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

As a general rule, absent an express agreement to the contrary, expenses associated with administering the bankruptcy estate, including pledged assets, are not chargeable to a secured creditor’s collateral or claim but must be paid out of the estate’s unencumbered assets. Recognizing, however, that the bankruptcy estate may be called upon to bear significant expense in connection with preserving or disposing of encumbered assets as part of an overall reorganization (or liquidation) strategy, U.S.

A main focus of the anticipated reform of the law governing limited liability companies by the draft Act on the Modernization of the Law on Limited Liability Companies and the Prevention of Abuse (generally referred to as the “MoMiG” or “Modernization Act”) is the new set of rules relating to shareholder debt financings.

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.

We’ve all seen it. The business opportunity looks enticing but is laced with risk about a potential bankruptcy filing down the road. As bankruptcy lawyers we are often asked how deals can be structured to prevent a potential bankruptcy filing.

The memorandum has been prepared on the basis of the law and practice in Guernsey as at 1 April 2010.

Introduction  

Liquidators were appointed over Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together “the Funds”) by orders of the BVI High Court dated 21 July 2009, 21 July 2009 and 23 April 2009 respectively. Fairfield Sentry Limited was the largest “feeder” fund to Bernard L Madoff Investment Securities LLC (“BLMIS”) and invested approximately 95% of its assets with BLMIS. BLMIS was placed into liquidation proceedings in the United States in December 2008, after it was revealed that Bernard Madoff operated BLMIS as a Ponzi scheme for many years.

The United States Supreme Court has agreed to address “[w]hether, under §365 of the Bankruptcy Code, a debtor-licensor’s ‘rejection’ of a license agreement—which ‘constitutes a breach of such contract,’ 11 U.S.C. §365(g)—terminates rights of the licensee that would survive the licensor’s breach under applicable nonbankruptcy law.” The appeal arises from a First Circuit decision, Mission Prod. Holdings, Inc. v.

Exculpation provisions in operating agreements must be carefully crafted in order to protect members, managers, directors and officers for breaches of fiduciary duties. In In re Simplexity, LLC, the Chapter 7 trustee sued the former officers and directors (who were also members and/or managers) for failing to act to preserve going concern value and exposing the debtors to WARN Act claims. The defendants argued the exculpation language in the operating agreements shielded against breach of fiduciary duty liability.

With the recent decline in housing and real estate generally, companies in the homebuilding and construction markets face serious challenges. Some projects have already been forced into Chapter 11 and others will almost certainly require either a bankruptcy filing or out-of-court restructure. In the event a bankruptcy is filed, vendors, contractors, subcontractors and other interested parties should be aware of the impact of important bankruptcy code provisions on their relationship with troubled companies.

Automatic Stay