Applicable State law holds generally that a distressed corporation owes a fiduciary duty to its creditors. However, the directors of the firm owe a fiduciary duty to the corporation, not individual creditors. An exception to this paradigm exists if the corporation is in actual or effective winding up, and the directors continue to operate the business for their own benefit and to the detriment of other creditors.

Directors of a corporate debtor in bankruptcy settled all of the debtor's claims against them through a Court-approved settlement in which they paid substantial sums to the debtor's trustee. Thereafter, certain creditors sued the same directors in State court, asserting claims for constructive trust arising from breach of fiduciary duty. Because the creditors' claims were based on acts of the directors: (i) taken at a time that the debtor was effectively winding up and (ii) taken for the benefit of the directors, the court held that the creditors had successfully pled claims that the directors owed fiduciary duties to the creditors, that such claims did not belong to the bankruptcy estate, and hence were not settled via the directors' prior settlement with the trustee.