In a recent decision, CML V, LLC v. Bax, et al., C.A. No 5373-VCL (Del. Ch. Nov. 3, 2010), the Delaware Court of Chancery held that, unlike Delaware corporations, creditors of an insolvent Delaware limited liability company cannot bring derivative actions against the members or managers of the company unless they specifically contract for such rights.

A decision recently handed down by the Delaware Chancery Court, CML V, LLC v. Bax, indicates that creditors of a limited liability company (“LLC”) organized under Delaware law do not have standing to institute derivative suits against an LLC’s management, even when the LLC is insolvent, unless the right is expressly set forth in the LLC’s organizational documents or external agreements.

Background

The Delaware Chancery Court has found the recapitalization of a media production company entirely fair. Faced with the possibility of bankruptcy and unable to service its debt, the company's board of directors (acting through its special committee) approved a revised recapitalization plan proposed by the company's majority stockholder and primary debt holder. The special committee retained independent legal counsel and a financial advisor. The special committee, after engaging in extensive due diligence, determined to negotiate the recapitalization proposal.

In a decision released on March 29, 2011, CDX Liquidating Trust v. Venrock Assocs., et al., 2011 U.S. App. LEXIS 6390 (7th Cir. March 29, 2011), the United States Court of Appeals for the Seventh Circuit, reversing the district court’s ruling, held that a director’s disclosure of a conflict, in and of itself, is insufficient to protect that director from liability for breach of fiduciary duty or disloyalty arising from that conflict.

1. Learn About Your Client and the Debtor.

Before you accept a collection case, make sure you know your client’s business and the debtor’s business.

Summary

In an 11 page opinion published May 18, 2011, Judge Shannon ruled that, in the context of a motion to dismiss, the officer of a corporation, which is itself a contractor, is not also a contractor by virtue of her position within the corporation. Judge Shannon’s opinion is available here (the “Opinion”).

Background

The plaintiff, Horng Technical Enterprise Co., LTD (“Horng”), was a Taiwanese corporation that manufactured computer accessories.  Horng Technical Enterprise Co., LTD v. Sakar International, Inc., No. 10-3648 (3d Cir. June 23, 2011).  The defendant, Sakar International, Inc.

Delaware has long been the bellwether for law concerning the duties that corporate officers and directors owe to a company and its creditors, and Florida courts often look to Delaware cases and compelling authority in evaluating disputes alleging breaches of fiduciary duties by directors or officers.  A recent significant Delaware opinion has helped clarify what duties officers and directors owe to whom and when.  In Quadrant Structured Products Co. v. Vertin, 2015 WL 2062115 *1 (Del. Ch.

The Delaware Court of Chancery recently issued an opinion in Quadrant Structured Products Company¹that addresses creditors’ rights to bring derivative lawsuits against directors and officers of a corporation.  The Court held that Delaware law does not impose a continuous insolvency requirement and that the “traditional balance sheet test” is the appropriate test for determining solvency.  The opinion also provides a roadmap on the current landscape under Delaware law for analyzing breach of fiduciary duty claims. 

Since at least the Delaware Supreme Court’s 2007 landmark decision in N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del.