The Delaware Supreme Court has banned derivative suits by creditors of Delaware limited liability companies ("LLCs").
CML V, LLC ("CML") lent money to JetDirect Aviation Holdings LLC ("JetDirect"), a private jet charter service, which was later determined to be insolvent. Following JetDirect's insolvency and its subsequent default on CML's loan, CML asserted derivative claims against JetDirect's managers, arguing that they had breached their fiduciary duties to JetDirect (and to CML, as creditors to JetDirect) by approving a number of imprudent acquisitions that led to JetDirect's insolvency.
In affirming the Chancery Court's decision to deny CML standing to pursue the derivative claim, the court looked at the plain language of the Delaware Limited Liability Company Act (the "Act"), holding that Section 18-1002 of the Act expressly limits standing to bring derivative claims to holders of LLC membership interests and their assignees only, and that creditors have no such rights. The court reasoned that the Act is "clear, unequivocal and exclusive, and operates to deny derivative standing to creditors who are not members or assignees of membership interests." In comparison, the Delaware General Corporation Law does not limit standing in a derivative suit to stockholders only and grants to creditors, in certain insolvency situations, standing to bring derivative claims. Acknowledging that the limitation with respect to LLCs "might surprise wizened veterans of the debates over corporate creditor standing," the court pointed to the plain language of the Act, and the Delaware legislature's clear intention to allow interested parties to contractually define their relationship with each other, to justify its decision. As such, the court affirmed the Chancery Court's decision to grant JetDirect's motion to dismiss for lack of standing.
CML V, LLC v. Bax, C.A. No. 5373-VCL (Del. Supr. Sept. 2, 2011)