Opinion ID: 1034091
Heading Depth: 4
Heading Rank: 2

Heading: The Injured Party

Text: Our analysis of purposeful direction also requires us to examine the claimed injuries giving rise to the lawsuit in the forum, which inevitably leads us to the question, “Who was injured, and where?” In this case, the answer turns out to be somewhat complicated. The named plaintiff, Newsome, is simply a court-appointed trustee. The bankruptcy court, however, gave Newsome charge over Mahalo USA’s legal claims, instructing him to administer them “for the benefit of creditors.” App. 11. This connection to the creditors is important. In Delaware, 3 if a wholly-owned subsidiary is solvent, the subsidiary’s directors owe their fiduciary duties to the parent and its shareholders. Anadarko Petroleum Corp. v. Panhandle E. Corp., 545 A.2d 1171, 1174 (Del. 1988). Thus, loading debt on a solvent subsidiary to maximize the parent’s value is not a breach of fiduciary duty to the subsidiary. Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 192 (Del. Ch. 2006). Things change, however, when the subsidiary becomes insolvent. At that point, the subsidiary’s “creditors take the place of the shareholders as the residual beneficiaries of any increase in value,” and the director therefore owes fiduciary duties to the creditors as well as the corporation. N. Am. Catholic Educ. 3 The parties agree that Delaware law governs at least the Mahalo USA directors’ duties. -13- Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007). Thus, if Newsome has a prima facie breach of fiduciary duty claim against the individual defendants, such a claim must derive from the duty Mahalo USA’s directors may have owed to the company and its creditors when the company became insolvent. Typically, this scenario leads to questions of standing, such as whether a creditor may bring a direct claim for breach of fiduciary duty, or only a derivative claim. Also important is whether a bankruptcy trustee brings a fiduciary duty claim on the creditors’ behalf, or only on the company’s behalf (although the trustee’s efforts might benefit the creditors). No one has challenged standing here, but these questions are not merely academic for our purposes. They are a necessary starting point for answering the question, “Who was injured, and where?” Fortunately, recent Delaware case law has resolved the standing questions. First, creditors of an insolvent corporation can almost never bring a direct action for breach of fiduciary duty. Gheewalla, 930 A.2d at 101–03. Such an action “would create a conflict between . . . directors’ duty to maximize the value of the insolvent corporation for the benefit of all those having an interest in it, and the newly recognized direct fiduciary duty to individual creditors.” Id. at 103. More specifically, “[d]irectors of insolvent corporations must retain the freedom to engage in vigorous, good faith negotiations with individual creditors for the benefit of the corporation.” Id. -14- Second, creditors of an insolvent corporation (like shareholders generally) may bring a derivative action for breach of fiduciary duty—i.e., an action to force the corporation to sue the relevant directors and officers. Id. at 101. Third, a bankruptcy trustee has standing to pursue the creditors’ claim for breach of fiduciary duty, but not because the trustee is somehow stepping into the shoes of the creditors. Rather, “a bankruptcy trustee may assert only the claims that belong to the bankruptcy estate,” but “those claims may include the interests of creditors in the sense that the trustee has the duty to marshal the assets of the estate so that they can be distributed to creditors on a pro rata basis.” In re Scott Acquisition Corp., 344 B.R. 283, 290–91 (Bankr. D. Del. 2006) (quoting Bondi v. Grant Thorton Int’l (In re Parmalat Sec. Litig.), 377 F. Supp. 2d 390, 420 (S.D.N.Y. 2005)) (emphasis added). These answers generally make sense, although applying them to the question here—“Who was injured, and where?”—is not straightforward. Specifically, if Newsome is not considered to be asserting the creditors’ claims, but rather Mahalo USA’s claims, then where was Mahalo USA injured? And may we nonetheless consider injury to and location of Mahalo USA’s creditors when evaluating personal jurisdiction? In other contexts, identifying the location of the corporation is fairly simple. For example, when evaluating diversity jurisdiction, a corporation is considered domiciled where it is incorporated and where it has its “principal place -15- of business,” 28 U.S.C. § 1332(c)(1), which the Supreme Court defines as “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities,” Hertz Corp. v. Friend, 130 S. Ct. 1181, 1192 (2010). In Mahalo USA’s case, this would mean it exists in Delaware (place of incorporation) and Canada (principal place of business). But these answers come by way of interpreting § 1332—a statute governing subject-matter jurisdiction, not personal jurisdiction. Personal jurisdiction restrictions come by way of the due process clause. Does the due process clause require us to treat Mahalo USA as located in any particular place for purposes of the injury it suffered? Similarly, does the due process clause require us to ignore where the alleged harm was principally felt? We believe the answer to both questions is no. When Delaware courts say that the injured party is the corporation principally, and the creditors only derivatively, these courts are really responding to the question of when and how creditors may sue for those injuries. Thus, to say, “This is the corporation’s injury,” does not mean that the creditors have suffered no harm, just that the creditors may not sue directly for that harm—because, among other reasons, allowing such suits would create the same undesirable consequences as allowing each shareholder to sue directly for loss of value to his or her stock. But that is a question of state substantive law and policy with respect to corporations. There is no reason to think that due process requires us to treat the -16- corporation and its creditors in the same way for purposes of determining personal jurisdiction. In particular, we do not believe due process requires us to ignore where the injury was actually felt, even if those who felt it face some impediment to suit on account of substantive corporation law. Thus, in a lawsuit claiming breach of fiduciary duty, we believe it is appropriate to consider harm to those to whom a fiduciary duty was owed—in this case, the creditors—when answering the question of who was injured and where. We do not mean to imply that a forum may obtain personal jurisdiction over corporate officers simply because one to whom a fiduciary duty was owed is located in that forum. But a court evaluating personal jurisdiction need not ignore the creditors’ or shareholders’ places of residence simply because the cause of action belongs to the corporation. Here, Newsome alleges that all or nearly all of Mahalo USA’s creditors are Oklahoma residents. Defendants do not dispute this claim. In addition, Mahalo USA filed for bankruptcy in Oklahoma, which strongly suggests that many creditors reside in Oklahoma. We therefore conclude that we may appropriately consider the alleged injury in this case to have occurred in Oklahoma. Thus, the answer to our question—“Who was injured, and where?”—is that Mahalo USA and its creditors were injured primarily in Oklahoma. Having concluded as much, we may turn to the purposeful direction analysis itself. -17-