A recent opinion out of the Court of Chancery of Delaware has surprised “wizened veterans of the debates over corporate creditor standing.”1 The court ruled that provisions of Delaware’s Limited Liability Company Act (the “LLC Act”) barred creditors from bringing derivative fiduciary duty claims against LLC managers, even where the LLC is insolvent. This holding represents a refusal by the Delaware court to extend North American Catholic, which defines derivative standing for creditors of insolvent corporations, to LLCs. While many have pointed to contract law concepts as most relevant to LLCs, few commentators or courts anticipated that the LLC Act would restrict derivative claims by creditors of insolvent entities. Indeed, as the Bax court notes, many have assumed that creditor derivative standing exists in the context of an insolvent LLC. Nevertheless, Vice Chancellor Laster’s opinion in Bax is clear that the plain language of the LLC Act restricts standing for derivative claims to members of the LLC or assignee’s of an LLC interest. Accordingly, the Bax court dismissed the creditor’s complaint against management for fiduciary duty violations. But while Bax was unexpected to many following the issue, its ultimate impact upon a creditor’s ability to pursue managers of an insolvent LLC may be limited.
Background and Claims
The debtor in Bax was JetDirect Aviation Holdings, LLC, a private jet management and charter company that, after an aggressive expansion, was left with cash flow issues and a highly leveraged balance sheet. In 2006, the company’s auditor informed management that there were 19 “material weaknesses, significant deficiencies, and control deficiencies” in the company’s internal controls, the most significant of which was management’s failure to properly collect and account for financial data from subsidiaries. A separate auditor, one year later, refused even to complete its audit because the JetDirect’s internal controls lacked integrity and could not be relied upon.
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