Supreme Court Affirms: Creditors Have No Right to Derivative Suit in LLC Context

CML V, LLC v. Bax, No. 735, 2010 (Del. Supr. Sept. 2, 2011), read Delaware Supreme Court opinion here. Delaware’s High Court confirmed that creditors of an insolvent LLC are not given standing by the Delaware LLC Act to pursue derivative claims–unlike the analogous situation in the corporate context. The affirmed Court of Chancery decision was highlighted on these pages here.Photo of the Supreme Court Courthouse in Dover

In sum: The Court reasoned that Section 18-1002 of the Delaware LLC Act is “clear, unequivocal and exclusive, and operates to deny derivative standing to creditors who are not members or assignees of membership interests.” The Court rejected the argument that the ability of creditors of insolvent corporations to bring derivative suits should be injected by analogy into the LLC statute, and instead honored the different public policy behind LLCs that was expressly promoted in the statute. So, too, the Court refused to be persuaded by a state constitutional argument that by prohibiting such a derivative claim, the legislature had limited the equitable jurisdiction of the Court of Chancery.

Scholarly supplement: Professor Larry Ribstein, one of the country’s foremost experts on LLCs, provides a scholarly and thorough analysis of this important decision here. Compare generally, Professor Ribstein’s praise of this Delaware opinion, and the state of LLC law in Delaware, with his reference in a post here to the “troubling lawlessness of New York’s LLC law.” One suggestion the good professor proposes in order to avoid the problems with New York law (posed by the case he discusses), is: “simply to avoid New York.”