A Lender’s Knowledge of Alleged Breaches of Fiduciary Duties Shall Not Be Imputed Upon Debtors in a Statute of Limitations Analysis

By: Michael DeRosa

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

        In In re AMC Investors, the Delaware district court reversed the bankruptcy court’s decision granting summary judgment in favor of the officers and directors (“Defendants”) of AMC (the “Company”) because[1] Eugenia, as the sole creditor, was granted derivative standing to file suit on behalf of the debtors of the Company.[2] Prior to being granted derivative standing, Eugenia filed involuntary Chapter 7 bankruptcy petitions against the debtors in 2009.[3] The bankruptcy court granted summary judgment in favor of the Defendants, which was based on Defendants’ statute of limitation defense.[4] Eugenia and the debtors (collectively “Plaintiffs”) appealed summary judgment.

        In 2011, Eugenia was granted derivative standing to sue on behalf of the debtors and brought a claim for breach of fiduciary duty against the Company in the Delaware Bankruptcy court.[5] The Bankruptcy court reasoned that a statute of limitations analysis was appropriate because alleged breaches of fiduciary duty are claims in equity.[6] The statute of limitations begins to accrue “upon the discovery of facts constituting the basis of the cause of action or the existence of facts sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to a discovery of such facts.”[7] The Bankruptcy Court held that Eugenia’s knowledge would be imputed to the debtors and, because Eugenia knew about the Defendants’ alleged breach in June 2005, the statute of limitations would not be tolled.[8] Accordingly, the Bankruptcy Court found that the Plaintiffs’ claim was time-barred and granted summary judgment in favor of Defendants.[9]

        On appeal, the Delaware district court concluded that Eugenia’s knowledge of the Defendants’ alleged breach could not be imputed upon the debtors.[10] The Plaintiffs argued that the Bankruptcy Court did not explain its reasoning as to why the Eugenia’s knowledge should be imputed to the debtors.[11] Further, Eugenia contended that the debtors did not know about any breaches of fiduciary duty until June 2009.[12] The Defendants disputed Plaintiffs’ claim by arguing that any possible tolling of the statute of limitations would cease once a plaintiff, who may derivatively sue for the debtors, became aware of the breach.[13] Ultimately, the district court held that the Bankruptcy Court erred in its statute of limitations analysis in that its inquiry should not have been based on Eugenia’s knowledge.[14] Rather, because the debtors are the true plaintiffs who have a valid claim for breach of fiduciary duty against the defendants, “the relevant inquiry turns on a plaintiff’s ability to discover the claim.”[15] Regarding the debtors’ ability to toll the statute of limitations, the district court relied on Kahn v. Seaboard Corporation, where the court stated “reasonable reliance upon the competence and good faith of others who have assumed legal responsibilities towards a plaintiff have not infrequently been held sufficient to toll the running of an applicable statute of limitations.”[16] Therefore, although Eugenia had the right to derivatively sue on behalf of the debtors, Eugenia’s knowledge should not be imputed to the debtors.[17]

        The Bankruptcy Court noted that, in equity, a court may toll the statute of limitations for breach of fiduciary duties.[18] The district court did not dispute the Bankruptcy court’s statute of limitations analysis, but rather the party to which the Bankruptcy Court imposed the equitable tolling.[19] There does not appear to be a bright line test imposed by the district court regarding equitable tolling. Ultimately, if the facts show that the debtors had prior knowledge of the alleged breach of fiduciary duty, the claim will still be time-barred. Therefore, equitable tolling will depend on the facts before the court. An appeal of the district court’s decision was filed to the Third Circuit on July 26, 2016, so stay tuned!