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A Selection of Ethics Issues in Bankruptcy Cases

Nancy B. Rapoport, David Thoman, Financial Distress in the Oil & Gas Industry

As more and more companies seem to find themselves in financial distress, it's important for everyone who finds himself occasionally involved in a bankruptcy case (or a situation that might end up in bankruptcy) to be aware of certain ethics issues.

I. Fiduciary duties of insolvent companies.

Corporations are statutory persons, and they are organized so that the owners (the shareholders) are distinct from the managers (the directors). It is axiomatic that a corporation is organized to maximize the benefit to its owners, the shareholders. The day-to-day managers of the corporation--the officers--report to the board of directors, which is charged with setting the broad direction for the corporation's business plan. The board of directors reports to the shareholders themselves. When a corporation contemplates filing for protection under the Bankruptcy Code, its board of directors must use its business judgment to determine whether filing for bankruptcy protection is in the corporation's best interests.

Traditionally, the board of directors is charged with fulfilling two fiduciary duties to the owners of the corporation: the duties of loyalty4 and due care.5 (Courts sometimes discuss an [13-2] explicit duty of good faith, but this duty can also be subsumed within the duty of due care.6) Various state codes and corporate bylaws may provide exculpatory la