Differences between the laws of different states can materially impact the outcome of fiduciary duty and "deepening insolvency" claims asserted in bankruptcy, as a recent Third Circuit Court of Appeals decision illustrates. In Official Committee of Unsecured Creditors v. Baldwin (In re Lemington Home for the Aged), 659 F.3d 282 (3d Cir. Sept. 21, 2011), as amended by 2011 BL 270076 (Oct. 20, 2011), the Third Circuit addressed breach of fiduciary duty and deepening insolvency claims asserted in bankruptcy litigation against former officers and directors of a bankrupt Pennsylvania non-profit corporation. Because a company's state of incorporation dictates the body of law applicable to such claims under the “internal affairs” doctrine, lawyers must understand how the laws of different states differ in their application to such claims.1 The Third Circuit's ruling in Lemington demonstrates the need for proper corporate governance of financially troubled organizations, because business judgment rule protection may not be available to officers and directors if facts support allegations that they acted without reasonable care and diligence, or with self-interest. The Third Circuit opinion also continues to recognize a deepening insolvency cause of action under Pennsylvania law -- even though that cause of action has only been recognized in Pennsylvania federal (not state) courts, and other jurisdictions including Delaware have declined to recognize the cause of action. Lemington also states that officer and director duties "are owed not only to the corporation and its shareholders, but also to the creditors of an insolvent entity."
The Third Circuit Decision
— Fiduciary Duties
— Business Judgment Rule
"Deepening Insolvency" Cause of Action Under Pennsylvania Law
In Pari Delicto
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