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A trio of recent Delaware bankruptcy and Court of Chancery decisions illuminate � and possibly expand � the fiduciary duties of corporate officers who are not also company directors. In addition to clarifying how officers might be liable for corporate wrongdoing, the decisions also beef up the sparse body of Delaware case law that specifically highlights the duties of officers, according to lawyers. The recent decisions may help eliminate confusion about the fiduciary duties of corporate officers, an issue which has been addressed mostly in snippets for more than 40 years, said Michael Maimone, a partner in the Wilmington, Del., office of Boston-based Edwards Angell Palmer & Dodge. “It’s a matter of clarifying that concept so it’s clearer,” Maimone said. Maimone also noted a Delaware statute change, which took effect in January 2004, that gave Delaware courts jurisdiction over corporate officers who are not Delaware residents in cases concerning an officer’s “violation of duty.” Previously, a Delaware court would have to use the state’s long-arm statute to obtain jurisdiction over such defendants, Maimone said. “That’s the change that’s going to create more litigation against officers,” he said. ‘Caremark duties’ On April 9, in the most recent of the three decisions, Delaware’s bankruptcy court invoked the so-called “ Caremark oversight duties” of corporate directors when it declined to dismiss claims against a former vice president and general counsel of a company in a bankruptcy case involving allegations of fraud against the former president. Caremark duties, which are named for a prior Chancery Court case, require corporate directors to establish monitoring systems to detect corporate wrongdoing. In re Caremark International Inc. Derivative Litigation, 698 A.2d 959, 967-71 (New Castle Co., Del., Ch. 1996). The bankruptcy court’s opinion in an adversary bankruptcy proceeding allowed the case against former general counsel Brian Licastro to move forward. Miller v. McDonald, No. 07-51350 (Bankr. D. Del.) The adversary case sprang from the Chapter 7 liquidation of a Pittsburgh-based health care staffing firm. World Health Alternatives Inc., No. 06-10166, (Bankr. D. Del.). In the Miller adversary case, which involved other parties who did not seek to dismiss the claims, the bankruptcy trustee alleged that Licastro breached his fiduciary duties by not setting up a monitoring system that would have increased the chances of detecting the company president’s fraudulent activities. The surviving claims against Licastro so far include breach of fiduciary duty; waste of corporate assets; negligent misrepresentation; professional negligence; along with aiding and abetting waste of corporate assets and the president’s breach of fiduciary duty and fraud. Licastro’s attorney in the Miller adversary proceeding, Norman E. Greenspan of Philadelphia’s Blank Rome, called the decision “an extension of the law and an improper one. “I see this case as being, at least for now, an extension to officers of companies’ duties and responsibilities that I don’t think the law assigns to them,” Greenspan said. Greenspan also noted that World Health Alternatives Inc. is a Florida corporation, and Florida law should apply despite the opinion’s citation of a Florida case, which notes that “Florida courts have relied upon Delaware corporate law to establish their own corporate doctrines.” “Just because it’s filed in Delaware doesn’t mean Delaware law applies,” Greenspan said. Powerful obligations for GCs Applying the Caremark duty of corporate oversight to officers who aren’t directors creates a powerful obligation for in-house lawyers, said Francis G.X. Pileggi, a partner at Fox Rothschild in Philadelphia who represents the trustee in the adversary case in bankruptcy court. “This is the first decision I’m aware of that specifically applied the Caremark [oversight] duties to an officer and an in-house lawyer who also happened to be an officer,” Pileggi said. “That has wide ranging impact on a lot of companies and lawyers and a lot of officers.” Besides the tussle in Delaware’s Bankruptcy Court, the Chancery Court has also directly tackled the issue of officer duties a couple of times during the past several months. One recent Chancery decision involved a challenge to a fraternal organization’s sale of real estate arranged by two former officers. The organization asked the court to undo the sale on the grounds that the officers breached their fiduciary duties because the sale process violated the group’s bylaws and the sale price was below market value. Midland Grange No. 27 Patrons of Husbandry v. Walls, No. 2155-VCN (New Castle Co., Del., Ch.) Vice Chancellor John W. Noble wrote that the respondents had fiduciary duties to the organization whether they were officers or directors. He also ruled that they hadn’t violated those duties because they acted in good faith. Equating duties Craig T. Eliassen of Schmittinger and Rodriguez in Dover, Del., the former officers’ lawyer, said he thoroughly researched the fiduciary duties of directors to prepare his case and he believes it makes sense to equate the duties of officers and directors in some situations. The case is “just the application of Delaware fiduciary duty case law to a unique factual circumstance,” Eliassen said. John Grady of Grady and Hampton in Dover, who represented the fraternal organization, did not return a call for comment. The Chancery court also took up the question in one of several decisions about alleged stock options backdating at circuit manufacturer Maxim Integrated Products Inc. Ryan v. Gifford, No. 2213-CC (New Castle Co., Del., Ch.). In a Nov. 21 opinion, Chancellor William B. Chandler III ruled that the court had jurisdiction for claims against former chief financial officer Carl W. Jasper for breach of fiduciary duty claims involving the stock options backdating. Chandler wrote that Jasper’s participation in the company’s concealment of the practice of backdating stock options is “disloyal conduct in breach of his duty as a fiduciary.” Taken together, the new opinions help establish the parameters of non-director officers’ fiduciary duties to the companies they work for, Pileggi said. “There are volumes of court decisions that discuss fiduciary duties of directors and precious few that discuss the fiduciary duties of officers,” he said. “It’s not as well settled.”

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