Managers and the Legal Environment 7th Edition by David Madsen, Constance Bagley

Exercise 3

Pluris, Inc. had $50 million in net operating losses (NOLs) when its directors voted to assign all its assets to an assignee for the benefit of creditors. Its largest creditor, Berg Berg Enterprises, had tried unsuccessfully to persuade the board to file for bankruptcy instead so that it could reorganize Pluris and take advantage of its NOLs. Under certain circumstances, a debtor with NOLs can merge with a firm with taxable income and thereby transfer the tax value of the NOLs to the other firm. Berg sued the directors of Pluris, in their individual capacity, claiming that they had breached their fiduciary duty to creditors by failing to make any reasonable inquiry into other possible approaches, such as a reorganization, which might or would have yielded greater value for creditors. Berg alleged that once the directors realized that their own equity investment in Pluris was worthless, they "took the easiest path for themselves" by assigning the assets and then "'washed their hands' of the matter." Who should prevail? Does it matter whether Pluris was insolvent or in the zone of insolvency at the time of the assignment? Does it matter where Pluris is incorporated? What, if any, defenses might be available to the directors? [Berg Berg Enterprises, LLC v. Boyle, 178 Cal. App. 4th 1020 (2009).]