In Berg & Berg Enterprises, LLC v. Boyle, the California Court of Appeal held that directors of a incorporation danger of becoming insolvent do not owe a fiduciary duty to the company’s creditors. The debtor company in Berg & Berg was failing and entered into an assignment for the benefit of creditors instead of filing a petition for bankruptcy. The company’s largest creditor sued the company’s directors, alleging that bankruptcy would have been better for the creditors and that the directors’ failure to pursue a bankruptcy filing constituted a breach of fiduciary duties owed to the company’s creditors.
The Court of Appeal found that the creditor’s lawsuit did not state a viable claim. The Court ruled that there is no California authority for the proposition that directors of a corporation entering the “zone of insolvency” (or becoming actually insolvent) owe a fiduciary duty to the company’s creditors. The only duty that corporate directors owe to creditors is, upon actual insolvency, to avoid taking actions that “divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors claims.” Examples of such actions include diverting assets to corporate insiders or giving preferential treatment to some creditors at the expense of others.