Duty to Creditors in Insolvency and the Zone of the Insolvency: Delaware and the Alternatives
![handle is hein.journals/nyujolbu7 and id is 335 raw text is: DUTY TO CREDITORS IN INSOLVENCY AND THE
ZONE OF INSOLVENCY: DELAWARE
AND THE ALTERNATIVES
NEIL RUBEN*
I.
INTRODUCTION
In North American Catholic Educational Programming Founda-
tion v. Gheewalla,' the Delaware Court of Chancery held, and
the Delaware Supreme Court affirmed, that creditors do not
have standing to assert direct breach of fiduciary duty claims
during insolvency or in the zone of insolvency.2 Gheewalla also
held that creditors do have standing to allege derivative claims
during insolvency, but made no clear statement as to creditors'
standing to assert such claims in the zone of insolvency.3 This
Note considers questions about the efficiency of Delaware's
treatment of fiduciary duties to creditors and explores the doc-
trinal confusion regarding creditors' standing to assert deriva-
* Candidate for JD, class of 2011, NYU School of Law.
1. See generally N. Am. Catholic Educ. Programming Found., Inc. v.
Gheewalla, No. Civ. A. 1456-N, 2006 WL 2588971 (Del. Ch. Sept. 1, 2006),
aff'd, 930 A.2d 92 (Del. 2007).
2. Zone of insolvency is a term used to describe a firm nearing insol-
vency, but not yet insolvent, and can be defined in a multitude of ways.
Neither the Delaware Court of Chancery nor the Delaware Supreme Court
precisely define[d] the term and the Delaware Supreme Court noted that
their decision precluded the need for a precise definition. Id. at 98 n.20.
Insolvency is usually defined as being unable to pay bills as they become due
or possessing liabilities greater than the market value of all assets held.
LaSalle Nat. Bank v. Perelman, 82 F. Supp. 2d 279, 290 (D. Del. 2000).
3. Direct claims allege that a breach of fiduciary duty caused a particu-
lar shareholder a particularized harm and damages are awarded to the
shareholder. Derivative claims allege that a breach of a fiduciary duty
harmed the firm and damages are awarded to the firm. See generally Tooley
v. Donaldson, Lufkin &Jenrette, Inc., 845 A.2d 1031 (Del. 2004). The Dela-
ware Court of Chancery and Delaware Supreme Court decisions suggest, but
do not hold, that creditors do not have standing to pursue derivative claims
in the zone of insolvency. See generally Gheewalla, No. Civ. A. 1456-N. See also
E. Norman Veasey, Counseling the Board of Directors of a Delaware Corporation in
Distress, AM. BANKR. INST. J., Jun. 2008, at 60, 63 (Whether creditors may
bring derivative claims against directors of a corporation that is solvent but
in the zone of insolvency is unclear, but doubtful as a practical matter.).
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Duty to Creditors in Insolvency and the Zone of the Insolvency: Delaware and the Alternatives
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