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Special Feature: Committee Standing

Feb 21, 2024

Earlier this month a Delaware bankruptcy judge ruled that a creditors’ committee has standing to pursue breach of fiduciary duty claims on behalf of a Delaware limited liability company’s bankruptcy estate against the company’s officers.  This holding is significant because at least three prior Delaware bankruptcy court cases held that creditors were barred from pursuing such derivative claims by operation of Delaware state law. 

Prior to the court’s decision in In re Pack LiquidatingLLC, bankruptcy courts in Delaware had rejected creditors’ requests for derivative standing to bring lawsuits belonging to an LLC’s bankruptcy estate.  Those courts pointed to the Delaware Limited Liability Company Act, which expressly requires that a member or assignee of the company must bring such claims.  These decisions left few vehicles for recovering on claims of managerial misconduct where the managers themselves remained in control of the debtor.  Without the ability to pursue such claims derivatively, creditors hoping to monetize these claims were forced to consider more extreme avenues such as appointing a trustee or converting the case outright. 

Breaking with his peers, Judge Goldblatt found that the Bankruptcy Code implicitly authorizes courts to grant derivative standing to pursue estate causes of action which the estate’s fiduciaries refuse to bring.  Judge Goldblatt relied on the Third Circuit’s decision in In re Cybergenics, which held that a committee’s standing is derived from federal bankruptcy law.  As such, a state statute imposing limitations on derivative standing has no impact on the bankruptcy court’s authority to grant standing to a creditors’ committee to pursue claims on behalf of the bankruptcy estate.  

The decision in Pack Liquidating furthers bankruptcy’s goal of maximizing value for the benefit of the estate and is a victory for creditors.  It remains to be seen if other bankruptcy judges will follow this court’s lead, however, Judge Goldblatt’s opinion makes a compelling case that the bankruptcy court’s authority to grant derivative standing to committees is dictated by binding Third Circuit precedent and the Bankruptcy Code itself.

Read the Opinion here.