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For the sake of completeness, it is useful to consider the last-gasp theory that the

Litigation Trust most stressed at oral argument. This last-gasp theory concedes that

certain aspects of the complaint are just silly. Namely, it concedes that Trenwick’s board

could, as an ordinary matter, use the assets of Trenwick America to help procure

financing for an acquisition strategy that Trenwick, as Trenwick America’s sole

stockholder, believed would be profitable for the overall Trenwick empire. What

of that (difficult to legitimize) act of judicial invention. Better for society that those who manage them see them as something more importantly human, as societal institutions freighted with the goal of responsible wealth creation. In the insolvency context, directors have, in my view, no less discretion, for example, to decide to accord respectful and considerate treatment to the company’s workers (who as Bainbridge admits, may have made more of a non-diversifiable risk with less opportunity to use the tool of contract as a shield) if they believe that will improve the firm’s value and the return to its creditors.

In other words, insolvency does not suddenly turn directors into mere collection agents. Rather, the creditors become the enforcement agents of fiduciary duties because the corporation’s wallet cannot handle the legal obligations owed. Theft from the firm remains theft from the firm, even if the firm as seen by academics is a legal fiction. In other words, the fiduciary duty tool is transferred to the creditors when the firm is insolvent in aid of the creditor’s contract rights. Because, by contract, the creditors have the right to benefit from the firm’s operations until they are fully repaid, it is they who have an interest in ensuring that the directors comply with their traditional fiduciary duties of loyalty and care. Any wrongful self-dealing, for example, injures creditors as a class by reducing the assets of the firm available to satisfy creditors.

To ensure that the directors manage the enterprise to maximize its value so that the firm can meet

as many of its obligations to creditors as possible — the new goal of the firm — the jurisprudence refers to the directors as owing fiduciary duties to the firm and its creditors.


, 2006 WL 1731277, at *5;


., 1991 WL 277613, at *34 & 34 n.55 (Del. Ch. Dec. 30, 2001) (“At least

where a corporation is operating in the vicinity of insolvency, a board of directors is not merely the agent of the residue risk bearers, but owes its duty to the corporate enterprise.”). The judicial decisions indicating that directors owe fiduciary duties to the firm when it is insolvent are not, in my view, at odds with Bainbridge’s fundamental perspective; indeed, they seem to me more a judicial method of attempting to reinforce the idea that the business judgment rule protects the directors of solvent, barely solvent, and insolvent corporations, and that the creditors of an insolvent firm have no greater right to challenge a disinterested, good faith business decision than the stockholders of a solvent firm. To this point, many firm life cycles have involved an emergence from bankruptcy with the firms’ former creditors emerging in the form of the firms’

new equityholders.


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