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1 J. Bus. & Tech. L. 431 (2006-2007)
Why a Fiduciary Duty Shift to Creditors of Insolvent Business Entities Is Incorrect as a Matter of Theory and Practice

handle is hein.journals/jobtela1 and id is 443 raw text is: J. WILLIAM CALLISON* Why a Fiduciary Duty Shift to Creditors of Insolvent Business Entities is Incorrect as a Matter of Theory and Practice IT IS A MANTRA THAT DIRECTORS OWE FIDUCIARY DUTIES of care and loyalty to the corporation and its shareholders. The duty of care requires directors to exercise appropriate diligence in making decisions, taking other actions, and in monitoring corporate management.' The duty of loyalty generally requires the director, as a corporate agent, to subordinate his or her interests to those of the corporation. It is the loyalty duty that requires directors to refrain from using corporate assets for personal gain, usurping corporate opportunities, competing with the corporation, dealing with the corporation as or on behalf of a party having an interest adverse to the corporation, and other similar acts.2 Both shareholders and creditors supply capital to the corporation. Creditors have fixed claims against the corporation, entitling them to receive repayment of their principal, with interest, at a specified time. Shareholders have the right to partici- pate in firm profits through dividends, as they may be declared by the directors, and to share in residual assets (i.e., assets remaining after creditor payment) upon dissolution. Although noncorporate business organizations, such as partnerships, limited partnerships, and limited liability companies, may not have the same role denominations, similar concepts apply and such firms have equity holders, entitled to distributions and to share in residual assets, and may have creditors, entitled to fixed payments of principal and interest. Because equityholders and creditors have different rights, they often have different interests. For example, shareholders may prefer larger dividend payments and riskier investments to maximize the value of . Partner, Faegre & Benson LLP, Denver, Colorado. I thank Dean Allan W. Vestal and the faculty of the University of Kentucky College of Law for their valuable input while I was a visiting professor of law at the school. I also thank Kathy Schaeffer for her research assistance. An earlier draft of this Article was presented at the Second Annual Symposium on Delaware Business Entity Law-The Fiduciary Duty to Creditors: Evolution or Revolution?-and I thank Professor Anne Conaway for organizing that symposium. Finally, I thank the University of Maryland School of Law and Professor Richard Booth for organizing the conference Twilight in the Zone of Insolvency: Fiduciary Duty and Creditors of Troubled Companies, at which a later version of this Article was presented. 1. See, e.g., COMMITTEE ON CORPORATE LAWS, AMERICAN BAR AssocIATIoN SECTION OF BUSINESS LAW, CORPORATE DIRECTOR'S GUIDEBOOK (3d ed. 2001), reprinted in 56 Bus. LAW. 1571, 1582 (2001). 2. Id. at 1583-84. JOURNAL OF BUSINESS & TECHNOLOGY LAW

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