Document Type
Research Memorandum
Publication Date
2024
Abstract
(Excerpt)
Delaware limited liability companies ("LLCs") are "creatures of contract" and their corporate structure may vary to resemble corporations, partnerships, or a mix of both. Managers of LLCs—like a director or officer of a corporation—owe fiduciary duties to the entity and its members. Generally, the entity has standing to pursue breach of fiduciary duty claims. It is well established that creditors of a corporate debtor may have standing to pursue breach of fiduciary duty claims against directors through derivative actions. Under Delaware law, the applicable statute does not confer standing for creditors of Delaware LLCs to bring derivative actions on an LLCs behalf. Delaware courts have generally concluded that creditors cannot pursue breach of fiduciary duty claims against LLCs. One Delaware bankruptcy court, however, disagrees.
This memorandum analyzes standing for creditors of Delaware LLCs bringing derivative actions in Delaware bankruptcy courts. Part I of this memorandum explains the pertinent provisions of Delaware Law. Part II explains that creditors of Delaware LLCs are precluded from bringing derivative claims. Part III explains Delaware bankruptcy courts’ application of Delaware state law and their conclusion that creditors do not have derivative standing in bankruptcy cases. Part IV discusses the decision by one Delaware bankruptcy court that concluded that creditors of Delaware LLCs can have derivative standing to pursue fiduciary duty claims against managers and officers.