Bankruptcy Judge Neil Bason has a nice explanation of Fiduciary Duties in a bankruptcy case. See Solution Trust v. 2100 Grand LLC (In re AWTR Liquidation Inc.), 548 B.R. 300 (Bkrtcy, C.D. Cal, 2016)(Bason. J.)
C. Corporate Fiduciary Duties
Corporate fiduciary duties typically are divided into three categories (although the
last of these may be a sub-category):
Duty of care – This is the duty to exercise reasonable prudence in making
business judgments for the corporation, including gathering adequate
information and undertaking due consideration of the relevant issues.
See, e.g., Lamden v. La Jolla Shores Clubdominium Homeowners Assn.,
21 Cal.4th 249, 258 (1999) (“A director shall perform the duties of a
director … with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.”).
Duty of loyalty – This is the duty to give primacy to the interest of the corporation,
most typically contrasted with acting in self-interest. See, e.g., Remillard
Brick Co. v. Remillard-Dandini Co., 109 Cal.App.2d 405, 419 (1952) (“It is
a cardinal principle of corporate law that a director cannot, at the expense
of the corporation, make an unfair profit from his position. He is precluded
from receiving any personal advantage without fullest disclosure to and
consent of all those affected.”).
Duty of good faith – This duty of good faith is generally considered part of the
duty of loyalty, because directors or officers cannot act loyally towards the
corporation unless they act in the good faith belief that their actions are in
the corporation’s best interest, and this has been held to include a duty of
oversight. See Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006); see also
Mueller v. Macban, 62 Cal.App.3d 258, 274, 132 (1976) (“Directors owe a
duty of highest good faith to the corporation and its stockholders, and this
same duty is demanded of officers of the corporation.”) (citations omitted).
1. The business judgment rule
Normally one who breaches a duty through ordinary negligence is liable for the
damages that are proximately caused, but directors are protected by the business
judgment rule. Caremark, 698 A.2d 959, 967-68. That rule is “a judicial policy of
deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions.” Everest Investors 8 v. McNeil Partners, 114 Cal.App.4th 411, 429 (2003); Burt v. Irvine Co., 237 Cal.App.2d 828, 852 (1965). See also Gantler, 965 A.2d 695, 705-06 (business judgment rule is “a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company”) (citation and quotation marks omitted, emphasis added).
Quoting the Rutter Guide:
[Corporate directors] will not be held liable for a negligent judgment (i.e.,
one a reasonably prudent person would not have made) so long as the
process leading to the judgment meets business judgment rule
requirements. In other words, courts will not “second-guess” the decisions
of disinterested directors made with reasonable diligence in ascertaining
the facts and believed to be in the corporation’s best interests. (This is so
even if the directors make a bad or “stupid” decision.) [Cal. Prac. Guide:
Corps. (The Rutter Group 2015) Ch. 6-C (emphasis added)]
But the process is critical. The business judgment rule “presuppose[s] that
judgment – reasonable diligence – has in fact been exercised” and “[a] director cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment.” Burt, 237 Cal.App.2d 828, 852-53. See also In re Bridgeport Holdings, Inc., 388 B.R. 548, 569 (Bankr. D. Del. 2008) (holding, under Delaware law, that “if the ‘directors individually and the board collectively’ fail to inform themselves ‘fully and in a deliberate manner,’ then they ‘lose the protection of the business judgment rule’ ….”) (citation omitted).