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Production Resources Decision

By Russell C. Silberglied and Kimberly D. Newmarch

In the current environment of increasing scrutiny of corporate behavior after corporate scandals such as Enron and WorldCom, lawsuits brought by creditors for breach of the fiduciary duties owed to them by officers and directors have increased significantly. The suits are taking center stage on the dockets of bankruptcy courts and state courts alike, and receive much public attention across the country. Against this backdrop, the Delaware Court of Chancery's November opinion in Production Resources Group, L.L.C. v. NCT Group, Inc., __ A.2d __ (Del. Ch. 2004); C.A. No. 114-N, 2004 Del. Ch. LEXIS 174 (Del. Ch. Nov.) is likely the most important pronouncement on the nature of fiduciary duty claims brought by creditors since the Court of Chancery's 1991 opinion in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., C.A. No. 12150, 1991 WL 277613 (Del. Ch. Dec. 30, 1991). Certain to be widely cited, this lengthy and scholarly opinion also is likely to be misconstrued by many bankruptcy practitioners as signaling a retreat from settled law that directors and officers of insolvent Delaware corporations owe fiduciary duties to creditors. This article demonstrates that such a reading of Production Resources is incorrect. We also discuss the holding of Production Resources that directors of a Delaware corporation can be exculpated from personal liability pursuant to ' 102(b)(7) of the Delaware General Corporation Law even in suits commenced by creditors. This holding, which has already been followed by the United States District Court for the District of Delaware in Continuing Creditors' Comm. of Star Telecommunications Inc. v. Edgecomb, No. Civ. A. 03-278-KAJ, 2004 WL 2980736 (D. Del. Dec. 21, 2004) is the first such holding in Delaware and is contrary to cases from other jurisdictions.

Fiduciary Duties Owed to Creditors and Standing to Maintain Suit

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