The Board of Directors of a California corporation has no general duty to operate a corporation in the “zone of insolvency”, for the benefit of creditors, rather than its conventional duty to serve the interest of the corporation and its shareholders, according to a decision of first impression by the California Court of Appeal (Berg & Berg Enterprises, LLC v. Boyle, California Courts of Appeal No. H031531, October 21, 2009).  The “zone of insolvency” concept, now rejected by California and several other jurisdictions, would place a company and its Board under a duty to operate (or liquidate) for the benefit of creditors, rather than conducting normal business for the benefit of the corporation and its shareholders, whenever a corporation entered the ill-defined “zone of insolvency” even if actual insolvency has not occurred or cannot be determined.  Instead, the court reinforces the California rule that even with an insolvent corporation, the Board of Directors duties are limited “to the avoidance of actions that divert, dissipate, or unduly risk corporate assets that may otherwise be used to pay creditor claims”, specifically including acts of self-dealing, or giving preferential treatment to a creditor over other similarly situated creditors.  Further, “because the existence of a zone or vicinity of insolvency is even less objectively determinable than actual insolvency, we hold that there is no fiduciary duty prescribed under California law that is owed to creditors by directors of the corporation solely by virtue of its operating in the ‘zone’ or ‘vicinity’ of insolvency.”

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