Virginia Court Dismisses Claims Against Corporate Director

The U.S. District Court for the Eastern District of Virginia dismissed claims by a corporate creditor against a director of the insolvent debtor corporation.  The creditor argued that the director was liable for the debt based on theories of misrepresentation and breach of fiduciary duty.  Essentially, the creditor contends that the director offered assurances of payment in order to induce the creditor to continue to provide services, even though the director allegedly knew that the corporation would never pay the debt.  The misrepresentation claims was kicked out on a fairly technical basis that will probably be cured by amending the pleading.  The court held that the creditor failed to plead fraud with particularity, as required by Federal Rule of Civil Procedure 9(b).  The plaintiff will likely return with a more fulsome pleading and therefore dismissal of the misrepresentation claim.  Nevertheless, it is a victory for the defendant since it locks the plaintiff into a more narrow theory of the case.

The court also dismissed the creditors claim against the director for breach of fiduciary duty.  The creditor argued that the board of the directors of the debtor corporation breached its fiduciary duty to the creditor because it continued to incur more debt while the operation was insolvent.  The theory of relief that the creditor asserted -- a derivative claim for breach of fiduciary duty against an insolvent corporation's directors -- is not unique.  It is based on the idea that the creditors step into the shoes of the shareholders during corporate insolvency since they, just as the shareholders, are injured by breach of fiduciary duty that diminish the corporation's value.  However, the creditors tried to stretch the theory of relief too far.  In essence, the creditor alleged the breach of fiduciary duty to be the nonpayment of the corporation's debt.  But, as the court noted, if that were permitted then every nonpayment of debt by an insolvent corporation would subject the individual directors to suit by the creditor.  This would effectively make the directors personal guarantors of the corporation's debt.