The recent decision of Trusa v. Nepo, C.A. No. 12071-VCMR (Del. Ch. April 13, 2017), stands for the proposition that a creditor lacks standing to assert a derivative claim against a limited liability company. In Trusa, the plaintiff creditor Steven B. Trusa brought a derivative action for breach of fiduciary duty and dissolution of Xion Management, LLC (“Xion” or “LLC”). The creditor brought such claims, among other reasons, as a result of his assertion that he lent money to the LLC under false pretenses. One of the managing members moves to dismiss the action for lack of standing, duplication, and failure to state a claim.
Vice Chancellor Montgomery-Reeves granted the motion to dismiss in its entirety. The Court held that under the plain language of the Delaware Limited Liability Act, only members and assignees can assert derivative claims on behalf of a limited liability company. The Court rejected Trusa’s argument that the power of attorney provision in the loan agreement granted creditor a contractual right to assert derivative claims, as the clause only permitted Trusa to pursue remedies as provided in the Agreement.
The Court also rejected Trusa’s demands for dissolution and fraud. Only a member or manager may seek dissolution of a limited liability company under the Delaware LLC Act’s dissolution statute, 6 Del. C. § 18-802. Moreover, the Court found that the extreme remedy of “equitable dissolution” did not apply. Finally, the Court rejected the creditor’s attempts to raise fraud in a breach of contract claim.
Notably, the Court rejected Trusa’s argument that because the LLC’s Certification of Formation was automatically cancelled under Section 18-203 of the LLC Act, he should be permitted to seek appointment of a receiver under Section 18-805 of the LLC Act. But as Vice Chancellor Montgomery-Reeves held: “a creditor may only seek the appointment of a trustee or receiver [under Section 18-805] when a certificate of cancellation is filed after the dissolution and winding up of the company, not where the certificate of formation has been canceled by operation of law for want of a registered agent.” (emphasis in original). The Court declined Trusa’s invitation to “read any cancellation method under Section 18-203(a) as triggering the rights granted to creditors in Section 18-805….”
Key Takeaway: Creditors will be denied standing to assert derivative claims to recover damages. The preferred course is to prepare for such contingencies in the loan documents. In addition, a creditor must wait until a certificate of cancellation is filed in order to seek appointment of a receiver under Section 18-805 of the LLC Act.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at email@example.com.