Although numerous scholarly articles and practical advisories have been written regarding a director's fiduciary duty to creditors once a company becomes insolvent or enters the "zone of insolvency," until now, the Delaware Supreme Court has never addressed the issue. As a result, the court's recent decision in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 2007 WL 1453705 (Del. May 18, 2007) will provide much-needed guidance for boards of directors of Delaware corporations to consider as they shepherd corporations through challenging financial circumstances. (While this case will likely provide persuasive authority in jurisdictions other than Delaware, it will not constitute binding authority with respect to companies that were incorporated elsewhere.)

At the start of its analysis, the court reiterated the following well-settled principles regarding fiduciary duty claims: (1) shareholders of solvent corporations have standing to assert derivative claims against directors, and (2) creditors of insolvent corporations have standing to assert derivative claims against directors. The court pointed out that, to date, none of the Delaware courts had explicitly ruled on whether creditors of insolvent corporations, or those in the "zone of insolvency," have standing to bring direct actions (alleging particularized harm) against directors, as opposed to derivative actions (alleging generalized harm to the corporation). In the North American Catholic decision, the court provided an unambiguous answer to this question by holding that creditors do not have standing to assert direct claims for breach of fiduciary duty against the corporation's directors.

The court emphasized the need for clarity in this area of the law:

• When a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising the business judgment in the best interest of the corporation for the benefit of its shareholder owners.

Given the specific focus of the language on shareholders, the court appears to have reaffirmed insolvency as the line when creditor standing for derivative claims arises and suggests that the court does not view creditors as having standing to assert derivative claims while the company is in the "zone of insolvency."

This ruling eliminates an avenue creditors had begun to pursue in applying pressure against the directors of a struggling corporation. Based upon this decision, directors can take comfort that they can likely avoid liability by exercising appropriate business judgment during times of financial difficulty. Moreover, the court has reaffirmed the standard that directors should act in the best interest of the corporation as a whole without regard to the impact on a particular class of creditors. In this way, directors will not be forced to base decisions on avoiding harm to particular creditors (even when such decisions benefit no one), but rather can pursue a path that will return the corporation to viability and profitability. In turn, this means that directors of an insolvent entity can appropriately consider the interests of various constituencies, including employees and shareholders, in addition to creditors, and make business judgments that are in the best interests of the corporation as a whole. As a result of the court's ruling, it will prove difficult for creditors to challenge the judgments of a well-advised, nonconflicted board, even when the corporation is insolvent.