Last week the Delaware Supreme Court ruled on the appeal of CML V, LLC v. Bax, in which the Court of Chancery held last year that a creditor of an insolvent LLC does not have standing to maintain a derivative suit in the name of the LLC against its managers.
In this memorandum opinion, the Court of Chancery held that a retiring member of a limited liability company was entitled to his proportionate share of the liquidation value, rather than the going concern value, of the company.
In this en banc decision, the Delaware Supreme Court affirmed the Court of Chancery’s decision that laches, instead of the applicable statute of limitations, applied to the plaintiff corporate officer’s claim for indemnification, and thus upheld the Court of Chancery’s decision that plaintiff was entitled to indemnification for certain actually and reasonably incurred attorneys’ fees and expenses.
In Trenwick America Litigation Trust v. Ernst & Young, LLP, 906 A.2d 168 (Del. Ch. 2006), the Delaware Court of Chancery definitively weighed in on the tort claim that has become known by the popular name “deepening insolvency” when it dismissed a “deepening insolvency” claim brought by a litigation trust to recover money for the benefit of the creditors of a bankrupt estate.
In this post-trial decision, the Court of Chancery held that a company’s repurchase of senior notes from an insider approximately six months after returning to solvency did not violate the express or implied terms of the indenture, constitute a fraudulent transfer, nor give rise to fiduciary duty claims on which the creditor had standing to sue.
Delaware courts often emphasize the freedom of contract of parties to define their rights, powers, duties, obligations, liabilities and restrictions in a limited liability or operating agreement under the Delaware Limited Liability Company Act (LLC Act).
In a groundbreaking, and somewhat surprising decision, the Delaware Supreme Court recently held that creditors of a company that is either in the zone of insolvency or actually insolvent cannot, as a matter of law, directly sue directors of the company for breaches of the directors’ fiduciary duties.
In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 2007 WL 1453705 (Del. May 18, 2007), the Delaware Supreme Court, in a case of first impression, provided some clarity on the controversial issue of whether and to what extent creditors have the ability to assert fiduciary duty claims against directors.
On May 18, 2007, in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla (“Gheewalla”),1 the Delaware Supreme Court affirmed the Delaware Court of Chancery’s decision2 in which the Court of Chancery precluded creditors from filing direct suits for breach of fiduciary duty against directors of corporations that are either in the zone of insolvency or are actually insolvent. With its decision, the Delaware Supreme Court has limited creditors’ ability to sue directors for breach of fiduciary duty.