Directorial Duties To Creditors - Getting To The Bottom Of The California Trust Fund Theory
A week ago today, Kevin LaCroix wrote about the potential liability of directors of financially stressed companies. Kevin's piece focused on Delaware law and makes no mention of the state of the law here in California.
In Berg & Berg Enterprises, LLC v. Boyle, 178 Cal. App. 4th 1020, 100 Cal. Rptr. 3d 875 (2009), the Court of Appeal held:
"Accordingly, based on this established doctrine, we conclude that under the current state of California law, there is no broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation's creditors solely because of a state of insolvency, whether derived from Credit Lyonnais [Credit Lyonnais Bank Nederland N.V. v. Pathe Communications Corp. 1991 Del. Ch. Lexis 215] or otherwise. And we decline to create any such duty, which would conflict with and dilute the statutory and common law duties that directors already owe to shareholders and the corporation."
The Court then obfuscated the matter by also concluding:
"Under the trust fund doctrine, upon actual insolvency, directors continue to owe fiduciary duties to shareholders and to the corporation but also owe creditors the duty to avoid diversion, dissipation, or undue risk to assets that might be used to satisfy creditors' claims."
Does the California trust fund doctrine apply to foreign corporations? If the creditor is neither a shareholder nor an officer or doctrine, it might be credibly asseverated that the internal affairs doctrine has no application. Corporations Code Section 2116, however, provides that the directors of a foreign corporation are liable to the corporation, its shareholders, creditors, receiver, liquidator, or trustee in bankruptcy for, among other things, breach of official duty according to the laws of the state of incorporation, whether the violation was committed or done in California or elsewhere. Thus, the law of the state of incorporation would appear to apply regardless of whether a claim of breach is viewed as direct or derivative. See CAMOFI Master LDC v. Associated Third Party Adm'rs, 2018 U.S. Dist. LEXIS 23657 ("Like shareholder actions prior to insolvency, creditor actions under the trust-fund doctrine for the dissipation of corporate assets are derivative.").