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Jesse M. Fried & Alon Chaver, Managers' Fiduciary Duty Upon the Firm's Insolvency: Accounting for Performance Creditors, 55 Vand. L. Rev. 1813 (2002).

Abstract: The leading view among corporate law scholars is that an insolvent firm's managers should maximize the sum of the values of all financial claims - both those held by shareholders and those held by creditors - against the firm. This Article points out a previously unrecognized problem with this financial value maximization (FVM) approach. What FVM proponents have overlooked is that an insolvent firm is likely to have two types of creditors: (1) payment creditors - parties owed cash, who hold financial claims against the firm; and (2) performance creditors - parties owed contractual performance, who hold claims for performance against the firm. The FVM approach requires managers to take into account the effect of their actions on payment creditors but not on performance creditors. We show that FVM's failure to account for performance creditors might cause an insolvent firm's managers to act in a way that harms performance creditors more than it benefits those with financial claims against the firm and, therefore, is inefficient. Our analysis indicates that an insolvent firm's managers should be obligated to maximize the sum of the values of all claims (both cash and performance) against the firm. This approach, we show, would eliminate the distortions associated with the FVM approach and make shareholders better off ex ante.