In a recent decision, CML V LLC v. Bax, 6 A.3d 238 (New Castle Co., Del., Ch. Nov. 3, 2010), the Delaware Court of Chancery held that, unlike creditors of an insolvent Delaware corporation, creditors of an insolvent Delaware limited liability company cannot bring derivative actions against the members or managers of the company unless they specifically contract for such rights. The decision effectively precludes creditors of insolvent LLCs from suing members and managers for breaches of fiduciary duties owed to the company, unless they amend the company’s LLC operating agreement to provide directly that such duties are owed to creditors.
The Chancery Court noted that the ruling contradicts widespread assumptions held by both academics and the Delaware courts themselves. In fact, this ruling runs contrary to common commercial practice, in which the form of an entity, whether a corporation, LLC or limited partnership, is most often selected for tax or corporate-control reasons, with the expectation that the general tenets of the Delaware corporate law apply.
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