Recent decision denies derivative standing to creditors of insolvent LLCs

Under Delaware law, it is well-settled that creditors of insolvent corporations have standing to pursue derivative actions in the right of the corporation. Many practitioners presumed that creditor derivative standing existed for insolvent LLCs as well, despite an absence of controlling precedent on that issue. But a recent en banc decision by the Delaware Supreme Court reached the opposite conclusion, holding that creditors of a Delaware LLC have no standing to assert derivative claims on behalf of the LLC. That decision, CML V LLC v Bax, (CML), held that a plain reading of 6 Del C § 18-1002 limits derivative standing in LLCs exclusively to members or assignees. Ultimately, the CML decision makes clear that Delaware courts expect LLC stakeholders to protect their rights by contract. Accordingly, parties drafting LLC agreements should consider whether to add provisions establishing the financial, informational, or control rights of creditors should the LLC become insolvent.