Baird and Henderson argue that theorists committed to “the sacred cow that the duty of the directors is owed solely to the shareholders” have “paint[ed] themselves into embarrassing corners” trying to address the filing of a bankruptcy petition and other situations where shareholder interests seem appropriately subordinate to those of other capital providers.

When a corporation is insolvent, the corporation’s directors become obligated to promote the interests of the creditors. So, were the corporation insolvent (under either a cash-flow or a balance-sheet basis), a bankruptcy filing that promoted the interests of creditors would not violate the normal fiduciary duty. See Geyer v. Ingersoll Publications. Of course, the filing of a bankruptcy petition can stop a creditors’ rush, so it may also be in the interests of the shareholders of a distressed corporation.

You have quoted language from the paper saying there should not be a fiduciary duty to creditors of a distressed corporation. One of the benefits of allowing such a fiduciary duty is that it would allow a court to avoid the Wagoner rule, which can in practice materially limit the ability of a corporation to engage, in an effective way, third party monitors. See 2 J. Bus. & Tech. L. at 382 (2007). So this fiduciary duty … can enhance the ability to enter into some enforceable contractual relationships.