In light of the possibility that several hundred FDIC-insured banks and thrifts may fail in the next two- to three-year period, many clients and friends of the firm have requested a summary of the legal concerns that arise for officers and directors immediately following the seizure of an institution by the FDIC, as well as steps that may be taken to be better prepared before a failure.

As the automotive industry continues to restructure, whether through self-liquidation or government intervention, suppliers will inevitably be confronted with many of the same issues prevalent 4-5 years ago, including a supplier’s obligation to continue to provide goods post-petition and the supplier’s rights to adequate assurance as a condition to such shipment.

In an area of the law that continues to be active, the federal bankruptcy court in Delaware has once again issued a detailed ruling on the actions of directors and officers leading up to a company's insolvency. Among the notable conclusions are: (1) failure to conduct due diligence before obtaining a loan may support a claim for breach of duty of care; and (2) there is no cause of action for "improvident lending" in Delaware or New Jersey. Official Comm. of Unsecured Creditors of Fedders N. Am., Inc. v. Goldman Sachs Credit Partners L.P. (In re Fedders N. Am., Inc.), 405 B.R.

Directors of California corporations have, for years, struggled to understand the scope of their fiduciary duties when a corporation is insolvent versus when a corporation is in the “zone of insolvency.” While other states (particularly Delaware) have provided some recent guidance in this area[1], the California Court of Appeal recently provided some much needed clarification – including providing comfort to the decision making processes of directors who are considering various alternatives when a corporation enters into a zone of insolvency.

On February 10th, the US Court of Appeals for the Fifth Circuit addressed, in one opinion, two separate appeals arising from a company's Chapter 11 bankruptcy. At the outset, the Court held that a severance payment to the firm's former CEO was a fraudulent transfer. The former CEO was an insider, since he was still CEO when the severance agreement was signed, even though he was not employed when he received the actual payment. The Court held further that the company did not receive equivalent value for the severance payment.

Traditionally, when a business begins to flounder and take on enough metaphorical water to sink, the officers and directors can find themselves in a fiduciary relationship with the company's creditors. However, in Wisconsin, an opinion was recently published by an appellate court which determined that no fiduciary duty attaches until such time as the sinking company is both insolvent and not a "going concern". In other words, it is only when this ship has sunk that a fiduciary duty will attach.

In this case, the Court of Chancery found that it would not impose or order remedies, whether legal or equitable, for the plaintiff’s claims pertaining to membership in, and wrongful dissolution of, American Asset Recovery, LLC, a Delaware limited liability company (the “Company”), because the plaintiff did not prove the extent of the remedies to which he was entitled.

IN THESE TURBULENT economic times, frantic calls from clients doing business with counterparties facing financial distress or bankruptcy is an increasingly common occurrence.

On October 29, 2009, the California Court of Appeal, Sixth District, in Berg & Berg Enterprises, LLC v. Boyle, et al., unequivocally ruled that, under California law, directors of either an insolvent corporation or a corporation in the more elusively defined “zone of insolvency” do not owe a fiduciary duty of care or loyalty to creditors. In so ruling, California joins Delaware in clarifying directors’ duties when the corporation is insolvent or in the zone of insolvency.

Background

This article was featured in the March 2010 issue of The Independent Counselor.

The role of credit counseling agencies in assisting consumers in financial distress has received a lot of positive government and media attention. Before the economic crisis, the public most often heard about credit counseling only in the context of broader discussions about consumer debt and repayment alternatives or bankruptcy.