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Left to right: Andrew Kassner and Joseph Argentina of Drinker Biddle & Reath. Left to right: Andrew Kassner and Joseph Argentina of Drinker Biddle & Reath.

The topic of when and who can assert claims against insiders for breach of fiduciary duty and related matters is often confusing when it involves a bankruptcy estate. Extensive case law has developed over the years regarding corporations. However, there is less case law regarding limited liability companies and limited partnerships. Decisions in Delaware and elsewhere have held that once a corporation is insolvent, directors and officers owe fiduciary duties not only to shareholders, but creditors as well. When directors and officers breach those duties, creditors as well as shareholders have standing to pursue derivative claims on behalf of the corporation. However, the rules governing standing are different when the bankrupt entity is a limited partnership or limited liability company. Judge Kevin Carey of the U.S. Bankruptcy Court for the District of Delaware recently issued an opinion on this issue in In re Citadel Watford City Disposal Partners, Case No. 17-50024-KJC (May 2, 2019). In that case, the court dismissed derivative claims asserted against a former principal of a limited partnership and limited liability companies because the creditors lacked standing to bring the claims on behalf of such entities.

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