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Cardozo Law Review

Abstract

No single body of law presently governs a corporation's obligations to creditors. However, disparate laws, starting from different perspectives, contribute to a patchwork of obligations that is poorly understood. Consequently, corporate directors have little guidance when balancing creditor and shareholder rights under corporate restructurings, securitizations, and leveraged transactions.

Commentators who have grappled with this issue focus almost exclusively on the fiduciary duty of a corporation's board of directors to shareholders. Some argue that only shareholders should be entitled to the duty; others argue that the duty should be extended to creditors under various circumstances. This Article maintains that both approaches are incomplete because they assume that the standard of duty, if one exists, is fiduciary and also because both fail to take into account other, more fundamental, sources of the corporate obligation to creditors.

This Article instead argues that the analysis of whether a corporation owes an obligation to creditors must start with the question of whether a debtor generally has an obligation to creditors. Only by answering that question can one analyze how the debtor's being a corporation should affect that obligation.

The Article uses this two-step approach to reflect on the appropriate boundaries of the corporate obligation to creditors, particularly where the interests of shareholders and creditors conflict. It shows that a debtor-corporate or not-owes a limited obligation of good faith to creditors that addresses many of the evils that commentators advocating a broad fiduciary duty to creditors have identified.

The Article then explores how that obligation is affected when the debtor is a corporation. In that context, it analyzes the "vicinity of insolvency" test proposed by Chancellor Allen in the Credit Lyonnais case, and suggests an alternative approach that sets a brighter line to determine when directors should have loyalty to both creditors and shareholders but gives more leeway and discretion to directors when that dual loyalty arises.

Finally, the Article proposes a theory that unifies these commercial law and corporate governance approaches while balancing a corporation's ability to take legitimate business risks with the reasonable expectations of creditors that their rights will not be impaired.

Keywords

Business and the Law, Creditors, Credit, Contracts, Fiduciaries

Disciplines

Contracts | Law

Included in

Contracts Commons

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