Richards Layton & Finger

TOUSA, USACafes, and the Fiduciary Duties of a Parent's Directors Upon a Subsidiary's Insolvency

November 2011

The recent economic climate has increased the tension between a variety of legal doctrines that, until relatively recently, were rarely considered together. Law regarding fiduciary duties, including those of controlling stockholders or parent entities, has been around for many years; law regarding limited liability companies and limited partnerships, and their controlling entities, is not as developed. The effect of insolvency on these doctrines is even less certain. In October 2010, the U.S. Bankruptcy Court for the Southern District of Florida issued its opinion in In re TOUSA, Inc., dealing with the intersection of all these issues. It is noteworthy because it appears to be the first reported opinion holding that a subsidiary's creditors committee may assert derivative claims for breach of fiduciary duty against not only the insolvent debtor/subsidiary's directors but also the directors of the debtor's parent. In this article, we examine the TOUSA opinion, and the doctrines it relies on, in an attempt to understand how these doctrines should be treated together.