As I have reported over the past several years, Delaware courts, including the Delaware Supreme Court, have addressed the nature of a director’s fiduciary duties when a Delaware corporation is insolvent or in the "zone of insolvency," most notably with the 2007 decision in North American Catholic Educational Programming, Inc. v. Gheewalla, et al., 930 A.2d 92 (Del. 2007). To read that decision, click on the case name in the prior sentence. For a discussion of that case, you may find this earlier post of interest: "Delaware Supreme Court Addresses, For The First Time, Whether Creditors Can Sue Directors For Breach Of Fiduciary Duty When The Corporation Is Insolvent Or In The Zone Of Insolvency."
California courts, however, did not have occasion to consider fiduciary duty issues involving directors of financially distressed California corporations until recently. In a decision called Berg & Berg Enterprises, LLC v. Boyle, the California Court of Appeal for the Sixth Appellate District has provided directors of California corporations facing potential insolvency with meaningful guidance on the scope of their fiduciary duties, including the application of California’s "trust fund doctrine."
- Click on the link in this sentence for a complete discussion of this California decision and the guidance it gives directors of distressed California corporations, which we recently published at the Bankruptcy & Restructuring group of Cooley Godward Kronish LLP.
- Follow the link this sentence for a copy of the Berg & Berg Enterprises decision itself.
It will be interesting to see whether other California courts, perhaps eventually including the California Supreme Court, will have opportunity in the months and years ahead to consider these important issues to directors and officers.