of its ability to reject an executory contract.

For the third time in as many years, the Delaware Chancery Court has handed down an important ruling interpreting the interaction between federal bankruptcy law and Delaware corporate law. The thorny question this time was whether a bankruptcy court’s determination that the directors of a corporation acted in good faith when they authorized a chapter 11 filing precluded a subsequent claim that the directors breached their fiduciary duties by doing so. The Delaware Chancery Court concluded that it did, ruling in Nelson v.

The ability of a chapter 11 debtor-in-possession (“DIP”) or bankruptcy trustee to assume or reject unexpired leases or contracts that are “executory” as of the bankruptcy filing date is one of the most important entitlements created by the Bankruptcy Code. It allows a DIP to rid itself of onerous contracts and to preserve contracts that can either benefit its reorganized business or be assigned to generate value for the bankruptcy estate and/or fund distributions to creditors under a chapter 11 plan.

The United States Bankruptcy Court for the District of Delaware on May 30, 2008, issued a memorandum opinion in which it refused to dismiss claims of breach of fiduciary duty against directors and officers of a company who approved the sale of the company’s assets on the eve of its filing for bankruptcy protection. In issuing its opinion inIn re Bridgeport Holdings Inc., the court provided some guidelines for directors and officers, particularly during challenging economic times.

The Fifth Circuit recently issued an opinion addressing an important issue with respect to the preservation of a debtor's causes of action in a Chapter 11 plan of reorganization. The Fifth Circuit held that a reorganized debtor lacked standing to pursue certain common-law claims that were based on the pre-confirmation management of the bankruptcy estate's assets.

Two recent Federal appeals court decisions — one issued by the Fifth, the other by the Second Circuit — illustrate the dangers of careless drafting of bankruptcy and reorganization plans. In the Fifth Circuit decision, a drafting error prevented a company reorganized under Chapter 11 from suing the administrators of its property during its bankruptcy for fraud, breach of fiduciary duty and negligence, thereby potentially depriving its creditors of bankruptcy assets.

Landlord's Rights when a Tenant files:

In a recent decision of the United States Court of Appeals for the Eighth Circuit, the court reversed a ruling against a D&O insurer in a coverage action arising from a bankruptcy case. In re: SRC Holding Corp., Nos. 07-1327/1335 (8th Cir. Oct. 27, 2008). Click here to read the Eighth Circuit's decision.

Two recent decisions by the Delaware Supreme Court clarify the fiduciary duties owed to creditors by directors of Delaware corporations that are insolvent or operating in the zone of insolvency. First, 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.

Plaintiff, the trustee of the Chapter 7 estate of Security Asset Capital Corporation (SACC), a corporate debtor, brought an action against the debtor’s officers and directors, alleging that they breached their fiduciary duties by failing to commence Chapter 7 liquidation once SACC became insolvent.