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North American Catholic Educational Programming Foundation, Inc. v. Gheewalla
Delaware Supreme Court
930 A.2d 92 (Del. 2007)
Clearwater Holdings, Inc. planned to create a national system of wireless Internet connections. To do so, it contracted to buy FCC spectrum licenses from North American Catholic Educational Programming Foundation, Inc. (NACEPF) (plaintiff) and other license holders for more than $24 million. In accordance with the agreement, NACEPF reserved its licenses for Clearwater and did not sell them to other buyers. When the spectrum market collapsed, Clearwater settled with the other license holders for about $2 million but did not pay NACEPF, claiming that Clearwater was on the verge of bankruptcy and could not obtain further financing. Goldman Sachs employees Rob Gheewalla, Gerry Cardinale, and Jack Daly (defendants) served as Clearwater’s directors and allegedly controlled it. After Clearwater effectively went out of business, NACEPF sued the directors in Delaware Chancery Court for breach of fiduciary duties, fraudulent inducement, and tortious interference in business relations. Under Delaware law, the chancery court has personal jurisdiction over nonresident directors of Delaware corporations for breach of fiduciary duty and sufficiently related claims only. Because no other basis for personal jurisdiction over the directors existed, the chancery court’s authority to hear the case hinged on the viability of the fiduciary breach claims. The directors moved to dismiss on the ground that creditors cannot bring direct claims for breach of fiduciary duty against directors of a Delaware corporation. NACEPF countered that when a corporation is insolvent or in the zone of insolvency, directors owe fiduciary duties to the corporation’s creditors. The chancery court dismissed the case, and NACEPF appealed.
Rule of Law
Holding and Reasoning (Holland, J.)
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