Bankruptcy Court Holds That, Even If USACafes Applies, No Actionable Breach of Duty Was Alleged

Bankruptcy Court Holds That, Even If  USACafes Applies, No Actionable

Breach of Duty Was Alleged

      In a recent decision by the Bankruptcy Court for the Eastern District of Kentucky, it considered and rejected an allegation that there was a breach of fiduciary duty by the corporate parent of an LLC when that LLC was itself insolvent.  The Liquidating Trustee of the Appalachian Fuels Liquidating Trust v. Energy Coal Resources (In re Appalachian Fuels), CIV. ACT.  No. 13-157-HRW, 2014 WL 4230877 (Bankr. E. D. Ky. Aug. 20, 2014).

      Appalachian Fuels, LLC, was an indirect wholly-owned subsidiary of Energy Coal Resources, Inc. (“ECR”). One of ECR’s directors served as the manager of Appalachian Fuels. After Appalachian Fuel’s failure, the plaintiff (the liquidating trustee) alleged that certain transactions damaged Appalachian Fuels and benefited ECR and its related companies at a time when Appalachian Fuels was insolvent. The allegations went on to assert that the approval of these transactions violated fiduciary duties owed by certain directors of ECR to Appalachian Fuels.

      The dispute would turn on whether the directors of ECR owed a fiduciary duty to Appalachian Fuels, the indirectly wholly-owned subsidiary.  In connection therewith, there was reviewed the line of Delaware cases beginning with In re USACafes, L. P. Litigation, 608 A.2d 43 (Del. Ch. 1991), which, as described in this opinion:

would hold that the human controller of an entity that manages another entity owes a fiduciary duty of loyalty to the managed entity, but that the fiduciary duty of loyalty in this context is limited to the duty not to engage in personal self-dealing.

As the second amended complaint did not allege personal self-dealing but only a violation duty of care, the directors had been dismissed. In responding to an objection to that finding, it was held that:

·         there is no contrary Kentucky common law of fiduciary duties from which a different rule could be drawn; and

·         Kentucky courts typically looked to the laws of Delaware when it comes to matters of Kentucky law on which there is not Kentucky law.

      Ultimately:

Plaintiffs claiming that the directors of a fiduciary parent company breached their fiduciary duty toward an insolvent subsidiary must therefore plead that the directors advanced themselves at the subsidiary’s expense. Here, negligence is the only thing alleged in the breach of fiduciary duty claim against the Independent Directors.