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firm. As a thoughtful federal decision recognizes, Chapter 11 of the Bankruptcy Code

expresses a societal recognition that an insolvent corporation’s creditors (and society as a

whole) may benefit if the corporation continues to conduct operations in the hope of

turning things around.103

If the board of an insolvent corporation, acting with due diligence and good faith,

pursues a business strategy that it believes will increase the corporation’s value, but that

also involves the incurrence of additional debt, it does not become a guarantor of that

strategy’s success. That the strategy results in continued insolvency and an even more

insolvent entity does not in itself give rise to a cause of action. Rather, in such a scenario

the directors are protected by the business judgment rule. To conclude otherwise would

fundamentally transform Delaware law.



, 316 B.R. 451, 460 (Bankr.

S.D.N.Y. 2004) (“The fiduciaries of an insolvent business might well conclude that the company

should continue to operate in order to maximize its “long-term wealth creating capacity,” or more generally, its enterprise value. In fact, chapter 11 is based on the accepted notion that a business is worth more to everyone alive than dead.”). 465 U.S. 513, 528 (1984) (“The fundamental purpose of reorganization is to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic



, 2003 WL 22989669, at *8 (Bankr. S.D.N.Y. Dec.

11, 2003) (“It has never been the law in the United States that directors are not afforded significant discretion as to whether an insolvent company can ‘work out’ its problems or should

file a bankruptcy petition.”);

, 225

B.R. 646, 655 (Bankr. N.D. Ill. 1998) (noting there is no duty “to liquidate and pay creditors when the corporation is near insolvency, provided that in the directors’ informed, good faith

judgment there is an alternative”), 2000); H.R. REP. NO. 95-595, at 220 (1977),

, 2000 WL 28266 (N.D. Ill. 1978 U.S.C.C.A.N. 1978, 5963,

6179 (“The premise of a business reorganization is that assets that are used for production in the industry for which they are designed are more valuable than those same assets sold for scrap . . . It is more economically efficient to reorganize than to liquidate, because it preserves jobs and assets.”).


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