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In Re Allserve Systems Corp.

379 B.R. 69 (D. N.J. 2007)

CORPORATIONS; FRAUD —Although the laws of the state of incorporation typically govern the internal affairs of the corporation, a court may weigh the significant and substantial interests of New Jersey in deciding which state’s substantive law applies, especially in a claim of fraud against the corporation’s directors.

In a bankruptcy proceeding, the bankruptcy trustee sought leave to amend an adversary proceeding to include additional claims against the bankrupt company’s directors relating to their knowledge of fraudulent transfers of the debtor’s assets, as well as their failure to disclose the transfers and identities of the recipients to the debtor or trustee. The directors sought to have the case dismissed for failure to state a claim. At issue was whether the directors breached their fiduciary duty to a creditor by allowing excessive salary payments to be made to the directors once the company was insolvent. The New Jersey Supreme Court in Francis v. United Jersey Bank, 87 N.J. 15 (1981) held that directors have a duty to third parties to take an active role in an insolvent corporation to prevent the misappropriation of assets. The Bankruptcy Court had to determine whether the laws of Delaware, the state of incorporation, applied or whether New Jersey law applied. If New Jersey law applied, then, under the Francis decision, the creditors could maintain a cause of action against the directors. The Bankruptcy Court noted that while the laws of the state of incorporation typically govern the internal affairs of the corporation, it had to weigh the significant and substantial interests of New Jersey in deciding which state’s substantive law applied. The Court recognized that since the debtor was a Delaware corporation, Delaware law would normally govern the internal affairs of the corporation. However, in this case, the Court found that New Jersey had a substantial stake in the outcome. Therefore, the Court held that New Jersey law should be applied since the fraudulent transfers were alleged to have occurred in New Jersey, the injured creditor resided in New Jersey, the directors resided in New Jersey, and there was an ongoing bankruptcy case in New Jersey.


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