Friday, December 17, 2010

TN Supreme Court Reviews Whether a Creditor May Bring a Direct Cause of Action Against an Insolvent Corporation’s Directors and Officers

MICHAEL SANFORD v. WAUGH & COMPANY, INC. ET AL. (Tenn. December 17, 2010)

The primary issue presented in this appeal is whether an individual creditor of an insolvent corporation may bring a direct cause of action for breach of fiduciary duty against the corporate directors and officers.

We hold that a creditor of an insolvent corporation may not bring a direct claim, only a derivative claim, against officers and directors for breach of the fiduciary duties they owe to the corporation.

We adopt the reasoning of the Delaware Supreme Court in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007), observing that corporate creditors are adequately protected by existing law, and that recognizing a new direct cause of action is unnecessary and would impede corporate governance.

We further hold that the trial court properly excluded evidence of conspiracy to interfere with contract and dismissed the claim for punitive damages. The judgment of the Court of Appeals is reversed.

Opinion available at: