February 29, 2012 Articles

Defending Against Breach of Fiduciary Duty in Bankruptcy

When a company files for bankruptcy, directors and officers can be targets for creditors and their counsel looking for scapegoats.

By Jeffrey Baddeley

“Victory has a thousand fathers; failure is an orphan.” The quote is attributed to John F. Kennedy in the wake of the failed Bay of Pigs invasion, though it appears to have been first used by Count Galeazzo Ciano, son-in-law of Benito Mussolini. The sentiment aptly characterizes the plight of directors and officers of bankrupt companies.

When a company files for bankruptcy, creditors and their counsel often look for scapegoats. Wiser directors or more capable managers would have avoided the economic calamity that now confronts the disappointed creditor constituency. The increasing reality in Chapter 11 bankruptcy cases is that very few companies emerge from bankruptcy intact. Sales of substantially all of a debtor’s assets under Bankruptcy Code Section 363 have become an overwhelmingly common approach to Chapter 11 “reorganization” cases. David Dragatt, “363(b) Sales: News, Views and Increased Use,” and cases cited therein, 18th Annual Southwest Bankruptcy Conference. Often the corporate debtor’s claims against its directors and officers, usually arising out of whatever actions put the debtor into bankruptcy, constitute a significant asset of the bankruptcy estate.

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