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In the Matter
of Krafft-Murphy Company, Inc., C.A. No. 6049-VCP (Del. Ch. Feb. 4,
This case addresses a question of first impression in
Delaware: Whether a receiver should be appointed more than 10-years after the
dissolution of a Delaware corporation when the dissolved corporation's only
assets are liability insurance policies. The Court observed that this
specific issue had not yet been squarely addressed previously in Delaware law.
Brief Overview of Case
The respondent company has moved in various other courts
to dismiss asbestos-related tort suits that were filed more than 10 years after
its dissolution. The petitioners filed this action seeking the
appointment of a receiver for the respondent company based on the perceived
existence of undistributed assets in the form of liability insurance
coverage. The respondent is a former corporation that was involved for
decades in the business of plastering and spray insulating. Due to the
nature of its business, the respondent has been subject to hundreds of
asbestos-related tort suits. The respondent dissolved in 1999, which was
7 years after ceasing operations. This decision is based on opposing motions
for summary judgment related to a petition for the appointment of a receiver
for a dissolved corporation.
Brief Summary of Legal Analysis
Delaware law allows for the appointment of a receiver
whenever a dissolved corporation has undistributed assets. The Court
first examined whether insurance liability contracts are undistributed assets
of a Delaware corporation that has been dissolved for more than 10 years.
In order to address the question, the Court first had to determine whether a
dissolved corporation is amenable to suits brought more than 10 years after
The Court concluded that the respondent company is not
amenable to asbestos-related tort suits commenced more than 10 years after its
dissolution. Therefore, based on the facts of this case, the insurance
contracts were deemed to be valueless. Because the company did not have
any undistributed assets, the Court found the appointment of a receiver
Overview of Background
Although they were not named as parties in this case, it
was alleged that the "real parties in interest" sponsoring the litigation for
the company were various insurance companies obligated to defend and settle
asbestos-related claims against the company under liability insurance
contracts. Those insurance companies included Travelers, CNA and Great
American Insurance Company.
The company involved, Krafft-Murphy, ceased operations in
1991 and filed a Certificate of Dissolution in 1999 pursuant to 8 Del. C.
Section 275, although it did not provide notice of its dissolution to
creditors, and its directors did not adopt a formal plan of dissolution.
Petitioners sought an the appointment of a receiver for a
dissolved corporation pursuant to 8 Del. C. Section
279. The company sought to dismiss the petition, and petitioners moved to
perfect service by publication pursuant to 10 Del. C. Section 3111(b)
and Rule 4(d)(4) or alternatively under Rule 4(d)(7). The motion to
perfect service of process was granted
The Court previously issued an opinion at 2011 WL 5420808
(Del. Ch. Nov. 9, 2011), highlighted on these pages here,
which denied the company's motion to dismiss and addressed those situations
which warranted the appointment of a receiver under DGCL Section 279. In
that opinion, the Court determined that the company had not shown that
the statutory language of Section 281(b) and Section 279, or the overall
statutory scheme for dissolution, compels the conclusion that there is an
absolute bar against the appointment of a receiver for the sole purpose of
allowing claimants to bring claims against the dissolved corporation more than
10 years after its dissolution.
In the current procedural posture, the company's
overarching argument is that the appointment of a receiver is unwarranted due
to the liability insurance contracts of the company not being assets of the
company, because the company is not amenable to suits brought after 10 years.
Overview of Dissolution Analysis
The Court began its analysis of the dissolution issue by
reviewing the history and statutory scheme of dissolution. The Court
referred to the common law view of dissolution as a civil death of the company,
but that in order to avoid depriving creditors of the ability to sue,
statutory authority prolongs the life of a corporation past its date of
dissolution. That authority is provided in 8 Del. C. Section 278.
Section 278 provides that a dissolved corporation
automatically continues for a term of 3 years following its dissolution "or for
such other longer period as the Court of Chancery shall in its discretion
The Court explained that the intention of the statute was
to balance the competing public policy interests of ensuring that claimants
against the corporation had a fair period in which to assert claims, and
ensuring that directors, officers and shareholders of a dissolved corporation
could have repose from claims regarding the dissolved corporation. The
latter interest of ensuring repose is addressed in 8 Del. C. Sections
280 through 282. See footnotes 34 and 35 and accompanying text.
The Court also explained that Section 279, which provides
for the appointment of a receiver for a dissolved corporation, functions
"primarily for the benefit of shareholders and creditors where assets remain
undisposed of after dissolution." See footnotes 37 and 38.
Dissolution Procedure Options in Delaware
The Court also instructed that Section 280 through 282 of
the Delaware General Corporation Law "create a detailed process, which entails
judicial involvement, by which dissolving corporations can essentially smoke
out claims, pay off claims in accordance with statutory priorities, and
establish reserves for contingent claims." See footnotes 40
The Court observed that the dissolving
corporation has the option of selecting from one of two procedures upon
dissolution: (1) The elective procedures in Sections 280 and 281(a); or
(2) The default procedures under Section 281(b).
The procedure in Sections 280 and 281(a) provide for a
judicial process where the Court of Chancery approves amounts set aside for
corporate claimants. This judicial protects the directors and shareholders from
potential future claims arising from the distribution of assets upon
dissolution. See footnotes 44 through 48 and accompanying text.
The Court explained that although the judicial
approval under Sections 280 and 281(a) for dissolution protects directors and
shareholders from personal liability, and Section 281(b) at least
nominally provides for similar protection, in reality, the non-judicial
procedure under Section 281(b) still comes with a risk of litigation about
whether or not there was compliance with the statutory standard of:
"reasonably likely to be sufficient" in terms of the amount set aside for
creditors. Thus, the Court explained that: "reliance upon
the mechanism of Section 281(b) may present a risky situation for corporate
directors regardless of their good faith and due care." (citing In
re RegO Co., 623 A.2d 92, 97 (Del. Ch. 1992)).
The Court provided an analysis of how the insurance
policies in this case should be treated in terms of ownership and asset
classification, and then concluded that there is no evidence that the
legislature intended to extend corporate liability beyond 10 years.
Moreover, the Court noted that Section 280(c)(3) does not contemplate that
corporations will need to provide for claims brought more than 10 years after
dissolution. See footnote 58.
The Court also distinguished the case of In
re Texas Eastern Overseas, 2009 Del. Ch. LEXIS 198 (Del. Ch. Nov. 30, 2009),
highlighted on these pages here. In part, the Court distinguished
that case on the basis that the suit in that case was filed only 7 years after
the company's dissolution and not beyond 10 years.
Therefore, because the Court found that the claims were
not asserted until more than 10 years after the date of dissolution, the
company does not have any undistributed assets, and therefore the appointment
of a receiver is unwarranted.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Eckert Seamans.
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