It’s off to Baltimore tomorrow for the University of Maryland conference on fiduciary duties in the "zone of insolvency. " Looks like a good group, including bloggers Gordon Smith and Steve Bainbridge. I’ll be presenting my paper, Business Judgment Rule in Good and Bad Times, co-authored with former student Kelli Alces. Here’s the abstract (will be posted sometime after the conference):
Despite many cases with seemingly contrary dicta, corporate directors’ duties do not change around insolvency. Rather, directors have a fiduciary duty to the corporation, just as they have at other times, that is based on the duty of loyalty and the business judgment rule. Under the business judgment rule, the directors have broad discretion not only to decide what actions to take, but in whose interests to act. The creditors may in some circumstances sue to enforce this duty, but the fact that the creditors are suing does not affect either the duty or the remedy. The creditors individually also may sue the corporation for breach of specific contractual, tort and statutory duties, particularly on account of fraudulent conveyances. But these cases do not amount to a general shift in directors’ fiduciary duties to the corporation around insolvency.
Although this is pretty straightforward (and, indeed, Gordon’s only giving me five minutes to summarize it), I will elaborate briefly here: there are no special fiduciary duties near insolvency. Period.
So why does this seem to be so confusing? Because law professors have used this as a way to work out their favorite theories of the corporation, and judges like to throw around “fiduciary duties” in dicta even if these duties have nothing to do with the case.
The article applies two of my papers, Are Partners Fiduciaries? 2005 Illinois Law Review 209 (the link is to a draft), and Accounting and Responsibility in Corporate Governance, forthcoming Notre Dame Law Review. The first article presents a narrow view of fiduciary duties that fits the holdings of the cases. The second shows that the business judgment rule basically eliminates most issues about director duties to non-shareholder stakeholders. The present paper combines the insights from those papers with an analysis of several “zone of insolvency” cases.
I should have more to say from and after the conference.
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