Abolition of the Corporate Duty to Creditors

8/13/2019 Abolition of the Corporate Duty to Creditors

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COLUMBIA LAW REVIEWVOL. 107 OCTOBER 2007 NO. 6

CONTENTS

ARTICLES

INSEARCH OF THEMODERNSKIDMORE STANDARD Kristin E. Hickman 1235

Matthew D. Krueger

ABOLITION OF THECORPORATEDUTY TOCREDITORS Henry T. C. Hu 1321

Jay Lawrence Westbrook

NOTES

STATUS ONTRIAL: THERACIALRAMIFICATIONS

OFADMITTINGPROSTITUTIONEVIDENCEUNDERSTATERAPESHIELDLEGISLATION Karin S. Portlock 1404

EDITINGDIRECTDEMOCRACY: DOESLIMITINGTHESUBJECTMATTER OFBALLOTINITIATIVESOFFEND THEFIRSTAMENDMENT? John Gildersleeve 1437

ESSAY

COMMONLAWCONSTITUTIONALISMAND THELIMITS OFREASON Adrian Vermeule 1482


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COLUMBIA LAW REVIEWVOL. 107 OCTOBER 2007 NO. 6

KARINS. PORTLOCKEditor-in-Chief

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NORYMILLER


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ABOLITION OF THE CORPORATE DUTY TO CREDITORS

Henry T. C. Hu*

Jay Lawrence Westbrook**

The corporations core objective is to further the interests of share-holders. But one judicially crafted exception has long existed. In manyjurisdictions around the world, financial distress mandates a shift to aduty to creditors. In May 2007, the Delaware Supreme Court an-nounced a modern law of duty shifting.

This Articles prescription and reasoning break with existing lawand critiques. We urge abolition of the doctrines. The result would be a

duty to creditors arising upon a formal bankruptcy filing. This legalstep, not insolvency or another financial metric, would bedeterminative.

Our reasoning is structural. First, the doctrines conflict with thecorporate governance structure, one consisting of two alternative systems:the corporate governance system rooted in state law and the bankruptcycorporate governance system rooted in federal law. The mechanisms ofthe normal system promote the largely unitary interests of shareholderswhile those of the bankruptcy system primarily protect the disparate inter-ests of creditors. By imposing creditor-oriented goals on corporations sub-

ject to the shareholder-oriented governance system, duty shifting mis-matches ends and means.Second, the doctrines misconceive the structure of shareholder own-

ership rights. Using a myopic residual claimant analysis, they ignorecall option-like economic rights as well as voting and other embeddedrights inherent in the concept of shareholder. Moreover, duty shiftingimposes a unique duty on corporate debtors, depriving shareholders ofproperty without justification, disclosure, or legal process.

Following the abolition of duty shifting, the task at hand will be todetermine the optimal transition between the two governance systems.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1323I. BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1331

A. Overview: Three Duty Regimes and Two HostGovernance Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1331

B. The Emergence of Modern Duty Shifting Within theCorporate Governance System. . . . . . . . . . . . . . . . . . . . . . . . 1331

* Henry T. C. Hu holds the Allan Shivers Chair in the Law of Banking and Finance at

the University of Texas School of Law (e-mail: [email protected]).** Jay Lawrence Westbrook holds the Benno C. Schmidt Chair of Business Law at the

University of Texas School of Law (e-mail: [email protected]).The authors have made equal contributions to the work; the order of listing is

alphabetical. We thank Bernard Black, Gerard Hertig, Douglas Laycock, Ronald Mann,John Pottow, Harry Rajak, Scott Vdoviak, Fred Tung, and participants in the University ofTexass Law, Business, and Economics Workshop for comments and suggestions. Wethank Catherine Bellah, Rafael Colorado, Mark Ditto, Ryan Gorsche, Eric Van Horn, RyanMcCormick, Erin Murdock, and David Park for their research assistance.

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1. Modest Origins in the Trust Fund Doctrine. . . . . . . 13322. Credit Lyonnais, the Delaware Chancery, and the

Core Business Decisions of Corporations . . . . . . . . . 1336

3. The Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13404. The Delaware Supreme Courts Synthesis: North

American . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1343C. The Emergence of the Bankruptcy Governance System

and Its Essential Conflict Resolution Functions . . . . . . . 1345II. DUTYSHIFTING AND THETWOGOVERNANCESYSTEMS:

INCONGRUENCE OFENDS ANDMEANS . . . . . . . . . . . . . . . . . . . . . . 1348A. Stakeholder Conflicts as to Risk: Broad

Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1349

1. Shareholders and Creditorsand the CorporateEntity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1350

2. Managers and Shareholders . . . . . . . . . . . . . . . . . . . . . . 13513. Shareholders Inter Se . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13524. Creditors Inter Se . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1352

B. The Corporate Governance System and the LargelyUnitary Interests Of Shareholders . . . . . . . . . . . . . . . . . . . . 13541. Three Foundational Conceptions of a Duty to

Shareholders and Alternate Meanings ofShareholder-Optimal Risk Taking . . . . . . . . . . . . . . . 1355a. The Traditional Conception . . . . . . . . . . . . . . . . . . 1356b. Actual Shareholder Wealth Maximization . . . . . 1357c. Blissful Shareholder Wealth Maximization . . . . 1359

2. Implementing Shareholder-Optimal Risk Taking:Finance Theory and the Largely Unitary Interestsof Shareholders as a Group . . . . . . . . . . . . . . . . . . . . . . 1360

C. The Corporate Governance System and the

Adjudication of Heterogeneous Interests . . . . . . . . . . . . . 13641. Ends Against Means: The Dissonance ofContinuing Shareholder-Oriented Means and Duty-Shifted Creditor Ends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1365

2. Ends Without Means: The Corporate GovernanceSystem Without Conflict Resolution Rules andMechanisms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1367

D. Solution: The Bankruptcy Governance System and ItsAdjudication Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1369

1. Governance in Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . 13702. Structure for Resolution of Conflicting InterestsAcross and Within Different Constituencies . . . . . . . 1373

E. Consequences of the Duty Shifting Doctrines . . . . . . . . . 1378III. DUTYSHIFTING AND THEFOUNDATIONALSTRUCTURE OF

OWNERSHIPRIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1381A. Shareholder Economic Rights . . . . . . . . . . . . . . . . . . . . . . . . 1382B. Shareholder Voting and Other Embedded Rights . . . . . 1383


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2007] ABOLITION OF THE CORPORATE DUTY TO CREDITORS 1323

1. Of Permanent Value: Exclusivity andImmutability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1383

2. Of New Value: Recent Trends and the

Decoupling of Voting Rights . . . . . . . . . . . . . . . . . . . 1385C. Shareholder Ownership Rights and Private Property . . 1389

1. A Special Corporate Duty to Creditors? . . . . . . . . . . . 13892. The Automatic Deprivation of Property . . . . . . . . . . . 1393

IV. NORTHAMERICANREVISITED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1397V. FOCALPOINTS FORFUTURERESEARCH . . . . . . . . . . . . . . . . . . . . . 1399

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1402

INTRODUCTION

In a society based on private property, the core objective of a corpo-ration would seem uncomplicated. The corporation is owned by share-holders and, like other property, exists to further the owners interests.This objective should animate every material corporate decision.

For nearly two centuries, one judicially crafted exception has existednear the intersection of corporate and bankruptcy law. When a corpora-tion reaches some stage of financial distress, but has not made a federalbankruptcy filing, the duty of directors shifts from a focus on the interests

of shareholders to those of creditors.1

Until two decades ago, the exception languished in a backwater.Since its resuscitation in a sweeping new form in an opinion carrying apatina of social science, the exception has attracted enormous attentionin the academy and in the real world. This is hardly surprising. Thesestate law duty shifting doctrines mandate that the corporations currentfinancial condition, without more, alters the corporations very reason forbeing. Similar duty shifting doctrines are found in other countries.2

1. For succinctness, we discuss primarily the most important duty shifting doctrine,although much of our discussion also applies to other doctrines. Specifically, we focus onthe doctrine associated with the traditional trust fund analysis and its modern extensions.We do not discuss, for instance, deepening insolvency, wherein recovery is sought fromofficers, directors, and others for prolonging the life of an insolvent corporation. See, e.g.,Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 349 (3d Cir.2001) (stating that deepening insolvency may give rise to a cognizable injury underPennsylvania law). The deepening insolvency doctrine appears to be falling of its ownweight. In a characteristically thoughtful and witty decision, Vice Chancellor Leo Strineheld in August 2006 that Delaware law does not recognize [deepening insolvency] as acause of action, because catchy though the term may be, it does not express a coherentconcept. Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 174 (Del. Ch.2006). Other judges are skeptical as well. See, e.g., Seitz v. Detweiler, Hershey & Assocs.(In re CitX Corp.), 448 F.3d 672, 678 (3d Cir. 2006) (holding that deepening insolvency isnot an independent cause of action); Official Comm. of Unsecured Creditors v. Rural Tel.Fin. Coop. (In re VarTec Telecom, Inc.), 335 B.R. 631, 646 (Bankr. N.D. Tex. 2005)(holding that Texas does not recognize tort of deepening insolvency).

2. As to related doctrines (and statutes) in other common law jurisdictions, seegenerally Caron Belanger Ernst & Young Inc. v. Wise (In re Peoples Dept Stores Inc.),[2004] 3 S.C.R. 461, 48186 (Can.) (discussing best interests of the corporation under


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Existing critiques of these doctrines are narrow in scope and incre-mental in reasoning.3 They focus on the current variants of the doctrineand sometimes proffer modifications. They tend to be grounded on

practical considerations such as the doctrines ambiguity and on the abil-ity of creditors to protect themselves. They do not challenge the doc-trines overarching tenet, that a companys financial condition shouldtrigger changes in duty. In May 2007, for the first time, the DelawareSupreme Court in North American Catholic Educational ProgrammingFoundation v. Gheewallaset out to define the modern law of duty shifting.4

Largely guided by existing critiques, the court subscribed to the doc-trines overarching tenet, while stating that insolvency would be thetrigger for their application.

Our methodology and our prescription are quite different. We focuson structure: that of the two corporate governance systems and that of atleast two distinct sets of ownership rights held by shareholders. First,rather than addressing the needs of creditors through the bankruptcygovernance system, a system designed for that very purpose, duty shiftingimposes creditor-oriented tasks on a corporate governance system that isdesigned to serve the interests of shareholders. This leads to unaccept-able mismatches in ends and means. Second, duty shifting fails to con-sider the foundational structure of either shareholder ownership rights

or private property generally. The doctrines ignore dynamic elementsof shareholder economic rights as well as voting and other ownershiprights embedded in the concept of shareholder. Duty shifting imposes aunique duty on corporate debtors of a sort the law has never imposed onnatural persons, with no justification. The result is to undermine deeplyheld understandings of the nature of private property and the properincidents of its transfer.

Our prescription is to abolish this century-old doctrine. Regardlessof financial condition, a corporation and its directors should never owe a

duty to creditors, apart from constraints arising in contract and tort.5Only when a corporation has passed on as a legal matterto the heaven

Canadian law); Andrew Keay & Michael Murray, Making Company Directors Liable: AComparative Analysis of Wrongful Trading in the United Kingdom and Insolvent Tradingin Australia, 14 Intl Insolvency Rev. 27 (2005) (comparing United Kingdoms wrongfultrading statute to Australias insolvent trading statute); Mark Cheng Wai Yuen, CorporateDirectors Common Law Duty to Creditors?A Revelation of the Present State of the Law,22 Sing. L. Rev. 104 (2002) (comparing corporate duty doctrines adopted by courts inAustralia, New Zealand, and United Kingdom to Singapore approach). For a pertinentnineteen-country survey, see INSOL Intl, Directors in the Twilight Zone II (2005)(comparing countries approaches to powers and duties of directors of financially troubledcorporations).

3. See infra Part I.B.3.4. No. 521, 2006, slip op. at 1516 (Del. May 18, 2007) (stating that court had never

directly addressed the zone of insolvency issue involving directors purported fiduciaryduties to creditors).

5. We thus exclude discussion of fraudulent behavior, inter alia. Cf. id. at 24(distinguishing fiduciary duty claims from claims rooted in contract or tort).


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or hell of federal bankruptcy law (and perhaps a reincarnation)wouldmatters change. A formal bankruptcy filing, unlike changes in financialcondition, initiates the structural changes in governance systems and

ownership rights that are essential to the proper resolution of the inter-ests of creditors.6

A fundamental reexamination of this sort would be vital and timely,even apart from North American. Current, perhaps unprecedented, creditconditions worldwide suggest an increasing number of corporations maybecome insolvent and thus trigger the creditor-oriented duty shifting re-gime.7 On the other hand, shareholder rights are on the ascent. In theUnited States and abroad, seminal changes in the status of shareholdersand the role of shareholder voting rights independent of shareholder ec-

onomic rights appear to have begun in the past few years.8 The tension

6. We keep an open mind regarding one prebankruptcy duty directors might have tocreditors: the duty to file for bankruptcy. Often directors may best serve shareholders aswell as creditors by an early filing, but we do not attempt to find the answer here. Indeed,we suggest that, in our framework, the key item on the research agenda is to determinewhen such filings should be mandated. See infra Part V.

7. For one pessimistic view, see Steven Rattner, The Coming Credit Meltdown, WallSt. J., June 18, 2007, at A17 (stating that money is available today in quantities, at pricesand on terms never before seen in the 100-plus years since U.S. financial markets reached

full flower). Similar deterioration in corporate creditworthiness may be occurring inEurope. See Floyd Norris, Are High Credit Ratings Just a Thing of the Past?, N.Y. Times,Nov. 11, 2006, at C3 (asserting that European credit ratings are trending downward, butthat trend is less advanced than in United States).

In August 2007, the Federal Reserve Board and European Central Bank felt compelledto intervene in ways not seen since 9/11 to stem near panic in world financial markets.See, e.g., David Smith et al., Panic on Wall Street Spreads Fears of Contagion Around theWorld, Australian, Aug. 13, 2007, at 29 (noting how European Central Bank had injectedmore liquidity in just two days in August 2007 than it had provided in wake of September11); Ben Steverman, Markets: Keeping the Bears at Bay, Bus. Wk. Online, Aug. 13, 2007, athttp://www.businessweek.com/investor/content/aug2007/pi20070810_184123.htm (on

file with the Columbia Law Review) (noting reasons for Federal Reserves injections ofliquidity in August 2007 and immediately after September 11 terrorist attacks).

8. For analysis of these changes, which have been driven in part by the growth ofhedge funds (and hedge fund decoupling of shareholder voting rights from theaccompanying economic interest), see Henry T. C. Hu & Bernard Black, The New VoteBuying: Empty Voting and Hidden (Morphable) Ownership, 79 S. Cal. L. Rev. 811, 815(2006) [hereinafter Hu & Black, The New Vote Buying] (analyzing decoupling ofeconomic ownership from voting power and corporate governance implications, includingrole of hedge fund activism); David A. Katz & Laura A. McIntosh, Corporate Governance:Advice on Coping with Hedge Fund Activism, N.Y.L.J., May 25, 2006, at 5 (stating that[e]very decade needs a villain and that in 2000s, it appears to be activist hedge funds);Kara Scannell, Outside Influence: How Borrowed Shares Swing Company Votes, Wall St.J., Jan. 26, 2007, at A1 (discussing decoupling via share lending and foregoing analysis);Ben White, Thesis on Hedge Fund Tactics Gives Investors a Shock, Fin. Times, Oct. 6,2006, at 29 (discussing institutional investors and the New Vote Buying-based speech).Similar changes appear to be occurring worldwide. See, e.g.,Andrew Morse, Hostile BidBreaks Japanese Mold, Wall St. J., July 25, 2006, at C4 (discussing unprecedented takeoverattempt in Japan); David Reilly, Deutsche Boerses New Tune on Mergers Gives InvestorsHope a New Deal Will Come, Wall St. J., Oct. 26, 2005, at C1 (describing implications forGerman shareholders of developments involving Deutsche Boerse); Laura Santini, A Firm


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between the trend toward shareholder primacy and the asserted duties tocreditors is increasing.

This Article is the first to analyze the duty shifting doctrines from a

perspective that integrates corporate governance and bankruptcy govern-ance considerations.9 That perspective leads us to propose a researchagenda centering on the optimal initiation of bankruptcy proceedings.

This Article proceeds as follows. Parts I.A and I.B briefly describe theevolution of the duty shifting doctrines from that nineteenth century cu-riosity, the trust fund doctrine. The central point is that creditor protec-tion via duty shifting was at its core a primordial, liquidation-orientedstate common law response to the absence of federal, reorganization-ori-ented bankruptcy law. Part I.B concludes with an initial description of

North American. Part I.C sketches the emergence of bankruptcy law in thetwentieth century, especially Chapter 11 reorganization, the type of bank-ruptcy chosen by the overwhelming majority of corporations of any size.10

In Part II, we show that the duty shifting doctrines impose corporateends that are in direct conflict with the normal (state law-centered) cor-porate governance system, while ignoring the (federal law-centered)bankruptcy governance system designed to achieve those very ends. Ineffect, the doctrines assign the protection of creditors to the wrong gov-ernance system.

Central to the argument is the fact that the interests of key corporatestakeholdersshareholders, creditors, management, and employeesare routinely in conflict with regard to tradeoffs between investment riskand reward, a conflict that grows more acute when the business is in fi-nancial difficulty.11 While modern finance theory and other analyses sug-

Activist, Lichtenstein Wins Big in South Korea, Wall St. J., Aug. 10, 2006, at C1 (describingimplications of hedge funds purchase of shares of underperforming South Koreancorporation); Julia Werdigier, At More Companies, Shareholders are Challenging the

Boss, and Winning, Intl Herald Trib., May 24, 2007, at 14 (discussing fight over ABNAMRO and other shareholder-related developments in Europe).

9. We are aware of only one other article that has called for a bankruptcy filing totrigger managerial duties to creditors, just published by Professors Rutherford Campbelland Christopher Frost. See Rutherford B. Campbell, Jr. & Christopher W. Frost,Managers Fiduciary Duties in Financially Distressed Corporations: Chaos in Delaware(and Elsewhere), 32 J. Corp. L. 491, 52225 (2007). It offers a helpful analysis and deployssome of the same points we make in this article. Campbell and Frost, however, groundtheir prescription largely on arguments rooted in the concept that clear and efficientdefault rules are of the utmost importance. Id. at 494.

Our analysis instead centers on the structure of shareholder ownership rights and ofgovernance systems. Campbell and Frost do not consider the structure of shareholderownership rights, do not address key congruence issues (such as the imposition of conflictresolution responsibilities on the corporate governance system), and do not consider theresearch necessitated by abolition of duty shifting.

10. Elizabeth Warren & Jay Lawrence Westbrook, Financial Characteristics ofBusinesses in Bankruptcy, 73 Am. Bankr. L.J. 499, 523 (1999).

11. The interests of shareholders and those of other constituencies do not alwaysconflict, of course. Thus, from an instrumental standpoint, a corporation may further theinterests of shareholders by making large (and visible) charitable donations to host


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gest that shareholders have largely unitary interests,12individual creditorstypically vary greatly in their interests with regard to corporate risk taking.The corporate governance system offers no mechanism for resolving risk

communities. In this Article, we are focusing on harder cases, where decisions do turn onwhich constituency matters.

In addition, when we talk of the corporate objective, we generally mean the core(i.e., primary) objective of the corporation. For a corporation to have as its core objectivethe furtherance of its shareholders welfare is not necessarily inconsistent with acorporation adopting as some lesser objective the promotion of the interests ofnonshareholder constituencies.

This Article does not expressly analyze the general desirability of a multipleconstituency philosophy or other corporate social responsibility matters. See infra note

16 (discussing how views we express in this Article are largely independent of multipleconstituency issue). We believe this is appropriate for three reasons. First, the soleexception to the core duty to shareholders recognized in Delaware and most other states isthat flowing from duty shifting. Irrespective of how one stands on corporate socialresponsibility generally, this exception exists as a matter of law and must be addressed.Second, Delaware and most other states have long rejected the multiple constituencyapproach and, if anything, have become more focused on the interests of shareholders inthe past few years. Third, and perhaps most important, it is the rare public corporationthat takes seriously the concept of a core duty to multiple constituencies; this is especiallyunlikely in todays environment of hedge funds, private equity funds, and shareholderactivism. Professor Robert Charles Clark recently noted that it does not appear thatdirectors and officers ever consider a multiple constituency approach and, instead,simply assume or state that the main effort is to maximize shareholder value. Robert C.Clark, Major Changes Lead Us Back to Basics (A Response to the Symposium on MyTreatise), 31 J. Corp. L. 591, 596 (2006). For a classic critique of a multiple constituencyphilosophy, see Comm. on Corporate Laws, Other Constituencies Statutes: Potential forConfusion, 45 Bus. Law. 2253 (1990); see also David A. Skeel, Jr., Icarus and AmericanCorporate Regulation, 61 Bus. Law. 155, 17576 (2005) (opposing multiple constituencyapproach to corporate law). But see Margaret M. Blair & Lynn A. Stout, A TeamProduction Theory of Corporate Law, 85 Va. L. Rev. 247, 24857 (1999) (advocating teamproduction approach to understanding public corporations); see also Janis Sarra,

Creditor Rights and the Public Interest: Restructuring Insolvent Corporations 10102(2003) (stating that, in Canada, directors act for all stakeholders).

12. At least as a starting point, in most cases, management concerned aboutshareholders need not consider the individual risk and time preferences of itsshareholders. See Henry T. C. Hu, Risk, Time, and Fiduciary Principles in CorporateInvestment, 38 UCLA L. Rev. 277, 28795 (1990) [hereinafter Hu, Risk & Time] (arguingthat using conventional capital budgeting technique generally leads to investmentdecisions that benefit all shareholders regardless of individual time and risk preferences);infra Parts II.B.12 (discussing corporate governance system and largely unitary interests ofshareholders). In this Article, we focus primarily on the usual publicly held corporation.The special considerations associated with closely held corporations (such as those flowing

from ill-diversified shareholders) are beyond the scope of this Article. We also assume,among other things, only one class of equity holders, all of whom are fully diversified andare concerned solely with their own material well-being. See infra Part II.B.2 (discussingstylized fact pattern involving only one class of equityholders). For a discussion oflimitations to the unitary nature of the interests of shareholders, see infra note 155 andaccompanying text.

In this Article, we leave aside attempts by one group of shareholders (e.g., controllingshareholders) to deprive another group of shareholders (e.g., minority shareholders) oftheir formal or informal ownership rights.


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management conflicts among individual creditors or between sharehold-ers and creditors.

Our analysis centers on the key task of corporate officers and direc-

tors: the deployment of current resources to achieve a future return.13Such investment decisions pose special difficulties, because investments

vary widely in their risk characteristics. High risk, high return projects, inresearch and development or otherwise, may well be shareholder-optimaland desirable to some creditors but anathema to other creditors and tomanagement.

The often-proffered solution that directors should just maximize cor-porate value for the benefit of the community of interests of the corpo-ration is almost meaningless. In particular, some key creditors will prefer

a slow, possibly terminal, decline. Directors told to focus on creditor in-terests may avoid the entrepreneurial risk taking crucial to our countrysglobal competitiveness.

In Dearborn, the Ford Motor Companys newly installed chief execu-tive thinks the company is faced with two choices.14 The safe choice,that of plant closings and introducing a few hit vehicles but with littlechange in attitude, will not be enough to see the company through. Theonly hope for survival, he says, lies in a full transformation of the wayFord thinks about consumers and approaches the American market.15

Yet soon, the duty shifting doctrines may ease Fords directors toward thesafe path, the one that may lead to its ultimate demise. In Michigan, inSilicon Valley, and elsewhere, mandated corporate timidity threatens thelong-term viability of our economy.

The problem that the duty shifting doctrines addressmanagementof a corporation in financial distress for the benefit of a variety of constit-uencies, each of which has differing interestsis precisely the focus ofthe bankruptcy system, including the dominant Chapter 11 reorganiza-tion pathway. In contrast to the corporate governance system, the federalbankruptcy system is predicated on, and seeks to resolve, the sharp diver-gence of interests among individual creditors and between creditors andother stakeholders. Control is allocated to the bankruptcy court, thepublic body that resolves such conflicts and is charged with a special re-sponsibility to creditors. Thus, at whatever point creditor needs should

13. For more details about the core nature of investment decisions and a discussion ofthe difficulties they pose, see Hu, Risk & Time, supra note 12, at 27980, 287306.

14. See Micheline Maynard, Ford Posts Loss of $5.8 Billion, Worst Since 1992, N.Y.Times, Oct. 24, 2006, at A1 (reporting Ford CEO Alan Mulallys description of twochoices); cf. Standard & Poors, Stock Report: Ford Motor Co. (Oct. 14, 2006) (analyzingFord creditworthiness as of Sept. 11, 2006); Antony Currie & Jonathan Ford, For Ford, ItDoesnt Add Up: Investors Valuation of Stock Is off When Considering Firms Liabilities,Assets, Wall St. J., Feb. 12, 2007, at C12 (claiming that intrinsic value of Ford shares iszero); Shikha Dalmia, The UAWs Health-Care Dreams, Wall St. J., July 27, 2007, at A13(claiming that Ford, among others, was teetering on the brink of bankruptcy,notwithstanding second quarter profit in 2007).

15. Maynard, supra note 14.


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become paramount, the corporation should file the bankruptcy petitionthat invokes bankruptcy governance.

In Part III, we suggest that the structure of shareholder ownership

rights also requires the abolition of duty shifting doctrines. Relying on asimplistic residual claimant analysis, the doctrines assume that when acorporation becomes troubled, shareholders have lost their stake, andthus the creditors are the real owners.

This flies in the face of the foundational structure of ownershiprights that has been in place since the emergence of the corporateform.16 Shareholders have broad economic rights as well as voting rights,inspection rights, rights to sue directors for fiduciary breaches, max-imization rights, and other rights inherent to the very concept of owner-ship. The duty shifting doctrines misconstrue the economic rights andignore altogether these so-called embedded rights.17

In terms of economic rights, the doctrines rely on a static residualclaimant analysis, positing that if a corporation is insolvent, shareholderclaimants would receive nothing from an immediate liquidation and sono shareholder economic rights exist. In fact, immediate liquidations sel-dom occur. Even with deeply troubled corporations, shareholders typi-cally enjoy the prospect of future cash flows that may arise on a change in

fortunes or a change in management. These dynamic, call option-like

16. We do not argue that the existing bundle of rights allocated to shareholders is theonly possible one, but rather that the longstanding foundational structure of shareholderownership rights should not be abandoned without compelling reasons. We also suggestthat whatever rights are in the bundle at a given time should not be abrogated withouttransparency and due process. See infra Part III.C. We should also make it clear that weare not addressing larger questions of the social responsibility of corporations. Such

questions involve social and political policies outside the scope of this Article. Commentsfrom readers and our conversations with each other confirm to us that one does not haveto be politically liberal or conservative to adopt the views we express in this Article. Seealso supra note 11 (discussing interests of multiple constituencies).

17. See Henry T. C. Hu, Shareholder and Creditor Decoupling: SeparatingEmbedded Rights and Contractual Rights from Economic Interests 4 (contribution to10th Singapore Conference on International Business Law, Aug. 2223, 2007, andassociated conference volume) (draft of Aug. 17, 2007, on file with the Columbia LawReview) [hereinafter Hu, Shareholder and Creditor Decoupling] (introducing concept ofembedded rights, of which voting rights, inspection rights, and rights to sue directors forviolations of fiduciary duty are examples).

The maximization rightthe right to require that management run the corporationin a way intended to maximize benefits to shareholdersis probably the most important ofthese embedded rights. This maximization right concept was introduced in Henry T. C.Hu, New Financial Products, the Modern Process of Financial Innovation, and the Puzzleof Shareholder Welfare, 69 Tex. L. Rev. 1273, 12881300 (1991) [hereinafter Hu,Shareholder Welfare]. However, to avoid the possibility of infinite regress, this Articlesownership-based analysis is not dependent on the existence of this particular embeddedright. It is sufficient for our purposes to rely instead on other, more structural rights, suchas voting rights.


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economic rights associated with the future cash flows of an ongoing cor-porate enterprise always have value.18

Voting and other embedded ownership rights of shareholders are

not considered at all by the doctrines residual claimant analysis, whichimplies they do not exist or have any value. In actuality, even if the com-pany is troubled, shareholder exclusivity as to voting continues: Share-holders retain the right to select directors and approve other actions. Es-pecially in todays world of activist hedge fundsfunds that sometimesuse innovative financial techniques to acquire voting rights decoupledfrom any associated economic interestit is now clear that shareholder

voting rights have value and must be considered separately from share-holder economic rights.19 Similarly, other embedded rights continue ir-

respective of the companys financial condition. For instance, sharehold-ers continue to have the exclusive right to inspect corporate records.

And shareholders continue to have the right to sue for fiduciarybreaches.

The duty shifting doctrines effectively dilute or override such share-holder economic and embedded rights by imposing on the corporationand its directors a special duty to creditorsa duty not owed by any natu-ral person. Proponents of duty shifting offer no persuasive justificationfor the imposition of this extraordinary duty to creditors. Moreover, the

expropriation occurs automatically, without the transparency and proce-dural safeguards we normally demand in a market-based society.

The importance of Delaware to corporate law demands we return fora further analysis of North American in Part IV. Although North Americanmakes the threshold for duty shifting more stringent, we suggest that theopinion mirrors conventional wisdom.

Part V suggests focal points for research relating to the protection ofcorporate stakeholders. Neither state corporate law nor federal bank-ruptcy law addresses the timing of the legal act of initiation of a reorgani-

18. The above static versus dynamic economic rights assertion does not depend in anyway on contingent claims analysis (CCAa branch of finance theory made possible byoption pricing models), on any of the related finance theoretic scholarship, or on thevalidity of any related finance scholarship. Some finance theorists have used CCA analysisto analyze certain creditor-shareholder conflicts and, in doing so, viewed shareholders ascall holders of some sort. See, e.g., Marc Chesney & Rajna Gibson-Asner, Reducing AssetSubstitution with Warrant and Convertible Debt Issues, J. Derivatives, Fall 2001, at 39, 51(stating that, under posited capital structure, equity can be priced as a combination ofdown-and-out European calls that is similar to a vertical call spread). For an introductionto call options and option pricing models, see Henry T. C. Hu, Misunderstood Derivatives:The Causes of Informational Failure and the Promise of Regulatory Incrementalism, 102Yale L.J. 1457, 146476 (1993) [hereinafter Hu, Misunderstood Derivatives].

As to the matter of options always having value, see infra note 221 and accompanyingtext.

19. See, e.g., Hu & Black, The New Vote Buying, supra note 8, at 81419 (discussingrecent emergence of this phenomenon and independent significance of shareholdervoting and economic rights). This Article does not purport to address all of theimplications of such decoupling. See infra Part V.


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any shifting of duties. Part I.B.1 and Part I.B.2 discuss, respectively, theorigins of the trust fund doctrine in Wood v. Dummer25and the genesis ofduty shifting in the Delaware case of Credit Lyonnais.

1. Modest Origins in the Trust Fund Doctrine. In Wood v. Dummer,Joseph Story was faced with a bank that was being dissolved. The boardof directors caused the bank to declare substantial dividends, using mon-ies vital to paying outside creditors. To protect creditors left holding

worthless notes, Justice Story invented what came to be known as thetrust fund doctrine.26

Justice Story focused on what he termed capital stock, referring tothe assets that the shareholders had put into the company: [T]he capi-tal stock of banks is to be deemed a pledge or trust fund for the payment

of the debts contracted by the bank, since [t]he public, as well as thelegislature, have always supposed this to be a fund appropriated for suchpurpose.27 The Justice did not define the precise nature of the pledgeor the trust fund. What mattered was that the dividends transferredthose pledged funds to shareholders. The directors egregious behavior

was exacerbated by the fact that this was a bank, historically an entitycharged with special responsibilities28and the only industry whose direc-tors have long had genuine exposure to personal liability.29 Creditorscould thus recover the monies from the directors.

The court did not seek to establish that the board of the bank owed aduty to run the bank in the interests of creditors. Instead, the court wasconcerned with using shareholder self-help to change the normal prior-ity rules with respect to the disposition of corporate assets onliquidation.30

25. 30 F. Cas. 435 (C.C.D. Me. 1824) (No. 17,994).26. 1 E. Merrick Dodd, Jr. & Ralph J. Baker, Cases on Business Associations

Corporations 895 (1940); Lawrence M. Friedman, A History of American Law 199 (2d ed.

1985).27. Wood, 30 F. Cas. at 436.28. See, e.g., Joseph Jude Norton, Relationship of Shareholders to Corporate

Creditors upon Dissolution: Nature and Implications of the Trust Fund Doctrine ofCorporate Assets, 30 Bus. Law. 1061, 1064 (1975). Note that the United States is like manyother countries in excluding banks from the operation of the ordinary bankruptcy laws.See 11 U.S.C. 109(b)(2) (2000). More broadly, governments tend to subject banks andother financial institutions to special regulation, including limiting the risk taking they mayengage in. See, e.g., Robert Charles Clark, The Soundness of Financial Intermediaries, 86Yale L.J. 1, 3 (1976). As with the state law duty shifting doctrines, bank regulatory regimesseek to limit shareholder-optimal risk taking. Henry T. C. Hu, Swaps, the Modern Processof Financial Innovation and the Vulnerability of a Regulatory Paradigm, 138 U. Pa. L. Rev.333, 36670 (1989). But, in contrast to those doctrines failure to consider mechanisms toguide managerial behavior, bank regulatory regimes rely on a wide variety of finely-tunedlegal, administrative, and market mechanisms to do so. See infra Parts II.C.2II.D.

29. See Joseph W. Bishop, Jr., Sitting Ducks and Decoy Ducks: New Trends in theIndemnification of Corporate Directors and Officers, 77 Yale L.J. 1078, 1099 (1968)(discussing uniqueness of bank director exposure).

30. Writing in 1940, Professors Merrick Dodd and Ralph Baker belittled thesignificance of the trust fund doctrine; all that Story meant was that corporate property


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The decision, in other words, had little to do with the corporate ob-jective and more to do with roguish behavior. Wood was an ad hoc re-sponse, a conceptually casual treatment of monies that were in the corpo-

rate till pledged in some ill-defined way to creditors. This wasunderstandable. At the time, there was no federal bankruptcy statute andno attendant mechanisms for ensuring creditor priorities inbankruptcy.31

The excuse fit into the financial and legal context of the time. In thenineteenth century, capital stock and the related notion of paid-in capi-tal were considered to have a colorable claim as creditor protection de-

vices.32 Shares of stock had to have par value. Each share of the corpora-tions capital represented the surrender to the corporation of a sum of

money (or other property) that should persist throughout the existenceof the corporation.33 Shareholders were forbidden from invading thatamount for dividends, and the creditors could expect that amount to beon hand unless consumed by legitimate losses.34

Of course, such devices could do little to protect creditors. Amongother things, there was no segregated lockbox to safeguard funds col-lected from shareholders. Instead, such funds were simply used to runthe business and thus subject to the vagaries thereof. Moreover, as a prac-tical matter, suspect valuations were often used for paid-in capitalpurposes.35

must be first appropriated to the payment of the debts of the company before there can beany distribution of it among stockholdersa proposition that is sound upon the plainestprinciples of common honesty. Dodd & Baker, supra note 26, at 895.

31. The Bankruptcy Act of 1800 was repealed in 1803, and the next federalbankruptcy statute would not be adopted until 1841. It was 1898 before the United Statesbegan to have a continuous federal bankruptcy system. Theodore Eisenberg, Bankruptcyand Debtor-Creditor Law 216 (3d ed. 2004); Elizabeth Warren & Jay Lawrence Westbrook,The Law of Debtors and Creditors 108 (5th ed. 2005) [hereinafter Warren & Westbrook,Text, Cases & Problems]. Not coincidentally, Justice Story, in the years after Wood, was aleading advocate of adoption of a federal bankruptcy law. According to his son, he actuallydrafted the bill that became the 1841 Act. 2 Life and Letters of Joseph Story 407 (WilliamW. Story ed., 1851).

This response was also understandable as a way of reaching the right result in the faceof poorly drafted pleadings. See Bayless Manning & James J. Hanks, Jr., Legal Capital 31(3d ed. 1990) (deeming Justice Storys Woodopinion simple, clear and wholly adequatefor the particular problem with which he was confronted); Norton, supra note 28, at

106263 (describing bill in equity as poorly written).32. For an amusing discussion of this historical context, see Manning & Hanks, supra

note 31, at 2043.

33. Arthur Stone Dewing, The Financial Policy of Corporations 21 (3d rev. ed. 1934).

34. One of the leading English cases was Trevor v. Whitworth, (1887) 12 App. Cas.409, 411 (H.L.) (appeal taken from C.A.) ([N]o reduction of capital otherwise than asallowed by statute is legitimate.).

35. See Dewing, supra note 33, at 2526 (arguing that aggregate par valuerepresentations are suspect).


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The abandonment of such devices began in 1912, when New Yorkpassed the first state statute allowing the issuance of no-par value stock.36

By 1928, substantially all states permitted the issuance of no-par value

stock for at least certain corporations.37

By 1980, the Model BusinessCorporation Act was revised to eliminate the concept of par value.38 To-day, few corporations have stock with more than nominal par value, sothe creditors fund represented by paid-in capital has virtuallydisappeared.

The trust fund doctrine fared almost as badly as its first cousin, parvalue. As early as 1893, the Supreme Court was getting skittish, emphasiz-ing that the trust fund doctrine does not mean that there is a direct andexpress trust attached to [corporate property].39 By 1983, one Fifth

Circuit opinion endorsed the notion that [p]erhaps no concept has cre-ated as much confusion in the field of corporate law.40

In Delaware, the trust fund doctrine has an uncertain status.41

There is only one Delaware Supreme Court case touching on the doc-trine, Bovay v. H.M. Byllesby & Co., and that 1944 case involved a story ofcorporate financing and manipulation . . . somewhat extraordinary evenfor the period that ended so abruptly in October, 1929.42 From its in-ception in 1928, a toll bridge company had been financially incapable ofcompleting the toll bridge for which it was organized because of the pro-

moters massive diversions of corporate funds; six years later, a federaldistrict court adjudged it bankrupt.43

While discussing the promoters fiduciary responsibilities, the courtreferred to the trust fund notion:

An insolvent corporation is civilly dead in the sense that its prop-erty may be administered in equity as a trust fund for the benefit

36. Act of Apr. 15, 1912, ch. 351, 1912 N.Y. Laws 687 (codified at N.Y. Stock Corp.Law 19); see Dewing, supra note 33, at 23 (noting first statute permitting no-par stock);

Dodd & Baker, supra note 26, at 1001 (discussing New York statute and comparing withthose of other states). It may not be entirely coincidental that these developmentsfollowed shortly after the adoption of our first viable bankruptcy law in 1898. In England,a leading case left directors largely free to ignore creditor interests. See Salomon v.Salomon & Co., [1897] A.C. 22, 27 (H.L.) (appeal taken from C.A.) (holding that directorneed not indemnify company against creditors claims).

37. Dewing, supra note 33, at 23.38. 2 James D. Cox, Thomas Lee Hazen & F. Hodge ONeal, Corporations 16.15 n.2

(1995).39. Hollins v. Brierfield Coal & Iron Co., 150 U.S. 371, 382 (1893).40. Am. Natl Bank of Austin v. MortgageAmerica Corp. (In re MortgageAmerica

Corp.), 714 F.2d 1266, 1269 (5th Cir. 1983) (quoting 15A William Meade Fletcher et al.,Fletcher Cyclopedia of the Law of Private Corporations 7369, at 42 (perm. ed., rev. vol.1981)).

41. For excellent discussions of the trust fund cases, see Decker v. Mitchell (In re JTSCorp.), 305 B.R. 529, 53536 (Bankr. N.D. Cal. 2003); Gregory V. Varallo & Jesse A.Finkelstein, Fiduciary Obligations of Directors of the Financially Troubled Company, 48Bus. Law. 239, 24548 (1992).

42. 38 A.2d 808, 809 (Del. 1944).43. Id. at 81112, 814.


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of creditors. The fact which creates the trust is the insolvency,and when that fact is established, the trust arises, and the legalityof the acts thereafter performed will be decided by very differ-

ent principles than in the case of solvency. The execution of atrust and the following and administering of trust funds are im-memorial heads of equity jurisprudence.44

The facts did not involve issues relating to the managers breach ofeither the duty of care or the duty of loyalty. As in Wood v. Dummer, thecase presented the crass diversion of funds unquestionably belonging toothers. In addition, the Bovaycourt believed the doctrine was applicableonly when the corporation is dead.45 A final settling up of accounts,informed by such doctrine, is incident to proper burial. In other words,

the court confined the doctrine to a corporations termination.46

The 1974 case of Harff v. Kerkorian47 was the first indicationDelaware courts might move toward a sort of duty to creditors beyondthose provided for by contract, but neither the Delaware courts48nor the

44. Id. at 813 (citations omitted).

45. Id.

46. Today this common law doctrine has been displaced with respect to thetermination of corporations by state statutory law relating to the winding up of

corporations and by federal bankruptcy law. If shareholders wish to terminate acorporation outside of bankruptcy, the directors must follow specific statutory rules aboutnotifying creditors, paying creditors, and distributing remaining property to shareholders.See, e.g., Rev. Model Bus. Corp. Act 14.02, 14.06, 14.09(a) (2005); cf. Pac. Scene, Inc. v.Penasquitos, Inc., 758 P.2d 1182, 1183 (Cal. 1988) (stating that Legislature has generallyoccupied the field with respect to the remedies available against the former shareholdersof dissolved corporations, thus preempting antecedent common law causes of action);Rev. Model Bus. Corp. Act 14.05 official cmt. (stating that winding up process underRevised Model Business Corporations Act does not have any of the characteristics ofcommon law dissolution). However, because of the ubiquity of bankruptcy law in theUnited States in the last century, use of winding up for insolvent corporations has been less

important. In the United Kingdom, where business bankruptcy law is treated as part ofcorporate law, winding up is the customary bankruptcy process for insolventcorporations. See Roy M. Goode, Principles of Corporate Insolvency Law 19 (3d ed. 2005)(noting that usual method of insolvency proceedings in United Kingdom is winding up);Harry Rajak, Company Liquidations, at vii (1988) (remarking that winding up is usualcourse for insolvent corporations in United Kingdom).

47. 324 A.2d 215 (Del. Ch. 1974), revd on other grounds, 347 A.2d 133 (Del. 1975).The single corporate act challenged was the declaration of a dividend of $1.75 a share byMetro-Goldwyn-Mayer the previous year. The plaintiffs, holders of convertible subordinatedebt, did not allege fraud or that the dividends violated either the governing indenture orany Delaware statute. Instead, the plaintiffs argued that defendants breached their

fiduciary duty to the plaintiffs since defendants were the controlling stockholders and suchdividends on the common stock hurt the market value of their debentures and theconversion feature. Id. at 221. Without citing Bovay, the trust fund doctrine, or offeringmuch by way of analysis, the court suggested the possibility of debenture holders havingextracontractual rights when there were special circumstances such as fraud, insolvency,or a violation of a statute. Id. at 22122. Nowhere did the Harffcourt suggest that theseextracontractual rights involved a fiduciary duty to creditors.

48. See, e.g., Simons v. Cogans, 542 A.2d 785, 788 (Del. Ch. 1987) (quoting withapproval 1987 chancery court opinion that (i) a debenture holder has no independent


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courts in other states49 could be fairly characterized as recognizing thefurtherance of creditor interests as one of the core corporate objectives.That is, until Credit Lyonnais.

2. Credit Lyonnais, the Delaware Chancery, and the Core Business Deci-sions of Corporations. Credit Lyonnais represented a sharp break withprior creditor-duty cases and the trust fund doctrine from which theyemerged. Substantially all the prior cases centered on roguish deviationsfrom priority rules for the distribution of corporate assets. Instead of par-celing out the assets properly, directors succumbed to near-larcenous be-havior, especially in the end game. These earlier cases centered on at-tempts to evade priority rights, generally in the liquidation context. Bycontrast, Credit Lyonnaiscentered on the deployment of corporate assets

to achieve future returnsthat is, on the corporations investment deci-sionmaking.50 This focus moved judges from the familiar role of adjudi-cating rights of rival claimants to a fixed pool of assets to the novel,grander role of overseeing the core business decisions of corporations.

right to maintain a claim for breach of fiduciary duty and (ii) in the absence of fraud,insolvency or a statutory violation, a debenture holders rights are defined by the terms ofthe indenture (quoting Contl Ill. Natl Bank & Trust Co. v. Hunt Intl Res. Corp., No.7888, 1987 WL 55826, at *4 (Del. Ch. Feb. 27, 1987))), affd, 549 A.2d 300 (Del. 1988).

The Delaware Supreme Court expressly predicated the existence of any fiduciary dutyowed by management on an existing property right or equitable interest supporting sucha duty; until a debenture is converted into stock, the holder has no equitable interest andremains a creditor whose interests are protected by the contractual terms of theindenture. 549 A.2d at 304. The court also noted that an equitable interest in theissuing corporation [is] necessary for the imposition of a trust relationship withconcomitant fiduciary duties. Id. at 303.

49. With perhaps one major exception, all of the decisions in which courts haveallowed recovery on such grounds involved directors of an insolvent corporation divertingcorporate assets for the benefit of insiders or preferred creditors. Professor Laura Lin

groups the cases as follows:(1) withdrawing assets from the insolvent corporation as alleged payment ofclaims that the directors had against the corporation, such as loans to thecompany or unpaid commissions; (2) using corporate funds to pay off thecompanys loans that the directors had personally guaranteed; (3) engaging intransactions, usually without fair consideration to the company, for the benefit ofits parent corporation or related entities; (4) pocketing the proceeds of a sale ofall corporate assets to a third party or otherwise transferring property to a relatedentity, leaving the former corporation insolvent; and (5) other forms of self-dealing in which the directors use assets of the insolvent firm for their ownbenefit, such as pledging stock owned by the corporation as collateral to finance

the directors personal stock purchases.Laura Lin, Shift of Fiduciary Duty upon Corporate Insolvency: Proper Scope of DirectorsDuty to Creditors, 46 Vand. L. Rev. 1485, 151314 (1993) (citations omitted). Theexception is N.Y. Credit Mens Adjustment Bureau v. Weiss, 110 N.E.2d 397 (N.Y. 1953).For a discussion of this case, see Jonathan C. Lipson, Directors Duties to Creditors: PowerImbalance and the Financially Distressed Corporation, 50 UCLA L. Rev. 1189, 120506(2003); Varallo & Finkelstein, supra note 41, at 24748.

50. It is nonetheless noteworthy that the example used in Credit Lyonnais assumes adead corporation, just like the carcasses in Woodand Bovay.


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Priority decisions relate to the distribution of assets. Investment de-cisions, by definition, involve the use of assets, not their distribution.They determine how the corporation will deploy its assets to generate

future value, value that may itself be distributed or invested yet again.Investment decisions are perhaps the most important ones made by cor-porate managers, animating all aspects of a corporations operations.51

They are also among the most difficult, since investments vary in theirrisk and time characteristics.52 This move from priority preservation toscrutiny of investment decisions represented a radical break of anothersort as well, implicating control of the corporation, the theme centrallyimportant to both the corporate and bankruptcy governance systems.53

Chancellor Allen did not rely on prior corporate case precedent in his

Credit Lyonnaisopinion. Instead, he resorted simply to his understandingof moral hazard, a conflict of interest long familiar to economists.

Credit Lyonnaisinvolved MGM-Pathe Communications Co. (MGM), aDelaware corporation that emerged in connection with a leveragedbuyout. Within months of Pathe Corporation (Pathe) acquiring a con-trolling interest in MGM, MGMs trade creditors forced MGM into bank-ruptcy court. Credit Lyonnais Bank Nederland (the Bank) was a lenderto both MGM and Pathe. In connection with the Banks attempts to fi-nance MGMs escape from bankruptcy, the Bank installed its own man-agement team. Following bankruptcy, Pathe, the controlling share-holder, challenged the bank-influenced management groups refusal tosell MGMs interest in UIP, a foreign movie distribution consortium, andto engage in certain other transactions. Pathe believed these sales wouldhave been advantageous to it and that the refusal constituted a violationof fiduciary duty.

51. For a discussion of corporate investment decisions and their importance, see

Hu, Risk & Time, supra note 12, at 27981.52. In fact, Credit Lyonnaisnot only intervenes as to investment decisions, but also as

to the other major class of managerial decisionsfinancing decisions. For the distinctionbetween investment decisions and financing decisions, see, for example, Hu, Risk & Time,supra note 12, at 279 & n.1 (characterizing investment decisions as any use of currentresources to achieve a future return and financing decisions as, roughly speaking, howthe corporation obtains the money).

53. For a discussion of this control versus economic rights theme in both thecorporate governance system (i.e., voting rights versus economic rights) and thebankruptcy governance system (i.e., control versus priority), see infra Parts II.CD, III.B.We have also independently considered this theme previously in our respective fields. Inthe context of the bankruptcy governance system, see Jay Lawrence Westbrook, TheControl of Wealth in Bankruptcy, 82 Tex. L. Rev. 795, 797 nn.34 (2004) [hereinafterWestbrook, Control]; see also Goode, supra note 46, 2-02 to -08. In the context of thecorporate governance system, see Henry T. C. Hu & Bernard Black, Empty Voting andHidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, 61 Bus. Law.1011, 101314 (2006) [hereinafter Hu & Black, Taxonomy]; Henry T. C. Hu & BernardBlack, Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership:Empty Voting and Hidden (Morphable) Ownership, 13 J. Corp. Fin. 343, 35355 (2007)[hereinafter Hu & Black, Decoupling].


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Chancellor Allen rejected this claim, but it was unclear on whatground. He stated that there was persuasive evidence that the manage-ment group acted prudently with respect to these transactions from the

point of view of MGM, and that in the troubled circumstances of thiscompany, the management group was appropriately mindful of the po-tential differing interests between the corporation and its 98% share-holder.54 He described the existing law as follows: At least where acorporation is operating in the vicinity of insolvency, a board of directorsis not merely the agent of the [residual] risk bearers, but owes its duty tothe corporate enterprise.55

Thus, in this vicinity of insolvencywhatever that might meanthe board had an obligation to the community of interest[s] that sus-

tained the corporation, to exercise judgment in an informed, good faitheffort to maximize the corporations long-term wealth creatingcapacity.56

Chancellor Allen nowhere offered any case or statute in support ofhis assertions. His support consisted of a footnote setting out his versionof a familiar analysis of a conflict between shareholders and creditors in-

volving moral hazard: If shareholders perceive that they have little ornothing to lose, they will want the corporation to engage in Hail Maryrisk taking that would ordinarily be rejected under normal risk-versus-

return investment methodologies (e.g., a high risk, high return projectthat has a negative net present value).57 Chancellor Allen did not indi-

54. Credit Lyonnais Bank Nederland, N.V. v. Pathe Commcns Corp., Civ. A. No.12150, 1991 WL 277613, at *33*34 (Del. Ch. Dec. 30, 1991).

55. Id. at *34.56. Id. It seemed clear that Credit Lyonnaiscreated a shield for directors, not a sword

to be used against them. Indeed, several years after Credit Lyonnais, shortly beforeresigning from the bench, Chancellor Allen offered dicta that appeared to exclude duty

shifting as a sword in the hands of creditors. See Equity-Linked Investors, L.P. v. Adams,705 A.2d 1040, 1041 (Del. Ch. 1997).This is not the law in Delaware today. See infra Part IV.57. The famous footnote follows:The possibility of insolvency can do curious things to incentives, exposingcreditors to risks of opportunistic behavior and creating complexities fordirectors. Consider, for example, a solvent corporation having a single asset, ajudgment for $51 million against a solvent debtor. The judgment is on appealand thus subject to modification or reversal. Assume that the only liabilities ofthe company are to bondholders in the amount of $12 million. Assume that thearray of probable outcomes of the appeal is as follows:

ExpectedValue

25% chance of affirmance ($51mm) $12.7570% chance of modification ($4mm) 2.85% chance of reversal ($0) 0

Expected Value of Judgment on AppealThus, the best evaluation is that the current value of the equity is $3.55 million.

($15.55 million expected value of judgment on appeal - $12 million liability to bondhold-


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cate the relationship between this conception of directorial duties andthe business judgment rule. Nor did he offer a general rule for the reso-lution of conflicting interests within this corporate community.58

The chancery court continued to adhere to duty shifting, albeit withevident discomfort. The November 2004 opinion in Production ResourcesGroup L.L.C. v. NCT Group, Inc. 59set the table for the Delaware Supreme

ers). Now assume an offer to settle at $12.5 million (also consider one at $17.5 million).By what standard do the directors of the company evaluate the fairness of these offers?The creditors of this solvent company would be in favor of accepting either a $12.5 millionoffer or a $17.5 million offer. In either event they will avoid the 75% risk of insolvency anddefault. The stockholders, however, will plainly be opposed to acceptance of a $12.5 mil-

lion settlement (under which they get practically nothing). More importantly, they verywell may be opposed to acceptance of the $17.5 million offer under which the residualvalue of the corporation would increase from $3.5 to $5.5 million. This is so because thelitigation alternative, with its 25% probability of a $39 million outcome to them ($51 mil-lon - $12 million = $39 million) has an expected value to the residual risk bearer of $9.75million ($39 million x 25% chance of affirmance), substantially greater than the $5.5 mil-lion available to them in the settlement. While in fact the stockholders preference wouldreflect their appetite for risk, it is possible (and with diversified shareholders likely) thatshareholders would prefer rejection of both settlement offers.

But if we consider the community of interests that the corporation represents it seemsapparent that one should in this hypothetical accept the best settlement offer availableproviding it is greater than $15.55 million, and one below that amount should be rejected.But that result will not be reached by a director who thinks he owes duties directly toshareholders only. It will be reached by directors who are capable of conceiving of thecorporation as a legal and economic entity. Such directors will recognize that in managingthe business affairs of a solvent corporation in the vicinity of insolvency, circumstances mayarise when the right (both the efficient and the fair) course to follow for the corporationmay diverge from the choice that the stockholders (or the creditors, or the employees, orany single group interested in the corporation) would make if given the opportunity to act.

Credit Lyonnais, 1991 WL 277613, at *34 n.55.

58. Although Chancellor Allens litigation example implicitly weighs conflicting

interests, there is no reason to believe that those weights were meant to (or even can) beused in nonlitigation contexts. See infra Part II.C.2.

59. 863 A.2d 772, 79091 (Del. Ch. 2004). In this case, Production Resources hadobtained a judgment against NCT Group, Inc., but had been unsuccessful in collecting thejudgment. Production Resources claimed NCT was insolvent and sought to protect itsinterests by the appointment of a receiver for NCT under Delaware law. ProductionResources also alleged that NCTs board and one of its officers had breached theirfiduciary duties. Credit Lyonnais and the trust fund doctrine came up in a proceduralcontext: NCT claimed that this fiduciary breach count raised derivative claims thatProduction Resources had not properly pled. If the nature of the claim was direct, ratherthan derivative, the count would not be barred. See also U.S. Bank Natl Assn v. U.S.Timberlands Klamath Falls, L.L.C., 864 A.2d 930, 94748 (Del. Ch. 2004) ([D]irectors ormanagers fiduciary duties may extend to the interests of the companys creditors when thecompany is in the zone of insolvency.), vacated, 875 A.2d 632 (Del. 2005); OdysseyPartners, L.P. v. Fleming Cos., 735 A.2d 386, 417 (Del. Ch. 1999) ([W]hile directorsnormally do not owe creditors fiduciary duties, an exception exists in the case of insolvency. . . . (citing Geyer v. Ingersoll Publns, 621 A.2d 784, 787 (Del. Ch. 1992))); Equity-LinkedInvestors, L.P. v. Adams, 705 A.2d 1040, 1042 (Del. Ch. 1997) (discussing interests ofcommon stockholders relative to those of preferred stockholders); Haft v. Haft, 671 A.2d413, 422 (Del. Ch. 1995) (discussing inefficiencies of proxy voting); Geyer, 621 A.2d at 787


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Court decision in North American, which relied heavily on its reasoning.60

In Production Resources, Vice Chancellor Strine questioned the CreditLyonnais vicinity of insolvency financial trigger for duty shifting: He

doubt[ed] the wisdom of a judicial endeavor to second-guess good-faithdirector conduct in the so-called zone.61

However, Production Resources adopted duty shiftings defining tenetthat financial condition determines changes in fiduciary duty. When afirm has become insolvent, it is settled that under Delaware law the di-rectors owe fiduciary duties to the creditors because the residual claim-ants of corporate assets are the constituency to which directors owe theirallegiance. Before insolvency, the residual claimants were the sharehold-ers; after insolvency, they were the creditors. The fiduciary duty was

never owed to shareholders because of ownership, but rather because oftheir residual claimant status.62

While Production Resourcesadopted a financial trigger more stringentthan Credit Lyonnais, one federal bankruptcy court in Massachusetts wentfar in the other direction, holding that even financially sound corpora-tions may be subject to duty shifting. In In re Healthco International, Inc.,that bankruptcy court, applying state corporate law, held that directors ofsuch corporations had a duty to creditors not to engage in a leveragedbuyout if it created an unreasonable risk of insolvency.63 Under this

approach, even healthy corporations can be subject to the states shiftedduty regime, in which judges may substantively scrutinize the directorscore business decisions.

3. The Literature. Credit Lyonnaishas proven an irresistible topic.By mid-2006, over 150 law review articles in the United States had citedthe case.64 For practitioners, the decision and its progeny substantivelychanged the law with profound consequences. Their writings in innu-merable memos to clients and in the legal literature generally focused onhelping clients reduce litigation risk, critiquing the case law foundations

([N]either party seriously disputes that when the insolvency exception does arise, itcreates fiduciary duties for the benefit of creditors.).

60. N. Am. Catholic Educ. Programming Found. v. Gheewalla, No. 521, 2006, slip op.at 1724 (Del. May 18, 2007) (discussing court of chancerys opinion in ProductionResources).

61. Prod. Res. Group, 863 A.2d at 790 n.57. Vice Chancellor Strine said, elegantly andaccurately, that he did not need to explore the metaphysical boundaries of the zone ofinsolvency because the company was insolvent. Id. at 790.

62. Id. at 79091.63. Brandt v. Hicks, Muse & Co. (In re Healthco Intl, Inc.), 208 B.R. 288, 302 (Bankr.

D. Mass. 1997) (involving suit brought by trustee in bankruptcy on behalf of corporationbut in interest of creditors). See infra Part II.E (warning that worthwhile bet thecompany risk taking may be precluded if Healthcois followed). It is worth noting that thecorporation in Chancellor Allens example in Credit Lyonnaiswas solvent, albeit comatoseand with no business to operate.

64. This is based on a search of the U.S. Law Reviews and Journals, Combineddatabase on Lexis on August 4, 2006. Using the phrase credit lyonnais /10 pathegenerated 160 items.


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for Credit Lyonnais, and complaining about the ambiguity of terms likevicinity of insolvency.

For legal academics, Chancellor Allens opinion had special

resonance. Fully a decade before Credit Lyonnais, one academic had al-ready noted the problem of firms on the brink of insolvency and sug-gested that the problem might be avoided by a concept of corporateduty of officers and directors to the abstract firm, not just to its sharehold-ers.65 Moreover, Chancellor Allen reached his decision not through theusual doctrinal analysis, but simply through the magic of social science.Legal academics thus had a poster child for dwelling on theoretical mat-ters they found interesting rather than the rules just-the-law studentsusually preferred. Besides, this was social science at just the right level:

no Greek letters or formal models, just arithmetic and a concrete litiga-tion hypothetical.

Academics were also attracted to the as-if liquidation residual claim-ant analysis of the sort set out in Production Resources. Relying on moralhazard and as-if liquidation residual claimant themes, numerous aca-demic analyses have almost treated duty shifting as being mandated byinformed common sense. A recent corporate hornbook illustrates:

It makes sense to impose fiduciary duties to bondholders on theboards of such companies [in or near insolvency], because insol-

vency is a paradigmatic final period situation in which the mar-ket constraints characteristic of repeat transactions are inopera-tive. In addition, because a common outcome of bankruptcyreorganization is the effective elimination of existing sharehold-ers and the issuance of equity in the post-reorganization firm tobondholders, the effect of insolvency is to render bondholdersthe de facto residual claimants.66

Academic writings have sometimes helped clarify our understandingof duty shifting. Some have offered additional rationales for duty shift-

ing, largely based on the need for paternalism and fairness to particularconstituencies.67 To the extent academics have criticized duty shifting,

65. Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganizations,83 Colum. L. Rev. 527, 583 (1983).

66. Stephen M. Bainbridge, Corporation Law and Economics 431 (2002); see alsoSabin Willett, The Shallows of Deepening Insolvency, 60 Bus. Law. 549, 561 (2005)(viewing insolvent company as dea[d] and its owners as having no real interest in it); cf.Janis Sarra, Taking the Corporation past the Plimsoll LineDirector and Officer LiabilityWhen the Corporation Founders, 10 Intl Insolvency Rev. 229, 23334 (2001) (asserting

residual claimant justification for duty shifting in context of Canadian doctrine). Thestatements set out in the text represent the classic conflating of insolvency, an economicstate, and bankruptcy, a legal proceeding. In a recent essay, Professor Bainbridge appearsto have modified his views on duty shifting somewhat, but continues to subscribe to dutyshiftings vision that shareholders are nothing more than as-if liquidation residualclaimants. See Stephen M. Bainbridge, Much Ado About Little? Directors FiduciaryDuties in the Vicinity of Insolvency, 1 J. Bus. & Tech. L. 335 passim(2007).

67. See, e.g., Alon Chaver & Jesse M. Fried, Managers Fiduciary Duty upon the FirmsInsolvency: Accounting for Performance Creditors, 55 Vand. L. Rev. 1813, 181516 (2002)


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however, they have done so largely on practical grounds. They typicallyrely on the uncertainties of a vicinity of insolvency standard, or on theability of many creditors to protect themselves ex ante.68 The criticism

does not look beyond the boundaries of the individual corporation andits constituencies and examine the host governance systems in whichcorporations operate.

The criticism has also generally been modest in its prescriptions.Even skeptics generally accept the duty shifting doctrines defining tenetthat a companys financial condition triggers duties to creditors. Theanalyses center on the proper financial trigger: Should it be insolvency,zone of insolvency, or some other yardstick? Overall, the criticism has

(discussing rationales for duty shifting with respect to performance creditors); AndrewKeay, Directors Duties to Creditors: Contractarian Concerns Relating to Efficiency andOver-Protection of Creditors, 66 Mod. L. Rev. 665, 69398 (2003) (discussing rationales forduty shifting with respect to employees, customers, involuntary creditors, and many tradecreditors); Lipson, supra note 49, at 124548 (discussing rationales for duty shifting withrespect to tort and wage claimants).

We are sympathetic to the special needs of constituencies such as involuntary creditorsbut feel that any accommodation for those needs must be based on approaches far morefinely tuned than duty shifting. See infra note 268 (elaborating on this and discussingpertinent bankruptcy statute provisions).

68. See, e.g., Lipson, supra note 49, at 1211 (stating that chief criticism of CreditLyonnais is that it creates uncertainty); Frederick Tung, Gap Filling in the Zone ofInsolvency, 1 J. Bus. & Tech. L. 1201, 1204 (2007) (arguing that fiduciary duties tocreditors are unnecessary and may be counterproductive). For a recent essay criticizingduty shifting resting in large part on the desirability of general directorial insulation fromchallenge, see Richard A. Booth, The Duty to Creditors ReconsideredFilling a MuchNeeded Gap in Corporation Law, 1 J. Bus. & Tech. L. 415, 425 (2007). For very thoughtfuldiscussions of the effect of these doctrines on the capacity of the corporations legaladvisors to advise management, see Royce de Rohan Barondes, Fiduciary Duties inDistressed Corporations: Second Generation Issues, 1 J. Bus. & Tech. L. 371, 37887

(2007); Bruce A. Markell, The Folly of Representing Insolvent Corporations: ExaminingLawyer Liability and Ethical Issues Involved in Extending Fiduciary Duties to Creditors, 6 J.Bankr. L. & Prac. 403, 41327 (1997). For a discussion of Campbell and Frosts helpfularticle, see supra note 9.

One recent article claims that a corporations use of net present value in deciding oninvestments would [serve] the interests of all corporate constituencies. See Remus D.Valsan & Moin A. Yahya, Shareholders, Creditors, and Directors Fiduciary Duties: A Lawand Finance Approach, 2 Va. L. & Bus. Rev. 1, 4 (2007). As to their critical claim thatmaximizing the value of the firm is functionally equivalent with maximizing shareholdervalue, Valsan and Yahya note that one of the authors of this Article has a differentopinion and outlines that opinion. Id. at 40 & n.108 (referring to Hu, Risk & Time, supra

note 12). On there being a difference in opinion, we agree. Valsan and Yahya fail toaddress a number of crucial matters, including differences between diversifiable andnondiversifiable risk, the impact of shareholder diversification on how net present valuecalculations should be adjusted for risk, and corporate decisions that are not translatableinto net present value terms. The closest Valsan and Yahya come to addressing the issue ofdiversifiable versus nondiversifable risk appears at the end of footnote 157, wherein theyappear to assume away conflicts between diversified shareholders and creditors on theground that shareholders in a corporation would also hold bonds in the corporationandin just the right amounts. Id. at 49 n.157.


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been based on incremental improvements to existing duty shiftingdoctrines.

4. The Delaware Supreme Courts Synthesis: North American. Al-

though Credit Lyonnais redefined the central principle of corporate lawand the role of judges with respect to corporate decisionmaking, untilrecently the Delaware Supreme Court had never cited Credit Lyonnais.69

Although most courts and litigants appear to have assumed that CreditLyonnaiss expansive duty shifting notions constituted Delaware law,70inMay 2007, the Delaware Supreme Court decided North American CatholicEducational Programming Foundation v. Gheewalla, modifying the financialtrigger adopted by Credit Lyonnaisbut accepting its overarching theme ofduty shifting.71

In North American, the plaintiff asserted claims against the defendantdirectors of a company called Clearwire, including breach of fiduciaryduty. The claims arose from a failed project to acquire spectrum licensesfrom the plaintiff and others. The fiduciary breach allegedly arose from,among other things, stringing out the business after it was apparentClearwires project could not go forward. The plaintiff alleged that thedefendant directors owed it fiduciary duties as creditor because Clearwire

was either insolvent or in the zone of insolvency.72 The plaintiff could

69. Indeed, its 2003 opinion in Omnicare, Inc. v. NCS Healthcare, Inc.could be read toreject duty shifting, although it did not cite Credit Lyonnais. In Omnicare, the majoritynoted:

Notwithstanding the corporations insolvent condition, the NCS board had noauthority to execute a merger agreement that subsequently prevented it fromeffectively discharging its ongoing fiduciary responsibilities.The stockholders of a Delaware corporation are entitled to rely upon the board todischarge its fiduciary duties at all times. The fiduciary duties of a director areunremitting and must be effectively discharged in the specific context of theactions that are required with regard to the corporation or its stockholders as

circumstances change.818 A.2d. 914, 938 (Del. 2003) (citations omitted).

70. For example, a June 2006 bankruptcy opinion indicates that, notwithstanding thecritical nature of the issue, none of the parties even tried to dispute that Delaware lawimposed fiduciary duties to creditors once a corporation was operating in the vicinity ofinsolvency. Official Comm. of Unsecured Creditors of Verestar, Inc. v. Am. Tower Corp.(In re Verestar, Inc.), 343 B.R. 444, 471 (Bankr. S.D.N.Y. 2006). In a July 2005 opinion, thechief judge of the District of Delawares Bankruptcy Court adopted the Credit Lyonnaisinsolvency or vicinity of insolvency as the trigger for duty shifting; she neither referencedOmnicare on this issue nor gave any indication that any litigant disputed hercharacterization. Liquidation Trust of Hechinger Inv. Co. of Del. v. Fleet Retail Fin. Group

(In re Hechinger Inv. Co. of Del.), 327 B.R. 537, 548 (Bankr. D. Del. 2005).71. N. Am. Catholic Educ. Programming Found. v. Gheewalla, No. 521, 2006, slip op.

at 20 (Del. May 18, 2007) (When a corporation is insolvent, however, its creditors take theplace of the shareholders as the residual beneficiaries of any increase in value.).

72. Id. at 3. Importantly, the lower court held it did not have to determine ifClearwire was insolvent or in the vicinity of insolvency, so the holding in the case muststand independent of that factual question. See N. Am. Catholic Educ. ProgrammingFound. v. Gheewalla, No. Civ. A. 1456-N, 2006 WL 2588971, at *6 n.65 (Del. Ch. Sept. 1,2006).


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not sustain jurisdiction against the defendants in Delaware unless it had aright to assert the fiduciary breach directly against them. A derivativeclaim would have been insufficient to sustain jurisdiction. The supreme

court held, as a procedural matter, that creditors would not have stand-ing to bring a directclaim against directors, whether the corporation wasinsolvent or near-insolvent, and therefore the case must be dismissed for

want of jurisdiction.73 That was the extent of its holding, strictlyspeaking.

The courts dicta were far more interestingit accepted duty shift-ing for the first time and prescribed the financial trigger for its applica-tion. In particular, the court rejected Credit Lyonnaiss zone of insol-

vency trigger in favor of the more precise (and stringent) trigger of

insolvency.74 This was explicitly premised on the ambiguity of a zoneof insolvency standard,75a central focus of discussion in earlier cases andin the literature.

The court went on to suggest that the insolvency trigger gave credi-tors rights beyond those given them by contract and tort.76 When a cor-poration is insolvent, creditors are the principal constituency injured byany fiduciary breaches that diminish the firms value and thus wouldhave standing to maintain derivative claims against directors for allegedbreaches of fiduciary duties.77

North American is best understood as a predictable crystallization ofconventional wisdom and existing judicial analysis, especially theresidual claimant analysis of Vice Chancellor Strine in ProductionResources. We return to North Americanafter working through the underly-ing difficulties.78

Viewed from a historical perspective, duty shifting has undergone aremarkable transformation. From their emergence nearly two centuriesago, the doctrines centered on roguish behavior in the distributionof as-

73. North American, No. 521, 2006, slip op. at 24.74. Id. at 1719.75. Id. at 19 (referring to need for providing directors with definitive guidance).

We believe, however, that in actual litigation, the distinction between whether acorporation is insolvent or merely in the zone of insolvency can also be far from clear.Even in the Delaware duty shifting cases themselves, there is no agreement as to whatinsolvency means. Compare Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772,782 (Del. Ch. 2004) (holding that insolvency means either (1) an asset shortfall in face ofwhich no reasonable prospect of successful continuation exists, or (2) an inability tomeet maturing obligations as they fall due (quoting Siple v. S & K Plumbing & Heating,

Inc., No. 6731, 1982 WL 8769, at *2 (Del. Ch. Apr. 13, 1982))), with Geyer v. IngersollPublns Co., 621 A.2d 784, 78790 (defining insolvency as when value of assets is less thanamount of debts). A 2005 Delaware bankruptcy court, purporting to apply Delaware dutyshifting doctrines, looked at neither Production Resourcesnor Geyer for guidance as to themeaning of insolvency, but instead at the Bankruptcy Code. In re Hechinger Inv. Co., 327B.R. at 548.

76. See North American, No. 521, 2006, slip op. at 2021.77. Id. (quoting Prod. Res. Group, 863 A.2d at 792).78. See infra Part IV.


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sets of dead corporations. Evasions from priority rules, often reeking offraud, were the target. By contrast, modern incarnations centered on thedeploymentof assets by ongoingenterprises. As we have already seen, cases

such as Credit Lyonnaisand North Americanplace judges in the role of re-viewing the core business decisions of troubled corporations. This is badenough. As we shall see, the creditor-oriented standards adopted forsuch judicial reviews make the doctrines untenable.

C. The Emergence of the Bankruptcy Governance System and Its EssentialConflict Resolution Functions

Bankruptcy law was ignored in Credit Lyonnaisand mentioned only in

passing in North American, which seems quite odd given that the conceptof insolvency is central to the duty shifting doctrines. That myopia, fail-ing to see the close connections between corporate law and bankruptcylaw at the insolvency border, explains much of the confusion created bythose doctrines.

Part of the explanation is historical. Bankruptcy law is relativelyyoung. There was no federal bankruptcy law when Woodc

Documents

Abolition of the Corporate Duty to Creditors