Bankruptcy – Breach of Fiduciary Duty

Listen to this article

7^th Circuit Court of Appeals

Case Name: Elliott D. Levin, et al. v. William I. Miller, et al.

Case No.: 17-1775

Officials: KANNE and SYKES, Circuit Judges, and DARROW, District Judge.

Focus: Bankruptcy – Breach of Fiduciary Duty

Irwin Financial Corporation was a holding company for two banks that failed in the wake of the 2007–2008 financial crisis. When the crisis began, regulators and Irwin’s outside legal counsel both advised the company to buoy up its sinking subsidiaries. Irwin’s Board of Directors therefore instructed the officers to do everything they could to save the banks. The officers tried to raise capital and applied for government aid, but the chances of success were slim. Private investors showed little interest in the company, and federal regulators signaled that a bailout was unlikely.

A small glimmer of hope flickered in 2009: Irwin received a $76 million tax refund. The Board authorized Irwin’s officers to transfer the refund to the subsidiary banks and for good reason: The Board believed that the refund legally belonged to the banks and hoped the cash infusion would keep them above water long enough for help to arrive. But the refund was not enough to save the day. Management could not raise sufficient capital, the hoped-for government relief never materialized, the banks failed, and Irwin filed for bankruptcy.

Elliott Levin was appointed as Chapter 7 trustee for Irwin’s bankruptcy estate, and he promptly filed suit against three of Irwin’s former officers. The suit alleged, among other things, that the officers breached their fiduciary duty to provide the Board with material information concerning the tax refund. Levin’s legal theory rested on an elaborate chain of assertions. He claimed the officers should have known the banks were going to fail, so they should have investigated alternatives to transferring the tax refund— specifically, an earlier bankruptcy—despite the Board’s clear directive to support the banks. Had the officers done so, they would have discovered that Irwin might be able to claim the $76 million tax refund as an asset in bankruptcy. And if the officers had presented this information to the Board, the Board would have declared bankruptcy before transferring the refund to the banks, thereby maximizing the holding company’s value for creditors.

The district judge didn’t buy Levin’s speculative theory and neither do we. Corporate officers have a duty to furnish the Board of Directors with material information, but that duty is subject to the Board’s contrary directives. The record clearly establishes that on the advice of government regulators and expert outside legal counsel, the Board had prioritized saving the banks. The officers had no authority to second-guess the Board’s judgment with their own independent investigation. We affirm.

Affirmed

Full Text

Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.