Risk Management

Ruling Toughens Claims vs. Fiduciaries

By reviving a lawsuit against Tower Air, an appeals court has made it more difficult for plaintiff's lawsuits to be dismissed early in the game.
Stephen TaubAugust 8, 2005

A recent ruling from the 3rd U.S. Circuit Court of Appeals could make it significantly easier for bankruptcy trustees to sue directors and officers for alleged breaches of their fiduciary duties, according to The Legal Intelligencer.

The ruling stems from a lawsuit against the former officers and directors of defunct charter airline Tower Air Inc. According to the Intelligencer, the trustee, Charles Stanziale, claimed that the individuals — especially Tower’s former chairman and CEO Morris Nachtomi — drove the company into insolvency through their indifference and poor decision-making.

A three-judge appeals panel unanimously concluded that U.S. District Judge Kent A. Jordan of the District of Delaware correctly applied the business judgment rule to Stanziale v. Nachtomi, but that he erred by applying Delaware’s stricter “fact pleading” standard rather than the more lenient federal “notice pleading” standard, reported the publication.

The court appeals court added that when analyzed under the more lenient federal standard, many of Stanziale’s claims would overcome the presumption that the officers and directors made their decisions based on valid business judgments, the Intelligencer added.

Stanziale alleges in his suit that the board breached its fiduciary duty because it never discussed the need for new airplane engines, the state of the old engines, or the financial ramifications of buying and leasing versus repairing, according to the report. In 1998, according the Intelligencer’s account of the lawsuit, 17 of the airline’s 20 planes were in service. By 2000, when Tower filed a voluntary petition for Chapter 11 relief, only 8 of 19 were still in working order.

Earlier this year a Baltimore County circuit judge ruled that creditors of Tower could proceed in their lawsuit against Ernst & Young, which they accuse of costing them hundred of millions of dollars by helping the bankrupt airline misstate its earnings.