CML V, LLC v. Bax
28 A.3d 1037
| Del. | 2011Background
- JetDirect Aviation Holdings LLC pursued derivative and direct claims against its officers and JetDirect's holdings entities after a leveraged roll-up left JetDirect highly indebted and with weak internal controls.
- JetDirect discovered serious accounting deficiencies in 2006, and new auditors in 2007 refused to complete the audit due to unreliable internal controls.
- In 2007 JetDirect undertook four major acquisitions using outdated financial information, while internal controls remained deficient.
- CML V, LLC loaned JetDirect about $25.7 million in 2007, later increasing to approximately $34.2 million, and became a junior secured lender.
- JetDirect defaulted on the loan in 2007; by 2008 insolvent status led to asset liquidation to reduce debt.
- The Vice Chancellor dismissed all four claims on standing grounds, holding that creditors lack derivative standing to sue on behalf of an LLC.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether LLC derivative standing is limited to members/assignees | CML argues §18-1002 does not bar creditors from derivative standing | Defendants argue §18-1002 expressly limits derivative standing to members/assignees | Yes; §18-1002 unambiguously limits standing to members/assignees. |
| Whether the plain-language reading of §18-1002 yields an absurd result | Reading §18-1002 as limiting to members/assignees would be absurd for creditors | No absurd result; legislative choice allowed and purposeful | No absurd result; plain language controls. |
| Whether §18-1002 is constitutional under Delaware's equity jurisdiction | Limiting derivative standing to insiders deprives equity power needed to prevent injustice | Constitution permits restricting derivative standing for LLCs; equity power does not override statutory text | Constitutional; LLC Act limits derivative standing and Court of Chancery jurisdiction remains intact. |
Key Cases Cited
- N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) (creditors have standing to sue derivatively for insolvent corporations)
- DuPont v. DuPont, 85 A.2d 724 (Del. 1951) (constitutional extent of equity jurisdiction)
- Schoon v. Smith, 953 A.2d 196 (Del. 2008) (derivative standing as a judicially created doctrine; limits to prevent injustice)
- LeVan v. Indep. Mall, Inc., 940 A.2d 929 (Del. 2007) (statutory construction and abuse of discretion standards; absurd results)
- Taylor v. Diamond State Port Corp., 14 A.3d 536 (Del. 2011) (statutory construction guidance; plain meaning controls)