Bankruptcy

Delaware Chancery Court Holds Directors Did Not Breach Fiduciary Duty To Creditors By Filing Chapter 11 Petition

By Scott Riddle

From the Delaware Litigation Blog comes the case of  Nelson v. Emerson, 2008 WL 1961150 (Del. Ch., May 6, 2008) (the opinion is linked from the Delaware Litigation Blog), where the one major secured creditor alleged the directors of the corporation breached their fiduciary duty to the creditor by filing a Chapter 11 petition and paying themselves excessive compensation.

The same claims had apparently been rejected by the Bankruptcy Court in In Re Repository Tech, Inc., 363 B.R. 868 (Bankr. N.D. Ill 2007) (read this opinion here). 

The problem with Nelson's claims is that he is seeking a second chance to win the same game.Nelson made the same arguments he raises in this case to the Bankruptcy Court for the Northern District of Illinois when he sought to have Repository's bankruptcy filing dismissed as being filed in bad faith or, alternatively, due to gross mismanagement of the Company. The Bankruptcy Court, despite dismissing Repository from Bankruptcy because it could not reorganize
successfully, explicitly found that “the bankruptcy filing cannot be held to be in bad faith” and that there had not been “any mismanagement of [Repository's] assets and business.” Satisfied with the dismissal of  Repository's bankruptcy, but unhappy with the Bankruptcy Court's ruling that the bankruptcy had not been brought in bad faith, Nelson appealed to the District Court for the Northern District of Illinois and
argued that the Bankruptcy Court's findings on the bad faith issue were dicta. In essence, Nelson was attempting to preserve his ability to present his bad
faith argument to another tribunal in the hope that a new court might find the argument more substantial. The District Court rejected Nelson's argument, ruling
that the bad faith determination was an essential part of the Bankruptcy Court's holding because Nelson himself had advanced the argument that the bankruptcy filing was made in bad faith.

Francis Pileggi's more thorough review of the opinion is found here. 

Full post as published by Georgia Bankruptcy Blog on May 10, 2008 (boomark / email).