Priority for Unpaid the Bankruptcy Act in 1978. This new required - - PDF document

September 2006

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Priority for Unpaid Workers’ Comp Premiums

High Court Says No

By Lawrence A. Katz Priorities are the alchemist’s stone

• f the Bankruptcy Code — they have

the power to turn worthless claims into pots of gold. Without priority sta- tus, unsecured claims typically receive little or no distributions from the bankruptcy estate. When these claims fall within one of the statutory priori- ties of § 507(a) of the Bankruptcy Code, however, they often lead to sig- nificant distributions — sometimes even payment in full. What often sep- arates the “haves” from the “have- nots” in the bankruptcy arena is the ability to fit one’s claim into the finite list of priorities set forth in § 507(a). Section 507(a)(4) of the Bankruptcy Code affords priority treatment to claims for “wages, salaries, or com- missions, including vacation, sever- ance, and sick leave earned by an individual” earned within 90 days of the earlier of the petition date or the cessation of the debtor’s business. In two earlier decisions of the U.S. Supreme Court, United States v. Embassy Restaurant, Inc., 359 U.S. 29 (1959), and Joint Industry Bd. of Elec. Industry v. United States, 391 U.S. 224 (1968), health and welfare plans were held not to be “wages” and thus not entitled to priority treatment under § 507(a)(4). In response to these deci- sions, Congress added § 507(a)(5) to the list of priorities when it amended the Bankruptcy Act in 1978. This new provision was intended to extend pri-

• rity treatment to other forms of

employee compensation not covered by § 507(a)(4), while establishing a combined monetary cap on the claims that could receive such priori- ty (pursuant to BAPCPA, what were previously §§ 507(a)(3) and (a)(4) of the Bankruptcy Code were numbered 507(a)(4) and (a)(5) and the com- bined cap on the priorities was increased to $10,000 per employee). The new provision covered “contri- butions to an employee benefit plan…arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first … ”

THE CASE

The issue in Howard Delivery Serv.,

• Inc. v. Zurich American Ins. Co., 126
• S. Ct. 2105 (2006), decided on June

15, 2006, was whether unpaid premi- ums due under a workers’ compensa- tion insurance policy constitute “con- tributions to an employee benefit plan” so as to entitle the claimholder to priority treatment under § 507 (a)(5). Resolving a split among the circuit courts, the Supreme Court ruled that such premiums do not fall within the scope of § 507(a)(5). The Supreme Court’s ruling in Howard Delivery provides insight into not

• nly the Court’s view of the priority

provisions at issue, but also its approach to the interpretation of all provisions of the Bankruptcy Code.

BACKGROUND

On Jan. 30, 2002, Howard Delivery Service, Inc. (Howard) filed its Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Northern District of West Virginia. Howard operated as an over-the- road-freight carrier to the Midwest and mid-Atlantic regions. The com- pany employed hundreds of truck drivers, mechanics, freight handlers, management and general administra- tive personnel. At the time it filed for bankruptcy, Howard owed Zurich American Insurance Company (Zurich) $410,215 in insurance pre- miums for the workers’ compensa- tion coverage that Howard was required to carry in each of the dozen or so states in which it operat-

• ed. In an amended proof of claim,

Zurich asserted that these unpaid premiums qualified as contributions to an employee benefit plan entitled to priority under § 507(a)(5). If enti- tled to priority, Zurich would share pro rata with other priority creditors, including various health, welfare and pension plans, in the net proceeds from the sale of Howard’s assets pur- suant to a Chapter 11 plan of liqui-

• dation. If Zurich was not entitled to

priority, the parties stipulated that Zurich would receive nothing. The Bankruptcy Court denied prior- ity status to Zurich’s claim, as did the District Court. Each court concluded that the unpaid insurance premiums did not constitute bargained-for bene- fits paid in lieu of wages, and thus were not contributions to an “employ- ee benefit plan” as that undefined term was used in the Bankruptcy

• Code. Each court relied on decisions
• f the Sixth (In re Birmingham-

Nashville Express, Inc., 224 F.3d 511, 517), Eighth (In re HLM Corp., 62 F.3d 224, 226-227) and Tenth (In re Southern Star Foods, Inc., 144 F.3d 712, 717) Circuits that had reached the same conclusion, and rejected the contrary ruling of the Ninth Circuit (Employers Ins. of Wausau v. Plaid Pantries, Inc., 10 F.3d 605, 607) that had ruled consistent with the position taken by Zurich. The Fourth Circuit reversed 2 to 1 in a per curium opinion, with no agreement among the judges as to the rationale for the decision. 403 F.3d 228 (4th Cir. 2005). Judge Robert King concluded that § 507(a)(5) was unambiguous on its face and that workers’ compensation insurance premiums fell within the plain mean- ing of “contributions” to an “employ- ee benefit plan,” as each of those terms was defined in the dictionary. While agreeing with the ultimate out- come, Judge Dennis Shedd found that the statute was ambiguous, thus inviting a review of the legislative history leading to the addition of § 507(a)(5) to the hierarchy of priori-

• ties. Based upon his review of the

legislative history, he concluded that

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Lawrence A. Katz is a partner in the Virginia and Washington, DC, offices

• f Venable LLP. He focuses on bank-

ruptcy, financial restructurings and commercial litigation and has exten- sive experience in debtor and credi- tors’ rights issues. Katz was counsel

• f record for the co-petitioner

Creditors Committee before the U.S. Supreme Court in the Howard Delivery case and was the author of the petition for certiorari and the briefs submitted by Howard Delivery and the Committee.

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September 2006

Congress intended the term “employ- ee benefit plan” to be taken from the definition contained in ERISA. This includes workers’ compensation plans within the definition of em- ployee benefit plans, but then carves them out of the scope of ERISA. Finally, Judge Paul V. Niemeyer dis- sented, finding that workers’ com- pensation insurance premiums were not within the plain meaning of “contributions to an employee bene- fit plan” and that the legislative history did not support such a reading of the priority statute.

THE SUPREME COURT DECISION

The split among the circuit courts, and among the judges of the Fourth Circuit who ruled to overturn the Bankruptcy Court and District Court decisions in favor of Howard, was ultimately resolved by the Supreme Court in a split decision authored by Justice Ginsburg, with a dissent authored by Justice Kennedy. Echoing the somewhat unusual alliances among the circuits on the issue presented in Howard Delivery (the Fourth and Ninth Circuits versus the Sixth, Eighth and Tenth), Justice Ginsburg’s opinion was joined by Justices Roberts, Stevens, Scalia, Thomas and Breyer, whereas Justice Kennedy’s dissenting opinion was joined by Justices Souter and Alito.

Other Statutes Not Controlling

In its brief and throughout its oral argument, Zurich forcefully asserted that the definition of the term “employee benefit plan” should be controlled by ERISA, which includes workers’ compensation plans within its definition of this term. In further support of its position, Zurich pointed to the Congressional hearings that pre- ceded enactment of the Bankruptcy Reform Act of 1978, which added the provisions of § 507(a)(5). In the course

• f these hearings, several witnesses

had urged Congress not to draft § 507(a)(5) too narrowly, making ref- erences to the expanding universe of benefits provided employees under the recently-passed ERISA statute. The majority rejected Zurich’s argu- ment and cautioned that borrowing definitions from other statutes absent express direction from Congress was fraught with peril, particularly when these other statutes were “designed without bankruptcy in mind.” Citing to the Court’s earlier holding in United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213, 219 (1996), where it had been noted that “[h]ere and there in the Bankruptcy Code Congress has included specific directions that establish the significance for bank- ruptcy law of a term used elsewhere in the federal statutes,” the majority in Howard Delivery concluded that “[n]o such directions are contained in §507(a)(5), and we have no warrant to write them into the text.” The first lesson of Howard Delivery is simply this: Do not look beyond the Bankruptcy Code for the mean- ing of its provisions unless the Code expressly points you elsewhere.

Plain Meaning, Bankruptcy Style

In the eyes of Justice Kennedy and the other dissenting justices, the plain meaning of the term “employee benefit plan” includes workers’ com-

• pensation. However, in reaching a

contrary conclusion, Justice Ginsburg and the majority of the Court adopt a somewhat customized version of the plain meaning doctrine for use in connection with the Bankruptcy

• Code. This bankruptcy-specific ver-

sion of the plain meaning rule looks beyond common usage and diction- ary definitions of the words con- tained in the statute; in fact, the majority opinion contains no refer- ences to the various dictionary defi- nitions relied upon by Judge King in

• pinion below. Instead, the majority

takes a broad view of the overriding principles of the Bankruptcy Code and applies the rules of statutory construction so as to comport with these general principles. As Justice Ginsburg explains, “We are guided in reaching our decision by the equal distribution objective underlying the Bankruptcy Code, and the corollary principle that pro- visions allowing preferences must be tightly construed.” As the majority duly notes, every claim granted pri-

• rity status reduces the funds avail-

able to general unsecured creditors and may diminish the recovery of

• ther claimants qualifying for equal
• r lesser priorities. In the case of

Howard Delivery, it was clear that granting priority to Zurich’s claim would substantially dilute the claims

• f various health, welfare and pen-

sion plans that were undeniably enti- tled to priority under § 507(a)(5), but which would not be paid in amount due to the debtor’s limited assets. When subjected to the litmus test

• f these fundamental principles of

bankruptcy law, Zurich’s plain mean- ing argument did not survive. As Justice Ginsburg concludes at the end of the majority opinion, any doubt concerning whether workers’ compensation falls with the plain meaning of the term “employee ben- efit plan” … is best resolved in accord with the Bankruptcy Code’s equal dis- tribution aim. We therefore reject the expanded interpretation Zurich invites. Unless and until Congress otherwise directs, we hold that carriers’ claims for unpaid workers’ compensation premiums remain outside the priority allowed by § 507(a)(5). Thus, the second lesson of Howard Delivery: Bankruptcy is unique and the plain meaning of the Bankruptcy Code must be determined in light of the fundamental principles upon which the Code is based.

THE ESSENTIAL CHARACTER OF WORKERS’ COMPENSATION

Beyond the issues of plain meaning and statutory interpretation, the Court in Howard Delivery still faced the question issue of whether workers’ compensation plans, be they statuto- rily mandated or voluntarily provid- ed, were “employee benefit plans.” The Court decided this ultimate issue by evaluating the “essential character”

• f workers’ compensation regimes. It

noted that, unlike pension plans and life, health and disability insurance plans that were designed to supple- ment or substitute for employee wages, workers’ compensation programs “have a dominant employer-oriented thrust: They modify, or substitute for,

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Workers’ Comp

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September 2006

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and were providing $100 million of exit financing for the restructuring. Despite the fact that the plan had been overwhelmingly approved and no economic stakeholder objected to the plan support agreements, the United States Trustee again sought to designate the votes of these creditors. And, again, the Court ruled that § 1125(b) prohibits any plan support agreement that is delivered after the petition date, even where such acts are mere formalities in connection with a pre-negotiated Chapter 11 case where the parties have already substantively agreed upon the plan support agree- ment prior to the bankruptcy filing. At bottom, the Delaware Bank- ruptcy Court’s 2002 decisions — both issued by Judge Walrath based on

• bjections filed by the United States

Trustee — rested upon the legal con- clusion that a plan support agree- ment is a “solicitation” for purposes

• f § 1125(b).

THE OWENS CORNING DECISION

The Delaware Bankruptcy Court’s more recent June 2006 decision in the Owens Corning case reaches a differ- ent conclusion. At the time of the rul- ing, the Owens Corning Chapter 11 case, which involved numerous com- plex issues including enormous asbestos liabilities, had been pending for approximately 6 years. Several plans of reorganization had been pro- posed and hotly contested, including a plan that proposed a substantive consolidation of the debtors that had been confirmed, but was ultimately reversed on appeal. After this set- back, the debtors negotiated anew with their stakeholders to craft anoth- er new plan of reorganization. These negotiations produced a con- sensus regarding a reorganization plan that the parties memorialized in a plan support agreement signed by, among others, the debtors, the official asbestos claimants committee, the representative for future asbestos claimants, and numerous significant holders of the debtor’s bonds. The plan support agreement included the typical conditions, including that the signatories would vote in favor of the plan only if they received a court- approved disclosure statement that provided information consistent with the information that was given to the signatories in connection with the plan support agreement. The debtors then sought court approval of the plan support agreement as a settle- ment pursuant to Rule 9019 of the Federal Rules of Bankruptcy Pro-

• cedure. Relying upon the rulings in

NII and Staions Holding, the United States Trustee again objected that the plan support agreement amounted to a “solicitation” that violated § 1125(b). However, this time the Delaware Bankruptcy Court rejected the Trustee’s position and held unequivo- cally that “the Plan Support Agreement is not a solicitation.” In re Owens Corning, Case No. 00-3837 (Bankr. D.

• Del. June 23, 2006) (docket no. 18233

(transcript at 8-9). In so doing, the court joined the majority of courts that have recognized that Chapter 11 is, by its nature, a negotiated process and therefore, what constitutes an imper- missible postpetition “solicitation” under § 1125(b) should be interpreted narrowly and should be limited to the formal balloting process to obtain offi- cial votes on a Chapter 11 plan. See Century Glove, Inc. v. First Am. Bank

• f N.Y., 860 F.2d 94, 101–02 (3d Cir.

1988); In re Kellogg, 160 B.R. 336, 339–40 (Bankr. D. Minn. 1993); In re Snyder, 51 B.R. 432, 437 (Bankr. D. Utah 1985); Zentek GBV Fund IV, LLC

• v. Vesper, Nos. 00-5385, 00-5386, 2001

WL 1042217, **9 (6th Cir. Aug. 29, 2001); In re Gilbert, 104 B.R. 206, 214 (Bankr. W.D. Mo. 1989); In re Pleasant Hill Partners, L.P., 163 B.R. 388, 391 (Bankr. N.D. Ga. 1994); In re Texaco, 81 B.R. 813, 814–15 (Bankr. S.D.N.Y. 1988); In re Cal. Fid., Inc., 198 B.R. 567, 571–72 (B.A.P. 9th Cir. 1996); In re Dow Corning Corp., 227 B.R. 111, 118 (Bankr. E.D. Mich. 1999); Keach RJ: infra at 45 (noting that a majority

• f courts define “solicitation” narrowly
• ut of concern that ‘broad reading of

[Section] 1125 can seriously inhibit free creditor negotiations.’”). Indeed, the

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the common-law tort liability to which employers were exposed for work- related accidents.” Thus, workers’ com- pensation regimes offer something to both employees — the right to receive benefits on a no-fault basis, and to employers — the freedom from large tort judgments and the attendant litiga- tion costs. By contrast, no such trade-off or sharing of benefits exists with respect to the fringe benefit plans that Congress sought to protect when it enacted § 507(a)(5) in response to the Supreme Court’s holdings in Embassy Restaurant and Joint Industry Board. Unlike workers’ compensation insur- ance which, consistent with fire, theft, and other forms of insurance, benefits the employer by shielding it from lia- bility, employer-sponsored pension plans, and group health or life insur- ance plans typically insure, and there- by benefit, only the employee or his

• survivor. These latter plans constitute

the type of fringe benefits that the leg- islative history surrounding § 507(a)(5) specifically addressed –– “health insurance programs, life insurance plans, pension funds, and all other forms of employee compensation that [are] not in the form of wages.” Balancing these various factors, the Court found that “although the ques- tion is close,” workers’ compensation was not compensation for the employee, but rather a substitute for the tort liability of the employer: In sum, we find it far from clear that an employer’s liability to pro- vide workers’ compensation cov- erage fits the § 507(a)(5) category “contributions to an employee benefit plan…arising from servic- es rendered.” Weighing against such categorization, workers’ compensation does not compen- sate employees for work per- formed, but instead, for on-the- job injuries incurred; workers’ compensation regimes substitute not for wage payments, but for tort liability. One can therefore summarize the third and final lesson of Howard Delivery as follows: When deciding

Lockup Agreements

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Workers’ Comp

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September 2006

and officers breached their duties of loyalty and care in connection with Scotty’s pre-bankruptcy workout with its lenders. More specifically, Scotty’s sold sev- eral parcels of real estate to certain defendants at less than market rates. Even though they were insiders, Scotty’s failed to solicit and consider third-party offers for the purchase of this choice real estate, and failed to seek any independent consideration

• r review of these insider transactions.

Additionally, Scotty’s entered into insider loans with these defendants, whereby they loaned several million dollars to Scotty’s at what appeared to be above market interest rate of 11% or greater. All these loans were paid back before the filing. The defendants, directors and offi- cers moved to dismiss on several grounds, including that the directors

• f the wholly owned subsidiary owe

no duty to the subsidiary corporation, and, thus, they could not have violat- ed their fiduciary duties to Scotty’s,

• Inc. Relying upon Southwest Holdings,

L.L.C. v. Kohlberg & Co. (In re Southwest Supermarkets L.L.C.), 315 B.R. 565 (Bankr. D. Ariz. 2004), the defendants argued that Delaware law holds that the directors and officers of a wholly owned subsidiary owe their fiduciary duties solely to the single shareholder and not to the subsidiary corporation itself, even when the cor- poration becomes insolvent. The Trustee opposed the motion, arguing that such a duty did exist, and that he was bringing the action

• n behalf of the parent corporation,

the wholly-owned subsidiary, and the creditors of Scotty’s.

COURT’S DECISION

The court rejected the defendants’ contention, and ruled that Delaware law would recognize that the directors and officers of an insolvent, wholly-

• wned subsidiary owe fiduciary

duties to the subsidiary and its credi-

• tors. It distinguished the Southwest

Court’s decision primarily because of its reliance upon Anadarko Petroleum

• Corp. v. Panhandle Eastern Corp., 545
• A. 2d 1171 (Del. 1998), which arose

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court declared that a plan support agreement “clearly is [not] a request for an official vote. There is no ballot, no plan.” In re Owens Corning, (Docket

• no. 18233, transcript at 9).

Rather, the court determined that the plan support agreement was merely an agreement to cast an official vote in the future subject to important conditions, including compliance with § 1125(b)’s requirement of a disclosure statement at the time of the official vote. See In re Owens Corning, (docket no. 18233, transcript at 12-14 (“There is nothing in the Plan Support Agreement that demands or solicits a vote unless the plan proposed meets with the satisfac- tion of the Plan Support Agreement

• parties. And those parties have put

together in the Plan Support Agreement the information that tells the plan proponents what the parame- ters of the plan must be to achieve the favorable vote of the creditors who are parties.”); see also In re Kellogg, 160 B.R. at 340 (finding postpetition lockup agreement not to be § 1125(b) solicita- tion because solicitation did not occur until court approved disclosure state- ment was distributed for official votes); In re Pioneer Fin. Corp., 246 B.R. 626, 631–33 (Bankr. D. Nev. 2000) (finding language of consent solicitation that is similar to lockup agreement language not to be an “acceptance” of a plan, but an “agree[ment] to agree on a plan”); Century Glove, 860 F.2d at 101–02 (“We find no principled, pre- dictable difference between negotia- tions and solicitation of future accept-

• ances. We therefore reject any defini-

tion of solicitation which might cause creditors to limit their negotiations.”); In re Dow Corning, 227 B.R. at 118 (“Solicitation ‘[does] not encompass discussions, exchanges of information, negotiations or tentative agreements that may be made by the various par- ties in interest in a bankruptcy case which may lead to the development of a disclosure statement or plan of reor- ganization or information to be includ- ed therein.’” (quoting In re Snyder, 51 B.R. 432, 437 (Bankr. D. Utah 1985))). As noted, Owens Corning was decid- ed by Visiting Judge Fitzgerald, while NII Holdings and Stations Holding were both issued by Judge Walrath, so it remains to be seen whether Owens Corning represents a change in direc- tion in Delaware, or merely a differ- ence of opinion. Nevertheless, it is cer- tainly encouraging to see that the most recent Delaware decision has joined the majority view to interpret § 1125(b) in a flexible manner that promotes the consensual resolution of Chapter 11

• cases. This ruling should provide com-

fort to practitioners seeking to memori- alize consensual Chapter 11 resolu- tions, particularly where the parties seek court approval of such agree- ments under Bankruptcy Rule 9019. Finally, it should be noted that addi- tional protection for postpetition plan support agreements in prenegotiated Chapter 11 cases may also be found in new § 1125(g) of the Bankruptcy

• Code. 11 U.S.C. § 1125(g). See Mayr

KA: Unlocking the Lockup: The Revival of Plan Support Agree-ments Under New § 1125(g) of the Bankruptcy Code. 15 J Bankr L. & Prac, Issue No. 6 (forthcoming Dec. 2006) (discussing new § 1125(g) safe- harbor for plan support agreements in prenegotiated and prepackaged Chapter 11 cases). That provision ex- empts from § 1125(b) the continuation

• r completion of a “solicitation” that

began before commencement of the Chapter 11 case. Thus, even assuming that a lockup agreement is a solicita- tion, § 1125(g) would permit the type

• f activity that occurred in the NII

Holdings case provided that such activity complied with applicable non- bankruptcy law.

Lockup Agreements

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Fiduciary Duties

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Luis Salazar is a shareholder at Greenberg Traurig and a member of its National Business Reorganization and Bankruptcy Department. He is based in the firm’s Miami office and ssalazarl@gtlaw.com.

The publisher of this newsletter is not engaged in rendering legal, accounting, financial, investment advisory or other professional services, and this publication is not meant to constitute legal, accounting, financial, investment advisory or

• ther professional advice. If legal, financial, investment

advisory or other professional assistance is required, the services of a competent professional person should be sought.

September 2006

7

• ut of different factual circumstances.

In Anadarko, the Delaware Supreme Court considered whether a corporate parent and directors of a wholly

• wned subsidiary owe fiduciary

duties to the prospective stockholders

• f the subsidiary after the parent

declares its intention to spin-off the

• subsidiary. The Delaware Supreme

Court ruled that, before the date of distribution, the interests of the respective stockholders were not suf- ficient to impose fiduciary obligations

• n the parent and the subsidiary’s
• directors. But Anadarko did not, as

the defendant directors and officers in Scott suggest, eliminate all duties of directors to subsidiary corporations. The Bankruptcy Court also noted that the majority of courts following Anadarko have rejected just such a contention as overbroad. The Scott court cited as one example Judge Allan L. Gropper’s decision in In re RSL Comm. Primecall, Inc., ___ B.R. ___, 2003 WL 22989669 (Bankr. S.D. N.Y. 2003), which noted under similar circumstances that Anadarko is distin- guishable in part because both the parent company and the subsidiary were solvent: It would be absurd to hold that the doctrine that directors owe special duties after insolvency is inapplicable when the insolvent company is a subsidiary of another corporation. That is pre- cisely when a director must be most acutely sensitive to the needs of the corporation’s sepa- rate community of interests, including both the parent share- holder and the corporation’s creditors … There is no basis for the principle propounded by a few of the Defendants that the directors of an insolvent sub- sidiary can, with impunity, per- mitted to be plundered for the benefit of its parent corporation. Primecall at *42-44. Southwest distinguished Primecall by noting that its exception to the Anadarko rule arose in the context

• f creditor, rather than debtor,
• claims. Thus, Southwest posits that

directors of wholly owned insolvent subsidiaries do not owe any fiduciary duties to the subsidiary corporation, but nevertheless owe fiduciary duties to the subsidiary’s creditors. But this misunderstands the concept of fidu- ciary duty to creditors, according to the Scott court. Under Delaware law, creditors of insolvent corporation are

• wed fiduciary duties, but these

duties are typically derivative of those owed to subsidiary corporation

• itself. So, if a subsidiary’s creditors

are said to be owed a fiduciary duty upon insolvency, the subsidiary itself must also be owed such a duty. Thus, Southwest’s distinction is with-

• ut merit.

The Scott court also noted that Southwest failure to recognize this point may in part be attributable to the fact that it was decided without the benefit of Production Resources Group L.L.C. v. NCT Group, Inc., 863

• A. 2d 772, 791-92 (Del. Ch. 2004),

which clarified that director’s fiduciary

• bligations in the zone of insolvency

are still to the corporation itself: When a firm has reached the point

• f insolvency, it is settled that

under Delaware law, the firm’s directors are said to owe fiduciary duties to the company’s creditors. This is an uncontroversial proposi- tion and does not completely turn

• n its head the equitable obliga-

tions of the directors to the firm

• itself. The directors continue to

have the task of attempting to maximize the economic value of the firm. That much of their job does not change. Thus, the court concluded, the more natural reading of Delaware law is that upon insolvency, directors

• f a wholly owned subsidiary owe

fiduciary duties to the subsidiary and its creditors.

CONCLUSION

While the Scott’s decision makes compelling legal sense, it adds a level of uncertainty to the duties of directors and officers acting within the zone of insolvency. To cite but

• ne example, the Bankruptcy Court

in In re Century Electronics Mfg., Inc., ____ B.R. ___, 2006, WL 1999216 (Bankr. D. Mass. 2006), relied upon the Scott decision to assert that the actions of directors and officers of a parent company, who also sat on the board of the sub- sidiary, could give rise to breach of fiduciary duty claims in two states — Delaware, where the parent corpora- tion was formed, and Massachusetts, where the subsidiary was incorporat-

• ed. Is it possible at all, then, to serve
• n the board of a parent and a sub in

the zone of insolvency? Based on Scott’s, it would certainly be a very fine line to walk. Editor’s Note: In what may prove to be a major development on this issue,

• n August 10, the Delaware Court of

Chancery considered the question of deepening insolvency in Trenwick America Litigation Trust v. Ernst & Young LLP, et al., C.A. No. 157-1. Hold- ing there is no claim for deepening insolvency under Delaware law, Vice Chancellor Leo E. Strine stated that “put simply, under Delaware law, ‘deepen- ing insolvency’ is no more of a cause of action when a firm is insolvent than a cause of action for ‘shallowing prof- itability’ would be when a firm is sol- vent.” A full analysis of this decision will appear in an upcoming issue.

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Fiduciary Duties

continued from page 6 —❖— what type of claims are entitled to priority under the Bankruptcy Code, the Court will look at all relevant aspects of the claim to ascertain its essential character and is likely to construe the priority in light of its legislative history. In the end, §507(a)(5) proved not to be the alchemist’s stone that the insurance industry had hoped for. Whether this will change in the future is now up to Congress.

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