Morris Manning & Martin, LLP

Trust Me, I'm a Lawyer: Restoring Faith in Fiduciaries

05.01.2006

TRUST ME, I'M A LAWYER: RESTORING FAITH IN FIDUCIARIES BY DUMPING “DUE DILIGENCE” AND TOLLING THE STATUTE OF LIMITATIONS FOR POSTPETITION BREACH OF FIDUCIARY DUTY IN CHAPTER 11     

      Imagine the following scenario: Corporation X files for bankruptcy under chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”). The directors of X, as the debtor-in-possession (“DIP”), propose what appears to be a feasible reorganization plan and the plan is confirmed. The plan, however, which depends on maintaining X's current business contracts for its success, was formulated under false pretenses. After confirmation of the plan, the DIP proceeds to divert the very business contracts that would have allowed Corporation X to successfully reorganize to Corporation Y, which is wholly owned by X's directors. As a result of the DIP's usurpation of Corporation X's business contracts, the reorganization fails. This is one example of how the DIP can breach her fiduciary duty of loyalty in chapter 11. [FN1]

       As the above scenario demonstrates, the ability to enforce fiduciary duties in chapter 11 is crucial because breaches of fiduciary duty can cause a potentially successful reorganization to fail.  There is a plethora of scholarly commentary concerning fiduciary duties in chapter 11. [FN2] Few scholars, *638 however, have discussed the problems associated with enforcing those fiduciary duties. [FN3]

       Statutes of limitations hinder one's ability to enforce fiduciary duties because of the nature of fiduciary relationships; a beneficiary will often fail to file a timely action because she has trusted the fiduciary was acting in her best interests.  This is especially likely during a complex reorganization, which necessitates the beneficiary placing trust and reliance in others, especially those with fiduciary obligations.  In this context, barring actions because the statute of limitations has run is detrimental--it effectively encourages, rather than deters, fiduciaries to breach their obligations. [FN4]

       Further, the tolling provisions available in bankruptcy, which are intended to ameliorate the harsh application of the statute of limitations, are inadequate because they only prevent the running of the statute of limitations if a plaintiff has exercised due diligence to discover her claim. [FN5] It is inconsistent with the very nature of a fiduciary relationship to require the beneficiary to engage in “aggressive oversight” of her fiduciary. [FN6]

       This Comment argues Congress should create a federal “reliance on fiduciary” tolling provision under chapter 11 of the Bankruptcy Code that would automatically toll the statute of limitations if a plaintiff failed to file suit because of reliance on a fiduciary relationship. Part I of this Comment discusses the fiduciary duties of the DIP, the chapter 11 trustee, and reorganization committees. Part II discusses the rationale for statutes of limitations and the tolling provisions applied in chapter 11.

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