Solution Trust v. 2100 Grand LLC (In re AWTR Liquidation Inc.)

OPINION ON DIRECTORS’ AND OFFICERS’ DUTIES UPON INSOLVENCY, AND RELATED ISSUES

I. INTRODUCTION

The individual defendants were all directors of the debtor corporation, then known as Rhythm & Hues, Inc. (“Debt- or”), before it filed its bankruptcy petition on February 13,2013 (the “Petition Date”). Some defendants also served as Debtor’s officers. The plaintiff, which is the liquidating trustee under Debtor’s confirmed chapter 11 plan, alleges that while Debtor was insolvent these defendants (the “Directors”) diverted its assets to themselves, or dissipated or unduly risked those assets. The plaintiff seeks to recover damages for the benefit of Debtor’s creditors.

The Directors argue that there is no duty to creditors even upon insolvency— that their duties run solely to stockholders—and alternatively that the plaintiff has not adequately alleged insolvency. This opinion rejects those arguments. In so doing this opinion interprets what measures of insolvency apply and what it means for directors (and officers) to “unduly risk” a corporation’s assets under the leading California decisions.

Some issues of California law are not settled, so this opinion must predict how the…