The Expressive Function of Directors’ Duties to Creditors

Abstract

This Article offers an explanation of the doctrine of directors' duties to creditors. Courts frequently say - but rarely hold - that corporate directors owe duties to or for the benefit of corporate creditors when the corporation is in distress. These cases are puzzling for at least two reasons. First, they link fiduciary duty to priority in right of payment, effectively treating creditors as if they were shareholders, at least for certain purposes. But this ignores the fact that priority is a complex and volatile concept. Moreover, contract and other rights at law usually protect creditors, even (especially) when a firm is distressed. It is thus not surprising that courts do not in fact want to treat directors as fiduciaries for creditors, except in extreme cases. But this leaves us with the second puzzle: If directors are rarely treated as fiduciaries for creditors, why have the Delaware courts bothered to say so much about this, especially in their recent opinions? This Article explores these two puzzles, and argues that these cases are best understood as examples of expressive judging, exhortations to good behavior not necessarily tethered to meaningful instrumental consequences. It identifies four expressive themes in these decisions on, among other things, director discretion, the boundaries of acceptable conduct towards creditors, the role of contract, and the educative function of courts. The Article concludes by noting several doctrinal gaps created by some of the recent case law, and suggests ways that the better expressive aspirations of the Delaware opinions can fill these gaps in fair and efficient ways.