Justia.com Opinion Summary: CML, a junior secured creditor of JetDirect, sued JetDirect's present and former officers directly and derivatively for breaching their fiduciary duties. The Vice Chancellor dismissed all four of CML's claims. The court affirmed the judgment because CML, as a JetDirector creditor, lacked standing to sue derivatively on JetDirect's behalf.
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IN THE SUPREME COURT OF THE STATE OF DELAWARE
CML V, LLC, individually and
Derivatively on behalf of Jet Direct
Aviation Holdings, LLC
)
)
)
)
Plaintiff Below Appellant,
)
)
v.
)
)
JOHN BAX, GREGORY S. CAMPBELL, )
LOUIS CAPPELLI, JANE GARVEY,
)
STEVEN M. HANKIN, PAUL M.
)
HARRINGTON, DONALD HEBB,
)
JEFFREY P. KELLY, JAMES W.
)
MARLEY, ROBERT P. PINKAS, PETER )
SINATRA, STEPHANIE ZIMMERMAN, )
and JETDIRECT AVIATION
)
HOLDINGS LLC,
)
)
Defendants Below Appellees, )
)
and
)
)
JETDIRECT AVIATION HOLDINGS, LLC)
)
Nominal Defendant Below
)
Appellee.
)
No. 735, 2010
Court Below: Court of Chancery
of the State of Delaware
C.A. No. 5373
Submitted: June 22, 2011
Decided: September 2, 2011
Before STEELE, Chief Justice, HOLLAND, BERGER, RIDGELY, Justices and
BRADLEY, Judge* constituting the Court en banc.
Upon appeal from the Court of Chancery. AFFIRMED.
*Sitting by designation pursuant to Del. Const. art. IV § 12.
David A. Jenkins, Michele C. Gott of Smith, Katzenstein & Jenkins LLP,
Wilmington, Delaware. Of Counsel: Michael J. Friedman and Gene C. Schaerr
(argued) of Winston & Strawn LLP, New York, NY for appellant.
A. Gilchrist Sparks III, (argued) and Ryan D. Stottmann of Morris, Nichols,
Arsht & Tunnell LLP, Wilmington, Delaware for appellees Gregory S. Campbell,
Louis Cappelli, Jane Garvey, Paul M. Harrington, Donald Hebb, Jeffrey P. Kelly,
James W. Marley, Peter Sinatra and Stephanie Zimmerman. Of Counsel: Jennifer
Barrett and Hilary Ormond of Quinn Emanuel Urquhart & Sullivan, LLP, New
York, NY for appellee Jeffrey P. Kelly.
Kevin S. Mann of Cross & Simon, LLC, Wilmington, Delaware. Of
Counsel: Dan C. Kozusko of Wilkie Farr & Gallagher LLP, New York, NY for
appellees John Bax and Steven M. Hankin.
STEELE, Chief Justice:
2
CML V, LLC (CML), a junior secured creditor of JetDirect Aviation
Holdings, LLC, sued JetDirect’s present and former officers directly and
derivatively for breaching their fiduciary duties. The Vice Chancellor dismissed
all four of CML’s claims. Because CML, as a JetDirect creditor, lacked standing
to sue derivatively on JetDirect’s behalf, we affirm.
I.
FACTS AND PROCEDURAL HISTORY
JetDirect Aviation Holdings LLC, a Delaware limited liability company, was
a private jet management and charter company. As part of a roll up strategy,
starting in 2005, JetDirect acquired a number of small to midsized competitor
charter and service companies. This aggressive expansion left JetDirect with a
highly leveraged balance sheet and volatile cash flows.
In 2006, JetDirect’s board of managers learned about serious deficiencies in
its accounting system.
JetDirect’s auditor informed the officers of various
weaknesses and deficiencies in JetDirect’s internal controls.
A year later,
JetDirect’s new auditor—Ernst & Young LLP—declined to complete its audit
because JetDirect’s internal controls lacked sufficient integrity and the auditor
could not rely on JetDirect’s internal accounting books and records.
In 2007, JetDirect’s board undertook to consolidate its billing, accounting,
and other operations.
The consolidation exacerbated JetDirect’s preexisting
3
internal control deficiencies.
Specifically, the consolidation complicated
JetDirect’s billing and customer service functions, leading to increased accounts
receivable and a lag in the ability of JetDirect managers to compile current
operating and financial results. Nevertheless, despite lacking current information
about JetDirect’s true financial condition, the board approved four major
acquisitions in late 2007.
In April 2007, before the board made the four late 2007 acquisitions on the
basis of outdated information, CML loaned JetDirect $25,743,912 and became a
junior secured lender. Later, the parties increased this loan to $34,243,912. In
June 2007, JetDirect defaulted on its loan obligations to CML. By January 2008,
JetDirect was insolvent. In late 2008, JetDirect’s managers began liquidating
JetDirect’s assets to reduce its debt burden.
CML alleges that if JetDirect’s managers had possessed accurate financial
information, which they did not, they would have understood that JetDirect lacked
the working capital to finance the late 2007 acquisitions and they would have never
approved those acquisitions.
CML also alleges that senior management hid
adverse information from the board and that when JetDirect managers began
liquidating JetDirect’s assets to reduce its debt burden, certain managers negotiated
sales of assets to entities that they controlled and the board approved these
interested sales without adequately reviewing their propriety.
4
CML asserts that despite the liquidation, JetDirect has not repaid any of its
debt to CML, and that after accounting for interest, the balance of CML’s
outstanding loan to JetDirect exceeds $40,000,000. On March 26, 2010, CML
filed a Complaint in the Delaware Court of Chancery asserting both derivative and
direct claims against JetDirect’s present and former managers. Specifically, CML
asserted derivatively that: (1) the individual defendants breached their duty of care
by approving the late 2007 acquisitions without informing themselves of
JetDirect’s true financial condition, (2) the individual defendants acted in bad faith
by consciously failing to implement and monitor an adequate system of internal
controls and—with respect to one specific individual defendant—hiding critical
information from the board, and (3) certain individual defendants breached their
duty of loyalty by benefitting from self interested asset sales upon JetDirect’s asset
liquidation in 2008. CML also asserted a direct claim for money damages against
JetDirect for breaching the loan agreement between the parties. Both parties and
the Vice Chancellor agreed that the Court of Chancery would only have
jurisdiction over the direct claim if any of the derivative claims survive a motion to
dismiss; if all of the derivative claims are subject to dismissal, the direct claim
would fail as well.
On May 27, 2010, JetDirect and the individual defendants moved to dismiss
all four claims. The Vice Chancellor dismissed all four claims on the basis that
5
CML, as a creditor, lacks standing to pursue derivative claims on behalf of
JetDirect. CML now appeals this judgment, and we affirm.
II.
STANDARD OF REVIEW
We review judgments granting motions to dismiss under Court of Chancery
rule 12(b)(6) de novo “to determine whether the trial judge erred as a matter of law
in formulating or applying legal precepts.”1 We do not affirm a trial judge’s
dismissal of a claim unless the judge (i) accepts as true all well-pleaded factual
allegations, (ii) accepts even vague factual allegations as “well-pleaded” if they
give the opposing party notice of the claim, (iii) draws all reasonable inferences in
favor of the non-moving party, and (iv) dismisses the Complaint only if the
plaintiff would not be entitled to recover under “any reasonably conceivable set of
circumstances susceptible of proof.”2 We review issues of statutory construction
and interpretation de novo.3 We also review issues of constitutional dimension de
novo.4
1
Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010) (quoting Gantler v. Stephens, 965 A.2d
695, 703–04 (Del. 2009)).
2
In re Gen. Motors S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (quoting Savor, Inc. v. FMR
Corp., 812 A.2d 894, 896–97 (Del. 2002)).
3
Bay Surgical Servs. v. Swier, 900 A.2d 646, 652 (Del. 2006).
4
See Stigars v. State, 674 A.2d 477, 479 (Del. 1996).
6
III.
ANALYSIS
The parties dispute the effect of the derivative standing provisions of the
Limited Liability Company Act—specifically 6 Del. C. §§ 18-1001 and 18-1002.
CML contends that those provisions do not deprive creditors of standing to bring
derivative actions on behalf of insolvent LLCs. The defendants argue that the
provisions clearly deprive creditors of derivative standing. CML then contends
that if, in fact, the provisions deprive the Court of Chancery of its equity
jurisdiction to extend derivative standing to creditors of insolvent LLCs, then those
provisions are an unconstitutional limitation on the Court of Chancery’s powers “in
equity.”
CML is wrong with respect to both claims. The LLC Act, by its plain
language, exclusively limits derivative standing to “member[s]” or “assignee[s],”
and that exclusive limitation is constitutional.
I.
The LLC Act Denies Derivative Standing To Creditors of Insolvent
LLCs.
The plain language of 6 Del. C. § 18-1002 is unambiguous and limits
derivative standing in LLCs exclusively to “member[s]” or “assignee[s].” The
rules of statutory construction are well settled.5 First, we must determine whether
5
Taylor v. Diamond State Port Corp., 14 A.3d 536, 538 (Del. 2011) (citing Dewey Beach
Enters., Inc. v. Bd. of Adjustment, 1 A.3d 305, 307 (Del. 2010)).
7
the statute is ambiguous.6 If it is unambiguous, then there is no room for judicial
interpretation and “the plain meaning of the statutory language controls.”7 The
statute is ambiguous if it is susceptible of two reasonable interpretations8 or if a
literal reading of its terms “would lead to an unreasonable or absurd result not
contemplated by the legislature.”9 If the statute is ambiguous, then we consider it
as a whole and we read each section in light of all the others to produce a
harmonious whole.10 We also ascribe a purpose to the General Assembly’s use of
particular statutory language and construe it against surplusage if reasonably
possible.11
In this case, the parties dispute the effect of the derivative standing
provisions of the LLC Act. The central provision at issue is 6 Del. C. § 18-1002,
entitled “Proper plaintiff.” That provision reads:
In a derivative action, the plaintiff must be a member or an assignee of
a limited liability company interest at the time of bringing the action
and:
6
Id.
7
LeVan, 940 A.2d at 933 (quoting Eliason v. Englehart, 733 A.2d 944, 946 (Del. 1999)).
8
Id.
9
LeVan v. Indep. Mall, Inc., 940 A.2d 929, 933 (Del. 2007) (quoting Newtowne Vill. Serv. Corp.
v. Newtowne Rd. Dev. Co., 772 A.2d 172, 175 (Del. 2001)).
10
Taylor, 14 A.3d at 538 (citing Dewey Beach Enters., 1 A.3d at 307).
11
Id.
8
(1) At the time of the transaction of which the plaintiff complains;
or
(2) The plaintiff’s status as a member or an assignee of a limited
liability company interest had devolved upon the plaintiff by
operation of law or pursuant to the terms of a limited liability
company agreement from a person who was a member or an
assignee of a limited liability company interest at the time of
the transaction.12
This provision is unambiguous on its face; therefore, its plain language controls.
In as many words, the provision dictates that a proper derivative action plaintiff
“must be a member or an assignee of a limited liability company interest . . . .”13
The statutory language is clear, unequivocal, and exclusive, and operates to deny
derivative standing to creditors who are not members or assignees of membership
interests.
CML contends that section 18-1002 is limited to the context of section 181001, entitled “Right to bring action,” which reads:
A member or an assignee of a limited liability company interest may
bring an action in the Court of Chancery in the right of a limited
liability company to recover a judgment in its favor if the managers or
members with authority to do so have refused to bring the action or if
an effort to cause those managers or members to bring the action is
not likely to succeed.14
12
6 Del. C. § 18-1002.
13
Id.
14
6 Del. C. § 18-1001.
9
In other words, one part of CML’s contentions posits that section 18-1001
guarantees derivative standing to members or assignees, but does not limit standing
to those groups. Reading the two sections together and consistently with each
other, CML contends, demonstrates that the General Assembly intended merely to
rephrase the language of section 327 of the Delaware General Corporate Law,15
which this Court has determined does not bar creditors of insolvent corporations
from derivative standing.16 According to CML, the combination of sections 181001 and 18-1002 shows that the General Assembly merely intended to take the
corporate rule of derivative standing for creditors of insolvent corporations and
apply it in the LLC context. We disagree. When statutory text is unambiguous,
we must apply the plain language without any extraneous contemplation of, or
intellectually stimulating musings about, the General Assembly’s intent.
The text of section 18-1002 is unambiguous because it is not susceptible of
two reasonable interpretations and because invoking its clear language does not
15
8 Del. C. § 327. Stockholder’s derivative action; allegation of stock ownership
In any derivative suit instituted by a stockholder of a corporation, it shall be
averred in the complaint that the plaintiff was a stockholder of the corporation at
the time of the transaction of which such stockholder complains or that such
stockholder’s stock thereafter devolved upon such stockholder by operation of
law.
16
See N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del.
2007) (“[T]he creditors of an insolvent corporation have standing to maintain derivative claims
against directors on behalf of the corporation for breaches of fiduciary duties.”) (emphasis in
original).
10
yield an unreasonable or absurd result the General Assembly never contemplated.17
First, the General Assembly used the indefinite phrase “a derivative action” instead
of the definite phrase “the derivative action” to describe those derivative actions to
which section 18-1002 applies. We ascribe purpose to this choice. By making the
choice, the General Assembly created an independent restriction on all derivative
actions on behalf of LLCs—not merely those derivative actions that section 181001 seemingly authorizes. Moreover, in section 18-1002, the General Assembly
used the mandatory and exclusive “must,” rather than the permissive “may” that it
used in section 18-1001. That is, in the LLC context, the “Proper Plaintiff” “must
be a member or an assignee of a limited liability company interest . . . .” That is
the only reasonable interpretation of the plain language of section 18-1002.
Finally, applying the plain language of section 18-1002 does not yield an
unreasonable or absurd result the General Assembly never contemplated.18 Indeed,
sections 18-1001 and 18-1002 serve very different purposes. In section 18-1001,
the General Assembly created the right to file a derivative action on behalf of an
LLC and conferred derivative standing on LLC members and assignees. In section
17
18
See LeVan, 940 A.2d at 933.
See Reddy v. PMA Ins. Co., 20 A.3d 1281, 1287–89 (Del. 2011) (discussing the absurd result
principle of statutory construction).
11
18-1002, the General Assembly limited the scope of LLC derivative standing to
members and assignees.
CML contends that this result is absurd because, given the policy underlying
derivative standing, there should be no difference between LLCs and corporations.
CML argues that unless the Court of Chancery can vest creditors of insolvent
LLCs with derivative standing in equity, there will exist no stakeholders with
incentive to enforce fiduciary duties through legal action. CML may be correct
that in insolvency creditors become the ultimate risk bearers in LLCs. But, the
General Assembly is free to elect a statutory limitation on derivative standing for
LLCs that is different than that for corporations, and thereby preclude creditors
from attaining standing. The General Assembly is well suited to make that policy
choice and we must honor that choice. In this respect, it is hardly absurd for the
General Assembly to design a system promoting maximum business entity
diversity. Ultimately, LLCs and corporations are different; investors can choose to
invest in an LLC, which offers one bundle of rights, or in a corporation, which
offers an entirely separate bundle of rights.
Moreover, in the LLC context specifically, the General Assembly has
espoused its clear intent to allow interested parties to define the contours of their
12
relationships with each other to the maximum extent possible.19
It is, therefore,
logical for the General Assembly to limit LLC derivative standing and exclude
creditors because the structure of LLCs affords creditors significant contractual
flexibility to protect their unique, distinct interests.20
Because section 18-1002 is unambiguous, is susceptible of only one
reasonable interpretation, and does not yield an absurd or unreasonable result, we
apply its plain language. Only LLC members or assignees of LLC interests have
derivative standing to sue on behalf of an LLC—creditors do not. Therefore,
section 18-1002 precludes CML from suing derivatively, and the Vice Chancellor
properly granted the motion to dismiss.
19
See 6 Del. C. § 18-1101(a), (b). Construction and application of chapter and limited liability
company agreement.
(a) The rule that statutes in derogation of the common law are to be strictly construed
shall have no application to this chapter.
(b) It is the policy of this chapter to give the maximum effect to the principle of freedom
of contract and to the enforceability of limited liability company agreements.
20
Admittedly, this approach is not the only option the General Assembly had, and we make no
normative comment on the General Assembly’s policy choice. Our only purpose here is to
explain that limiting derivative standing to members and assignees in a contractual entity like an
LLC is not absurd because other interest holders—like creditors—have other options—as, for
example, negotiating automatic assignment of membership interests upon insolvency clauses into
the credit agreement and requiring the members and governing board to amend the LLC
agreement accordingly.
13
II.
Section 18-1002 Of The LLC Act Is Constitutional.
CML also claims that if section 18-1002 of the LLC Act limits derivative
standing exclusively to “member[s]” or “assignee[s],” then it is unconstitutional.
Having held that section 18-1002 in fact does limit derivative standing to
“member[s]” or “assignee[s]” to the exclusion of creditors, we now confront
CML’s constitutional contention.
Specifically, CML argues that if section 18-1002 exclusively limits
derivative standing—as we now hold that it does—then it strips the Court of
Chancery of equitable jurisdiction to extend standing to sue derivatively in cases
where derivative standing is necessary to prevent a complete failure of justice.
This, according to CML, is an unconstitutional curtailment of the Court of
Chancery’s jurisdiction to less than what that jurisdiction was in 1792 when
Delaware ratified its first constitution.21 We disagree.
The Delaware Constitution prohibits the General Assembly from limiting the
equity jurisdiction of the Court of Chancery to less than the general equity
jurisdiction of the High Court of Chancery of Great Britain existing at the time of
21
See DEL. CONST. art. IV, § 10 (“[The Court of Chancery] shall have all the jurisdiction and
powers vested by the laws of this State in the Court of Chancery.”); DuPont v. DuPont, 85 A.2d
724, 729 (Del. 1951) (“[T]he general equity jurisdiction of the Court of Chancery is measured in
terms of the general equity jurisdiction of the High Court of Chancery of Great Britain and is a
constitutional grant not subject to legislative curtailment . . . .”).
14
our separation from the Mother Country.22 At common law, courts of equity
granted equitable derivative standing to corporate stockholders to sue on behalf of
a corporation in order to prevent failures of justice.23 This Court has recognized
that a corporate derivative action is a “judicially-created doctrine” and a “creature
of equity” that serves as a “vehicle to enforce a corporate right.”24 The corporate
form and corporate derivative standing both pre-dated the Delaware General
Corporate Law statutes. For that reason, section 327 of the DGCL25—the only
section of our corporate statute that implicates derivative actions—does not create
derivative standing.
Rather, it merely limits derivative standing to those
stockholders who owned their stock at the time of the allegedly wrongful
transaction or whose stock devolved upon them by operation of law from a person
who owned the stock at that time.26
22
DuPont, 85 A.2d at 729. See also RANDY J. HOLLAND, THE DELAWARE STATE CONSTITUTION:
A REFERENCE GUIDE 134–35 (G. Alan Tarr ed., 2002).
23
Schoon v. Smith, 953 A.2d 196, 201 (Del. 2008).
24
Id. at 201–02 (citing 13 FLETCHER ENCYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS §
5940, at 30 (2004) and R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, 1 THE DELAWARE LAW
OF CORPORATIONS AND BUSINESS ORGANIZATIONS § 13.10, at 13–20 (3d ed. 2008)).
25
26
8 Del. C. § 327.
Id. at 204 (“Section 327 ‘does not create the right to sue derivatively, but rather restricts that
right.’ The equitable standing of a stockholder to bring a derivative action was judicially created
but later restricted by a statutory requirement that a stockholder plaintiff must either have been a
stockholder at the time of the transaction of which she complains or her stock must devolved
upon her thereafter by operation of law.” (quoting Harff v. Kerkorian, 324 A.2d 215, 218 (Del.
15
As this court has explained, “[j]udicially-created equitable doctrines may be
extended so long as the extension is consistent with the principles of equity.”27 To
that end, courts may extend, in equity, the judicially created equitable doctrine of
corporate derivative standing “to address new circumstances.”28
Indeed, in
appropriate circumstances, we have done exactly that.29
Our precedent shows, however, that the common law equity power to extend
derivative standing to address new circumstances is (a) exercisable only to prevent
failures of justice, and (b) limited to the corporate context.30 Absent a threat to
justice in the corporate context, the High Court of Chancery of Great Britain at the
time of the separation did not have equitable jurisdiction to grant or extend
derivative standing.31 Although the Delaware Constitution prohibits the General
Ch. 1974))). See also 8 Del. C. § 327 (“In any derivative suit instituted by a stockholder of a
corporation, it shall be averred in the complaint that the plaintiff was a stockholder of the
corporation at the time of the transaction of which such stockholder complains or that such
stockholder’s stock thereafter devolved upon such stockholder by operation of law.”).
27
Schoon, 953 A.2d at 205.
28
Id. at 204.
29
See Gheewalla, 930 A.2d at 101 (extending corporate derivative standing to creditors of
insolvent corporations). But see Schoon, 953 A.2d at 210 (declining to extend corporate
derivative standing to a corporate director).
30
Schoon, 953 A.2d at 201 (“To prevent a failure of justice, courts of equity granted equitable
standing to stockholders to sue on behalf of the corporation . . . .”) (emphasis added).
31
Indeed, what we now consider alternative business entities—like LLCs—did not exist at
common law.
16
Assembly from limiting the Court of Chancery’s jurisdiction over the extension of
corporate derivative standing in the interests of justice,32 this case deals not with a
corporation but with a statutorily created LLC—a business entity that did not exist
in 1792. Therefore, nothing in the Delaware Constitution precludes the General
Assembly from limiting the scope of LLC derivative standing in 6 Del. C. § 181002 to LLC “member[s]” or assignee[s].”33
Limited liability companies, unlike corporations, did not exist at common
law.
The corporate form existed in 1792, but LLCs came into existence in
Delaware in 1992 when the General Assembly passed the Delaware Limited
Liability Company Act. Indeed, the General Assembly passed the LLC Act as a
broad enactment in derogation of the common law, and it acknowledged as much.34
Consequently, when adjudicating the rights, remedies, and obligations associated
with Delaware LLCs, courts must look to the LLC Act because it is only the statute
that creates those rights, remedies, and obligations. CML correctly asserts that the
32
DuPont, 85 A.2d at 729 (“[T]he general equity jurisdiction of the Court of Chancery is
measured in terms of the general equity jurisdiction of the High Court of Chancery of Great
Britain and is a constitutional grant not subject to legislative curtailment . . . .”).
33
Accord Rose v. Doctors Hosp., 801 S.W.2d 841, 845–46 (Tex. 1990) (holding that since there
was no common law cause of action for wrongful death the Texas Constitution’s open courts
provision did not bar limiting rights and remedies that were created exclusively by statute). See
DEL CONST. art I, § 9.
34
See 6 Del. C. § 18-1101(a) (“The rule that statutes in derogation of the common law are to be
strictly construed shall have no application to this chapter.”).
17
General Assembly expressly acknowledged in the text of the LLC Act that
common law equity principles supplement the Act’s express provisions.35 But
what this means is that where the General Assembly has not defined a right,
remedy, or obligation with respect to an LLC, courts should apply the common
law. It follows that if the General Assembly has defined a right, remedy, or
obligation with respect to an LLC, courts cannot interpret the common law to
override the express provisions the General Assembly adopted. Supplementing
express provisions is altogether different from displacing them or interpreting them
out of existence under the guise of articulating and applying equitable principles.
Even if the Court of Chancery had the common law equitable jurisdiction to
extend derivative standing outside the corporate context—which we have
determined it does not—that equitable power cannot override the LLC Act’s
express provisions. In sections 18-1001 and 18-1002—unlike in DGCL section
327—the General Assembly both created the right to sue derivatively on behalf of
an LLC and expressly limited that right to “member[s]” or “assignee[s].”36 That is
a valid exercise of legislative authority, and the limitation does not
unconstitutionally impinge upon the constitutional jurisdiction of the Court of
35
See, e.g., 6 Del. C. § 18-1104 (“In any case not provided for in this chapter, the rules of law
and equity, including the law merchant, shall govern.”).
36
See 6 Del. C. §§ 18-1001; 18-1002.
18
Chancery. In this context, there is simply no room for the common law to override
the statutory mandate.
Even if the Court of Chancery did have the jurisdiction to extend LLC
derivative standing—which, again, it does not—it should exercise that jurisdiction
only absent an adequate remedy at law.37 In this case, CML has ample remedy at
law and there is no threat of a failure of justice that could justify the application of
equity. CML contends that because JetDirect is insolvent, the creditors, as ultimate
risk bearers, are the only interest holders with incentive to enforce fiduciary duties
through legal action, and that without the intervention of equity a failure of justice
will result. We disagree. CML could have negotiated its remedies by contract. It
did not. Instead, it chose to lend on what later turned out to be unfavorable terms.
As creditors, CML could have negotiated a contractual remedy at law that would
not require the equitable extension of derivative standing even if the Court of
Chancery had the requisite jurisdiction to do so. For example, CML could have
negotiated for a provision that would convert its interests to that of an “assignee”
in the event of insolvency. Or, it could have negotiated for a term that would give
CML control of the LLC’s governing body in such an event. These are but two
37
Chavin v. H.H. Rosin & Co., 246 A.2d 921, 922 (Del. 1968) (“It is, of course, axiomatic that
Equity has no jurisdiction over a controversy for which there is a complete and adequate remedy
at law.”).
19
examples. Of course, CML may have had to pay for broader contractual rights, by
forsaking a higher interest rate or otherwise, in negotiating the loan terms and
conditions, but CML made a choice.
The mere fact that CML’s contractual
decisions in crafting its loan documents did not adequately protect its legal
remedies in the event of insolvency hardly “threatens the interests of justice” to
justify Delaware courts to equitably extend standing to sue derivatively to CML as
a creditor.
IV.
CONCLUSION
Section 18-1002 of the LLC Act, by its plain language, limits LLC
derivative standing to “member[s]” or “assignee[s],” and thereby denies derivative
standing to LLC creditors. That limitation is constitutional because, as pertains to
this case, the Delaware Constitution only guarantees the Court of Chancery the
equity jurisdiction to extend derivative standing to prevent failures of justice in
cases involving corporations. Therefore, we affirm the judgment of the Court of
Chancery.
20
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