On May 2, 2019, Judge Kevin J. Carey of the U.S. Bankruptcy Court for the District of Delaware issued an opinion holding that a liquidation trustee who brought claims initially raised in an adversary proceeding by an unsecured creditors committee did not have standing to assert derivative claims on behalf of the debtor. See In re Citadel Watford City Disposal Partners, L.P., No. 15-11323 (Bankr. D. Del. 2019). This ruling follows a number of recent similar decisions that have left creditors and their attorneys in a precarious position going forward. The ruling raises a number of questions, including whether it is appropriate to award a premium at the time credit is extended to compensate creditors for their potential lack of legal recourse should their investment sour and their interests diverge from the properly assigned parties; whether filing for bankruptcy will offer a debtor more flexibility on the assumption that creditors may have limited recourses after filing; and, as was determinative here, the strategic considerations and manner in which creditors seek to assert claims to protect their investment in the entity after the filing.

The case arose from the bankruptcy of a group of companies bearing the name Citadel that provided fluid-management services to oil and gas producers. In June 2015, the Citadel companies filed voluntary Chapter 11 petitions; shortly thereafter, the Office of the United States Trustee appointed an Unsecured Creditors Committee (the Committee). In 2017, the Committee commenced an adversary proceeding against former officers and directors as a derivative action on behalf of Citadel. The complaint alleged a variety of misconduct, including breach of fiduciary duty, gross mismanagement, waste, fraud, fraudulent concealment, conversion, and other causes of action relating to fraudulent investment practices, commingling, self-dealing, conversion of business assets, unauthorized assignment of assets, and the loss of a lease central to the Debtors’ business.

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