Liability of Directors of Chapter 11 Debtors in Possession: 'Don't Look Back - Something May Be Gaining on You'
American Bankruptcy Law Journal, Vol. 68, No. 155, 1994
Posted: 25 Jul 2006
This article addresses a series of important questions involving the fiduciary obligations and personal liability of bankruptcy trustees and directors of debtors in possession. The article begins by noting the uncertainty of lawyers representing directors of chapter 11 debtors. These lawyers must advise individual directors on their possible liability for decision making post petition. The article continues with a review of basic corporate governance of companies preceding and following the filing of a chapter 11 petition.
The article focuses on the content of the fiduciary obligations of care and loyalty of directors of the bankrupt companies. Supreme Court opinions indicate that the fiduciary obligations of the debtor in possession are to be mirrored on the obligations of the trustee in bankruptcy. As a result, the article argues that the business judgment rule, as it is commonly applied to non bankrupt companies, is not appropriately applied to directors of chapter 11 companies. Although directors should be given broad discretion, it is not equivalent to the discretion they may have had prior to filing the petition.
The article evaluates cases involving trustees in bankruptcy in the course of reaching conclusions regarding the obligations of directors of the debtor in possession. In addition, the article suggests that trustees in bankruptcy and directors of chapter 11 companies ought to be subjected to a duty of impartiality. This latter duty is necessary because chapter 11 creates a host of beneficiaries of the bankruptcy trust, creating a set of conflicting interests for trustees and directors. The article demonstrates how trustee-based fiduciary obligations would operate in the course of decision making by directors of the debtor in possession. In particular, the article hypothesizes a chapter 11 airline in which directors ponder significant changes to the debtor's business model.
Finally, the article parses through the chaotic set of federal opinions concerning the personal liability of bankruptcy trustees, and directors of chapter 11 debtors. The article argues that the distinction drawn by some courts between breaches of the duty of care (for which trustees are rarely liable) and breaches of the duty of loyalty (for which trustees are usually liable) is incorrect. A breach of a fiduciary obligation to a beneficiary of the bankruptcy trust (creditors, et. al) should result in liability. Directors of debtor in possession should be treated in the same manner as trustees.
The author continued his treatment of the duties and liability of trustees and directors of chapter 11 companies in two additional articles: Finding the Still Small Voice: The Liability of Bankruptcy Trustees and the Work of the National Bankruptcy Review Commission, 102 Dick. L. Rev. 703 (1998), and Unexpected Gifts of Chapter 11: The Breach of a Director's Duty of Loyalty Following Plan Confirmation and the Post Confirmation Jurisdiction of Bankruptcy Courts, 72 Am. Bankr. L. J. 303 (1998).
Keywords: director, directors, Debtors in possession, personal, liability, trustee, business judgment rule, fiduciary, obligations, care, loyalty, corporate governance, bankruptcy, chapter 11, impartiality
Suggested Citation: Suggested Citation