Matthew Lunn is a partner at Young Conaway
Stargatt & Taylor LLP. Lunn has more than 15 years
of experience representing debtors, secured and
unsecured creditors, committees, and litigation
parties in Chapter 11 bankruptcy cases, and
frequently represents foreign representatives,
debtors, and other parties in cross-border
Chapter 11 and Chapter 15 bankruptcy cases.
He can be reached at email@example.com.
Justin Rucki is an associate at Young Conaway
Stargatt & Taylor LLP. Rucki has nearly a decade
of experience representing debtors, secured
and unsecured creditors, committees, and
litigation parties in Chapter 11 bankruptcy
cases, and trustees, creditors, debtors, and
litigation parties in Chapter 7 bankruptcy
cases. He can be reached at firstname.lastname@example.org.
to become assignees may
reduce the utility of this remedy.
Additionally, this remedy would
require the agreement of the
members whose interests would
be subject to assignment.
(ii) The likelihood that such
contractual standing would be
enforceable might be greater if it
is incorporated in an amended
LLC operating agreement,
as opposed to just a separate
loan or security agreement.
(iii) The Delaware courts’ dicta have
spoken of “automatic assignment
of membership interest upon
insolvency clauses,” but such
provisions very well may be invalid
ipso facto provisions under the
Bankruptcy Code. As such, a
creditor, such as a secured lender,
might instead consider making
such provisions a remedy for
default of payment obligations.
If this is done and coupled with
a power of attorney, the Trusa
opinion might be distinguishable.
The law of distressed LLCs continues
to develop. Recent years have yielded
important case law shedding light in
this area, particularly as it relates to
the ability (or inability) of creditors
to pursue claims in the name of an
LLC, and that trend is continuing.
Although uncertainty remains in this
area, it is clear that if a creditor can
be permitted to pursue such claims
at all, it will only be through a clear
and express contractual agreement.
Moreover, creditors now have
additional case law illustrating what
might be required for such a right
to be negotiated and enforced. J
1 CML V, LLC v. Bax (Bax I), 6 A.3d 238
(Del. Ch. 2010), aff’d CML V, LLC v. Bax
(Bax II), 28 A.3d 1037, 1043 (Del. 2011).
2 The Delaware Supreme Court recognized
the right of creditors of insolvent
corporations to pursue derivative claims
against directors in North American Catholic
Educational Programming Foundation Inc.
v. Gheewalla, 930 A.2d 92 (Del. 2007). In
that case, the court noted that the fiduciary
duties of directors normally run only to
the corporation and its stockholders, while
creditors rely upon the various protections
afforded by contractual agreements,
bankruptcy law, and other sources of
creditor rights to safeguard their interests.
When a corporation becomes insolvent,
however, the court reasoned that because
creditors take the place of stockholders as
the residual beneficiaries of any increase
in value in the enterprise, creditors then
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become the principal constituency injured
by breaches of fiduciary duties by directors
that detract value from the corporation.
3 Bax II, 28 A.3d at 1043 & n. 20.
4 Although not discussed in this article,
the decision also provides guidance
concerning when a creditor may be entitled
to pursue dissolution of a distressed LLC.