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In the Matter of Krafft-Murphy Company, Inc., C.A. No. 649-VCP (Del. Ch. Nov. 9, 2011) (Parsons, V.C.)

November 9, 2011

In this memorandum opinion, the Court of Chancery denied a motion filed on behalf of a dissolved corporation to dismiss a petition for the appointment of a receiver under 8 Del. C. § 279, ruling that the petitioners might “conceivably” demonstrate entitlement to such appointment in light of their factual allegations concerning the dissolved corporation’s “plan of dissolution” under 8 Del. C. § 281(b). The Court also granted the petitioners’ motion to perfect service upon the dissolved corporation and denied the motion to dismiss for insufficiency of service of process.

Krafft-Murphy Company, Inc. (“KMC”) is a dissolved Delaware corporation that has been the subject of “hundreds” of asbestos-related personal injury lawsuits spanning two decades. In response to its “potentially immense tort liability,” KMC ceased operations in 1991 and formally dissolved on July 30, 1999. At the time of its dissolution, KMC possessed liability insurance contracts with various insurance companies (the “Insurers”) that covered its asbestos-related tort liability. Under the direction of the Insurers, KMC continued to defend, litigate and settle asbestos-related claims for ten years after its dissolution (i.e., until July 30, 2009), and thereafter began moving to dismiss new claims.

In response to KMC’s motions to dismiss asbestos-related lawsuits in various courts in the mid-Atlantic region, certain asbestos claimants (“Petitioners”) filed a petition for the appointment of a receiver pursuant to Section 279 (the “Petition”). Petitioners initially sought to serve the Petition on KMC through an attorney (“McDonald”) that had been authorized to accept service on KMC’s behalf in relation to earlier asbestos-related lawsuits. At the direction of the Insurers, KMC moved to dismiss the Petition for insufficiency of service of process and failure to state a claim. Petitioners thereafter moved to perfect service on KMC through publication or, in the alternative, pursuant to Court of Chancery Rule 4(d)(7), which broadly authorizes the Court of Chancery to fashion an additional mode of service to allow service to be perfected upon a corporation where (i) the Court has jurisdiction over the corporation and (ii) there is no other available method of service prescribed by statute or rule.

With respect to the sufficiency and perfection of service, the Court held that – notwithstanding its dissolution – KMC could be served by publication of the substance of the action in a Delaware newspaper and Virginia newspaper pursuant to 10 Del. C. § 3111(b) and Court of Chancery Rule 4(d)(4).  Alternatively, to the extent such statutorily-prescribed mode of service was in any way “inappropriate” by reason of KMC’s dissolution, the Court held that it would exercise its discretion under Court of Chancery Rule 4(d)(7) to order KMC to be served through such publication. Further, recognizing that the Insurers are arguably the only persons with any cognizable risk in relation to the appointment of a receiver, and therefore the “real parties in interest,” the Court ordered Petitioners to formally serve the Petition upon McDonald, as well, to maximize the likelihood that the Insurers would receive notice of the Petition.  In assessing the motion to dismiss asserted on KMC’s behalf, the Court adhered to and applied the standard set forth in Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC, 27 A.3d 531, 537 (Del. 2011), in which the Delaware Supreme Court held that “the governing pleading standard in Delaware to survive a motion to dismiss is reasonable ‘conceivability.’” Accordingly, to the extent Petitioners alleged facts related to KMC’s dissolution that  conceivably could justify the appointment of a receiver under Section 279, the Court would be required to deny the motion to dismiss.

Petitioners contended that KMC’s insurance contracts and the Insurers’ litigation of claims arising under such contracts, including claims filed more than three years after KMC’s dissolution, represented KMC’s “plan of dissolution” and therefore reflected the existence of “unfinished business” necessitating the appointment of a receiver. By way of background, when a Delaware corporation decides to dissolve, it is required to select one of two wind-up procedures upon dissolution: (i) the “elective” procedure under 8 Del. C. §§ 280-281(a), which generally entails a judicially-supervised process with certain statutory “safe harbors” for the benefit of the dissolving corporation’s directors, or (ii) the default dissolution procedure under Section 281(b), the dissolving corporation must adopt a plan of dissolution pursuant to which it “shall make such provision as will be reasonably likely to be sufficient to provide compensation for claims that have not been made known to the corporation or that have not arisen but that . . . are likely to arise or to become known to the corporation or successor entity within 10 years after the date of dissolution.”

In seeking dismissal on KMC’s behalf, the Insurers contended that no such plan existed and that they voluntarily defended and settled suits against KMC after its dissolution. Under the reasonable conceivability standard, however, the Court reasonably inferred (at least for purposes of assessing the motion to dismiss) that the Insurers were obligated to do so under KMC’s plan of dissolution. The Court inferred that KMC’s directors were aware of their obligation to establish a plan of dissolution that would provide for foreseeable future asbestos-related claims and that KMC possessed insurance policies that would, in fact, provide resources for future claimants. Such logical assumptions supported the reasonable inference that KMC’s directors had an “informal plan of dissolution” that consisted of having the Insurers continue to represent KMC in its pending and expected asbestos-related litigation until KMC exhausted its coverage. Accordingly, Petitioners’ factual allegations concerning KMC’s plan of dissolution provided a conceivable basis for the appointment of a receiver and warranted denial of the motion to dismiss. In light of such holding, the Court determined that it “need not reach” Petitioners’ alternative argument that KMC’s insurance contracts would constitute “debts and property due and belonging to the corporation” under Section 279.

In reaching the foregoing conclusion and denying the motion to dismiss, the Court rejected the argument, raised on KMC’s behalf, that Section 281(b) imposes an “absolute bar” against the appointment of a receiver for the sole purpose of allowing claimants to assert claims against a dissolved corporation more than ten years after its dissolution. The Court held that the statutory reference to “10 years” in Section 281(b) is more logically understood as setting a “statutorily-prescribed time horizon” for directors of dissolving corporations, thereby affording such directors clarity and guidance in fulfilling their duties under Section 281(b). The Court held that the “absolute bar” interpretation favored by the Insurers would also conflict with the express language of Section 279, which authorizes the appointment of a receiver “at any time.”

The full opinion is available here