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or Trenwick America were insolvent at the time of any of the challenged transactions, the

premise for the Litigation Trust’s fiduciary duty claim does not exist.75

75 In an incisive article and a thoughtful blog comment, Professor Bainbridge is critical of j u r i s p r u d e n c e t h a t e x p r e s s e s t h e v i e w t h a t d i r e c t o r s o w e f i d u c i a r y d u t i e s t o t h e c o r p o r a t i o n i t s e l f ,

rather than a particular constituency of the corporation.

Stephen M. Bainbridge, (forthcoming 2006),

http://ssrn.com/abstract=832504; Duties of Directors of Insolvent Corporations, http://www.professorbainbridge.com/2006/07/duties_of_direc.html (July 26, 2006). When a c o r p o r a t i o n i s s o l v e n t , P r o f e s s o r B a i n b r i d g e b e l i e v e s t h a t f i d u c i a r y d u t i e s a r e o w e d b y t h e directors to the stockholders. Bainbridge, , at 5-6. When a corporation is insolvent, he

accepts the notion that the directors owe their fiduciary duties to the creditors, because the

creditors are now the residual claimants.

at 15. That does not mean, however, that Professor

Bainbridge believes that all claims against directors of insolvent corporations are direct claims

belonging to the creditors individually. To the contrary, he recognizes that if the directors of an insolvent firm commit a breach of fiduciary duty reducing the value of the firm, any claim belongs to the entity and that creditors would benefit from the recovery derivatively, based on their claim on the firm’s assets. at 38; Duties of Directors of Insolvent Corporations. Supporting his view that owing fiduciary duties to a firm is an unhelpful concept, Professor Bainbridge relies heavily on the idea of the corporation as a nexus of contracts to which it is silly

to think duties can be owed.


, at 21 n.94, n.96 (citing to HENRY

HANSMANN, THE OWNERSHIP OF ENTERPRISE 18 (1996) and Stephen M. Bainbridge,

, 88 IOWA L. REV. 1 (2002)). His concern is that telling directors that they owe fiduciary duties to a “nexus of contracts” provides no concrete objective against which to measure their conduct; thus, he favors clarity that the directors’ obligation is to maximize returns for the corporation’s residual claimants, who in the case of insolvency, are its creditors.

Although Professor Bainbridge’s views regarding the substantive effect the question of insolvency should have on directors’ ability to rely upon the business judgment rule and on the application of the derivative/direct claim distinction is identical to mine — short answer: none

  • I am not as critical as he of references to the directors owing duties to the insolvent

corporation itself.


, 2006 WL 1731277, *5-*7 (Bankr. D. Del.

June 23, 2006) (“[T]he fact of insolvency does not change the primary object of the directors’ duties, which is the firm itself.”). That expression might be short-hand that elides the rich academic debates about what corporations are but the expression seems to be used to advance an end that Bainbridge supports. Even when a corporation is solvent, the notion that the directors should pursue the best interests of the equityholders does not prevent them from making a myriad of judgments about how generous or stingy to be to other corporate constituencies in areas where there is no precise legal obligation to those constituencies. I do not understand this complexity to diminish when a firm is insolvent simply because the residual claimants are now creditors. Indeed, it is not immediately apparent to me why, if the common law were to begin to dole out in insolvency special, non-contractual “ward” rights to certain constituencies that transformed in a material way the obligations of directors, creditors would be the primary object


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