Vanderbilt Law Review

First Page



'Even at our best, we are only out for ourselves." It is human nature to act in one's own interest. Though ethicists and psychologists may disagree about the extent to which self-interest is a motivating factor behind human behavior, most accept that it plays some role. Assuming that human behavior is at least in part a function of self-interest, laws should be expected to reflect that behavior. Many already do: the law of agency imposes a duty on the agent to act with obedience towards his principal, and the ABA Model Rules of Professional Conduct prohibit a lawyer from representing a client when the lawyer's personal interests interfere with the representation. Where money is involved, the need to curb the incentive to advance one's own interests at the expense of another is even greater; for example, the law prohibits a corporate director from enriching himself at the expense of the corporation.

Specifically, the law of fiduciary duty addresses the problems associated with having one group of people manage the money of a second group. In the corporate context, the law of fiduciary duty is a (usually) well-defined concept with a substantial amount of case law. This predictability is a desirable characteristic, as it enables directors to make confident business decisions without fear that they have breached their duties to the corporation and its shareholders. Given the size and breadth of today's largest corporations, liability for breach of a fiduciary duty can be staggering. Accordingly, states have strived to clarify their corporate jurisprudence.

While the law of fiduciary duty is clear when applied to healthy, solvent corporations, its application becomes muddled when applied to financially distressed firms. In part, this is because a financially distressed firm is a different beast than a solvent firm. The ''corporate enterprise" of an insolvent firm comprises the same constituencies as a solvent firm, but the interests and risk levels of the respective constituencies are changed. Whereas these interests are usually harmonious in a solvent corporation, each self-interested constituency might find itself in tension with the others when insolvency is looming.