Litigation

Court Of Chancery Holds Creditors Lack Standing

By Edward M. McNally

CML V, LLC v. Bax, C.A. 5373-VCL (November 3, 2010)

Creditors of a Delaware corporation have standing to sue derivatively when the corporation is insolvent.  However, this decision holds that creditors of an LLC [and presumably an LLP] lack standing to sue derivatively.  The difference is that the LLC statute expressly says who has standing to bring a derivative suit and does not mention creditors.  In contrast, the corporate code only says when stockholders have standing and does not then actually define who else may have standing.

As the Court rightly points out, the solution to this problem is for creditors to have  any rights they want set out in the LLC agreement before they invest.  This again highlights the Delaware law that LLCs and LLPs are creatures of contract, not of judge-made fiduciary duties.  Buyer beware.

Full post as published by Delaware Business Litigation Report on November 03, 2010 (boomark / email).