Creditors Can’t Directly Sue Officers and Directors of an Insolvent Corporation in Tennessee
By On December 17, 2010, the Tennessee Supreme Court held “that a creditor of an insolvent corporation may not bring a direct claim, only a derivative claim, against officers and directors for breach of fiduciary duties they owe to the corporation.” Sanford v. Waugh, 2010 WL 5139496 (Tenn. 2010). With this holding, the Supreme Court reversed the Court of Appeals and instead adopted the reasoning of the Delaware Supreme Court.
This case can be seen as part of a national trend to pare back the sort of “deepening insolvency” theories that gained favor in the late 1990s and early 2000s. After this decision, creditors are still going to want to apply leverage by suing officers and directors. There are two windows that remain open after Waugh. First, I think that officers and directors still are fair game if they have engaged in otherwise tortious conduct. Depending on the facts, a range of business torts like fraud, conversion, or theft of trade secrets may be available to creditors. Second, Waugh is clear that derivative actions are available to creditors of insolvent corporations. This approach has not been commonly used in Tennessee, but perhaps we may see an upswing in creditors attempting this avenue to recovery.
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