For many hotel owners, it is an all-too-familiar story: occupancy is down, and even though operating expenses have been cut to the bone, there is just not enough money to go around. It seems there is always another bill: franchise fees, payroll, real property taxes, debt service—the list goes on. The unfortunate result is that either because of a failure to make a payment or a breach of some other covenant, the owner finds itself looking at a default notice from its lender. When dealing with a loan default, there are four things the hotel owner needs to understand.

The appointment of a receiver is one of the oldest equitable remedies. A receiver can receive, preserve, and manage property and funds, and even take charge of an operating business, as directed by the court. Appointing a receiver is a powerful remedy, not undertaken lightly by the courts.

A New York bankruptcy judge held on October 4, 2010, that second lien lenders could object to a debtor’s bid procedures approved by the first lien lenders despite the terms of an intercreditor agreement inIn re Boston Generating, LLC, No. 10-14419 (SCC) (Bankr. S.D.N.Y. Oct. 4, 2010).1 The intercreditor agreement provided the first lien lenders with the “exclusive right to…make determinations regarding the…sale” of the collateral. According to the court, however, the agreement did not expressly preclude the second lien lenders from objecting to bid procedures.

In this opinion, the Court of Chancery granted the defendants’ motion to dismiss the plaintiff’s derivative claims against the defendants for breach of fiduciary duties, holding that, under Section 18-1002 of the Delaware Limited Liability Company Act (the “LLC Act”), creditors of an insolvent LLC lack standing to sue derivatively.

In CML V, LLC v Bax, the Court of Chancery held that a creditor of JetDirect Aviation Holdings, LLC, a Delaware limited liability company ("JetDirect"), did not have derivative standing to assert breach of fiduciary duty claims against the board of managers of the insolvent JetDirect. The creditors would have had standing if JetDirect were a Delaware corporation, but the Court found that the Delaware LLC Act does not allow an LLC’s creditors to bring derivative claims when a Delaware LLC is insolvent (or at any other time).

Creditors of insolvent Delaware corporations have recourse against corporate directors and officers whose disloyal or self-dealing conduct reduces the corporation’s assets available for distribution. Delaware courts have held that directors and officers of insolvent corporations owe fiduciary duties to creditors as the principal stakeholders in the remaining corporate assets. Where those duties are breached, creditors have standing to bring actions derivatively on behalf of the corporation for damages to the corporation. However, in a recent decision by Vice Chancellor J.

Industry observers have been waiting to see when bank failures arising out of the recent financial crisis would produce a wave of Federal Deposit Insurance Corporation (“FDIC”) litigation similar to that seen in the early 1990s after the savings and loan crisis. With its second suit in recent months, the FDIC has shown that it will aggressively pursue claims against directors and officers in connection with failed depository institutions.

The Delaware Court of Chancery has held that under the Delaware Limited Liability Company Act, creditors of an insolvent Delaware limited liability company do not have standing to pursue a derivative claim against the managers of the company.

The Delaware Court of Chancery has held the seller in an asset purchase transaction liable for breach of an exclusivity provision in the subject asset purchase agreement, dismissing the seller's argument that the fiduciary duties owed by management to creditors negate the contractual exclusivity provision.

In today’s turbulent economic climate, it is vital for creditors and debtors to understand the precise boundaries of their rights and duties when an enterprise becomes insolvent. Directors, officers and managers must acknowledge those to whom they owe fiduciary duties and fulfill those duties at the risk of personal liability, while creditors evaluate their potential remedies against misbehaving insiders to collect on defaulted obligations.