Conflict Between Delaware LLC Act And Bankruptcy Code Affects Creditor Toolbox

As you know from our prior alerts, creditors of borrowers formed as Delaware LLCs (as opposed to corporations) lack standing under Delaware law to sue directors for breaching fiduciary duties even when, to the surprise of many, the LLC is insolvent. See our prior Alert. The disparity of substantive creditor rights depending entirely on corporate form results from two aspects of Delaware law. First, the Delaware Supreme Court has held that directors owe fiduciary duties to the corporation and, upon insolvency, those duties can be enforced by bringing a so-called "derivative action" (as distinct from a direct action) where the creditors sue on the corporation's behalf. Second, Section 18-1002 of the Delaware Limited Liability Company Act ("LLC Act") creates a statutory right only for LLC members and their assignees to bring a derivative action on behalf of an LLC. This means creditors of an insolvent LLC cannot sue directors for breaching fiduciary duties. Instead,