I didn't do as much blogging as I had expected from the "Vincinity of Insolvency" conference, but Larry Ribstein picked up the slack. When I wasn't listening to the participants, I was putting together my PowerPoint presentation, which left little time for blogging.

In addition to Larry's summaries, you might be interested in Steve Bainbridge's luncheon speech, in which he referred to the cemetary on the grounds of the University of Maryland Law School and encouraged us to "put a stake through the heart" of Credit Lyonnais, the modern case in which the duty to creditors was invigorated, if not created. Indeed, many of the participants felt that the duty was incoherent, at best, and perhaps harmful.

Rich Booth, who organized the conference, asked me to speak about venture capital-backed firms. In the morning session, a venture capitalist said he hoped that fiduciary duties to creditors in the vicinity of insolvency did not apply to startups, but I can't see any such limitations in the cases. That said, in my remarks, I explained why creditors may not require fiduciary protection when they invest alongside venture capitalists.

The argument is pretty straightforward: venture capitalists who invest in convertible preferred stock have interests that are closely aligned with creditors (low incentives to "roll the dice" and a strong incentive to preserve the assets of a failing firm), but the venture capitalists have more power to control the firm than most creditors. Venture capitalists rely not only on negative covenants, but on board control. If the creditors' contracts are incomplete, therefore, they will benefit from the presence of venture capitalists.

Larry Ribstein asserted in a comment afterwards that even if venture capitalists did not perform this function, courts should not intervene using fiduciary law. He claims that courts should not intervene as a "jurisprudential matter." If you are interested in understanding Larry's argument, you might find the conclusion to his paper (pdf) useful:

Despite many cases with seemingly contrary dicta, directors of insolvent or near-insolvent corporations do not have a fiduciary duty to creditors. Rather, they have a fiduciary duty to the corporation, just as they have at other times, that is based on the duty of loyalty and the business judgment rule. Under the business judgment rule, the directors have broad discretion not only to decide what actions to take, but in whose interests to act. The creditors may in some circumstances sue to enforce this duty, but the fact that the creditors are suing does not affect either the duty or the remedy. The creditors also may sue the corporation individually for breach of specific contractual, tort and statutory duties, particularly including the duty to refrain from fraudulent conveyances. But none of these cases amount to a general director fiduciary duty to creditors.

Even if Larry is right, that doesn't mean that creditors are problem-free in the zone of insolvency. As Alan Schwartz noted in his comments in our session, the problems faced by creditors are real. Larry's point seems to be simply that those problems are not well-handled via fiduciary law. No argument from me there.

Alan suggested that many of the problems faced by creditors could be addressed by enforcing more contracts (e.g., contracts with ipso facto clauses), and my point was complementary: in the context of venture-backed startups, many of the problems faced by creditors are addressed by the venture capitalists, who serve as sort of an interest proxy for the creditors.

All in all, it was a fun conference. The University of Maryland has a beautiful new facility, which is very techy, and it was fun to see many old friends, including Rich Booth, who was a gracious host. Enjoy the cheese, Rich!

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