Judge Karen B. Owens recently issued a decision on derivative standing in the bankruptcy of a limited liability company. The decision applied a Delaware Code provision that allows only an LLC member or its assignee to bring derivative claims on behalf of the LLC to deny standing to a creditors’ committee to bring derivative claims on behalf of the debtor in In re Dura Automotive Systems, LLC, No. 19-12378 (Bankr. D. Del. June 9, 2020). In this case, the Committee, neither a member or a member’s assignee, could not bring claims on the debtors’ behalf following the LLC debtors’ waiver and release of claims.

The Committee sought standing to pursue claims against the debtors’ prepetition lenders. These prepetition lenders were affiliates of the debtors’ majority shareholders and prepetition CEO. In the context of the bankruptcy court’s approval of the debtor-in-possession financing initially provided by these affiliated pre-petition lenders, the debtors waived claims against the lenders. The waiver was memorialized in the final DIP financing order. The DIP financing order bridged the debtors to an early sale of substantially all of their assets under section 363 of the Bankruptcy Code. Following the sale there was to be a conversion to a Chapter 7 case with a trustee appointed to pursue the only remaining assets for the benefit of unsecured creditors, i.e., the causes of action belonging to the debtors. Significantly, the determination that the Committee did not have standing to bring claims against these insider lenders also meant that the claims were not preserved for the Chapter 7 trustee to pursue following conversion.

Background and Procedural History