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Company Director Had Fiduciary Duty to File for Corporate Bankruptcy

Posted on Jan 01, 2016

On April 22, 2013, a trial court judge in New York ruled that a director’s failure to put a corporation into bankruptcy is guilty of a breach of fiduciary duty. The judge held that even merely delaying the filing, if done in order to serve his personal interest, constitutes a breach if the corporation’s value is diminished as a result. One reason why a director might do this is if he had a “springing recourse guaranty.” As a result, the finding shows that directors and officers of companies who act as both a fiduciary and guarantor of the business face potential risks. 

In the case in question, the director, David Lichtenstein, was a guarantor of  the debt of a corporation, Extended Stay, Inc. The debt amounted to approximately $4.1 billion in mortgage loan debt. The specific guaranty in question was a “springing recourse” guaranty, meaning liability would be imposed on the director only under circumstances of fraud, bad acts, or the filing of a voluntary bankruptcy petition. It exposed him to approximately $100 million in potential liability. He therefore had a conflict of interest when making the decision to file for bankruptcy, because he was exposed to liability under the guarantee. A director with a personal interest, such as here, has a duty of loyalty to the company and cannot be relieved of personal liability if he breaches that duty. 

In his defense, Lichtenstein alleged that counsel for ESI recommended that the company file for bankruptcy. He further alleged that the attorney advised the company’s board members that they had an obligation as fiduciaries to authorize the bankruptcy filing. He further asserted that the filing was necessary to preserve the value of the company. After the lenders sued the guarantors based upon the springing recourse guaranties, the guarantors sued the attorney for malpractice. Lichtenstein argued that he would have had no liability if he had refused to consent to the bankruptcy filing. The court, however, held that the director’s fiduciary duty was owed solely to the company and its stockholders. 

For more information about breach of contract and other business litigation matters, contact a New York breach of fiduciary duty attorney today at (888) 497-3410. 

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