Litigation

Chancery Rejects Extension of Deadline for Claims v. Dissolved Corporation's Shareholder

By Francis G. X. Pileggi, Esq.

In Virgin Islands v. Goldman, Sachs & Co., 2007 WL 4480823 (Del. Ch., Dec. 20, 2007), read opinion here,  the Chancery Court, in this epic decision of over 100 pages in its original format, recounts a generation-long procedural history in connection with a textbook-length discussion of the public policy considerations related to the time period within which one must, or should, bring a claim against a dissolved corporation or its shareholders and directors. DGCL Section 278 provides for a 3-year statute of limitations from the date of dissolution. The court rejected the concept that a trust should be impressed on specific assets received by a corporation or a successor entity after dissolution, as means of extending the period during which claims may be pursued.

Bottom line: DGCL Section 278 requires that claims be brought within 3 years of a corporation's dissolution. The court recognizes an opportunity for abuse when a company is insolvent or nearing insolvency and attempts to use Section 278 in an inequitable manner to evade creditors, but the court--in the course of rejecting the "trust fund doctrine" that might extend the 3 year statute--reasoned that there are several existing means by which creditors are protected from such potential abuses (in addition to the 3-year period), such as the following:

1) individuals may be personally accountable for tortious actions taken as officers and directors (see footnote 153);

2) the Fraudulent Conveyance Act may apply to dividends or distributions received by shareholders (see footnote 155);

3) DGCL Section 174 addresses liability for payment of illegal dividends; and

4) DGCL Section 162(b) gives an insolvent company's creditors a direct action against shareholders who have not fully paid for their shares--provided that creditors first satisfy the prerequisites of DGCL Section 325 which requires that they first obtain a judgment against the corporation which cannot be satisfied.

Although not directly applicable to the facts of this case, the court also noted the "cognitive dissonance" of  the amendments in 1987 to the DGCL Sections 281 and 282 that provide a detailed procedure for dissolving a corporation. That process provides for judicial involvement and allows for "smoking out claims" and paying them off according to statutory priorities, and then creating reserves for contingent liabilities. Nor is it inconsistent to make all distributions within one year in order to minimize federal tax liabilities, and  then to create a liquidating trust to assume corporate liabilities for the remaining period.

The court recognized the open question of what happens to a claim that  does not arise until after the 3 year statute of limitations expires. There is much more good stuff in this magnum opus, but the foregoing is enough for a blog post, at least for now.

Full post as published by Delaware Corporate and Commercial Litigation Blog on December 28, 2007 (boomark / email).