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Insurance Remains Property of Dissolved Corporation Even After Wind-up, According to Delaware Supreme Court

As Delaware has often been selected as a preferred place of incorporation by U.S. businesses, and consequently the venue for dissolution and bankruptcies, the recent decision by the Delaware Supreme Court, In the Matter of Krafft-Murphy Co., Inc., No. 85, 2013 (Del. Nov. 26, 2013), holding that insurance contracts remained property of the dissolved corporation may have significant implications for “orphan shares” at co-disposal, environmental remediation sites, as well as for non-environmental liabilities. As in other states, otherwise formerly insolvent corporations may find themselves once again parties to litigation as potential creditors seek to attach insurance assets.

This case is an appeal from a judgment of the Delaware Court of Chancery in an action to appoint a receiver for Krafft-Murphy Company, Inc. (the “Corporation”), a dissolved Delaware corporation. The Petitioners, tort claimants in lawsuits pending against the Corporation in other jurisdictions, sought the appointment of a receiver to pursue those claims against the Corporation.

The Respondent Corporation argued that because it held no assets other than unexhausted liability insurance policies, Delaware law does not authorize the appointment of a receiver and that, in any event, it is not necessary to appoint one. The Court of Chancery granted summary judgment in favor of the Corporation. The Petitioners then appealed.

The decision addresses two interrelated questions of first impression in Delaware, plus a third question directly addressed by settled Delaware law:

First, does a contingent contractual right, such as an insurance policy, constitute “property” within the meaning of 8 Del. C. § 279?

Second, does Delaware’s statutory corporate dissolution scheme (8 Del. C. §§ 278-282) contain a generally applicable statute of limitations that time-bars claims against a dissolved corporation by third parties after the limitations period expires?

Third, after Delaware’s three (3) year winding-up period expires, does a dissolved corporation have the power to act absent a court-appointed receiver or trustee?

The Delaware Supreme Court concluded that under 8 Del. C. § 279, contingent contractual rights, such as unexhausted insurance policies, constitute “property” of a dissolved corporation, so long as those rights are capable of vesting.

The Court further held that Delaware’s dissolution statutes impose no generally applicable statute of limitations that would time bar claims against a dissolved corporation by third parties.  Finally, the Court held that the existence of the “body corporate” continues beyond the expiration of the statutory winding-up period for purposes of conducting litigation commenced before the expiration of that period. But for litigation commenced after the expiration of that statutory period, a dissolved corporation may act only through a receiver or trustee. Because the insurance contracts were assets of Krafft, the Court reversed the Chancery Court and held that a receiver must be appointed to manage those assets in pending tort litigation.

For a copy of the complete opinion, click here.

With attorneys experienced in Superfund and a variety of federal and state environmentally related litigation, Spencer Fane’s complementing expertise in insurance and bankruptcy matters can provide valuable direction to secure remedies otherwise presumed unavailable for environmental exposures.