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Selling to an LLC?

By Alisa E. Moen
October 20, 2011

Late last fall, the Delaware Court of Chancery issued a decision that surprised many business law observers and practitioners. The Chancery Court dismissed creditors' derivative claims brought against the board of directors of a failed and insolvent limited liability company. The Delaware Supreme Court agreed and affirmed the decision.

Plaintiff CML V, LLC (“CML”) lent funds to JetDirect Aviation Holdings, LLC (“JetDirect”), a private jet management and charter company. Beginning in 2005, JetDirect undertook an expansion program pursuant to which it acquired other charter and service companies. It was this acquisition campaign that the plaintiff blamed upon the company's eventual demise into bankruptcy. The Complaint alleged, among other claims, that the directors failed to adequately supervise the acquisition efforts and failed to educate themselves on the true financial condition before approving further expansions. Such claims for breaches of fiduciary duties to the company and its ownership would be readily available in the corporate context when the enterprise is insolvent. Not so, when the company is formed as an alternative business entity, such as a limited liability company or a limited partnership. To some, until recently, this was a distinction without a difference. Now ' lender beware.

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