On appeal, the plaintiffs argued that §18-1001 only guarantees derivative standing for members and assignees, but does not limit standing to those two groups, and that read in conjunction with §18-1002, the legislative intent was to mimic the analogous section of the Delaware General Corporation Law, which has been held not to bar derivative standing for creditors. The Supreme Court disagreed. It found the language of §18-1002 to be unambiguous and declined to engage in “any extraneous contemplation of, of intellectually stimulating musings about, the General Assembly’s intent.” It also rejected the argument that a plain reading of §18-1002 yields an absurd result (by creating standing for corporate creditors but not for LLC creditors), pointing out that the General Assembly is free to promote “maximum business entity diversity” by giving investors the option to invest in corporate forms offering different “bundle[s] of rights.
The plaintiffs also contended that by limiting derivative standing in this way, the General Assembly had curtailed the Court of Chancery jurisdiction in violation of the Delaware Constitution. They argued that the Delaware Constitution guarantees the Chancery Court the same or greater equity jurisdiction enjoyed by the High Court of Chancery of Great Britain at the time of separation from Britain, and since courts of equity at that time had the power to grant derivative standing to corporate stockholders “to prevent failures of justice,” the Delaware Constitution requires that the Chancery Court have jurisdiction to extend derivative standing where it is necessary to prevent complete failures of justice. The Court explained that derivative standing is a “judicially-created … creature of equity, ” and for that reason the Delaware General Corporation Law does not create derivative standing. Rather, section §327 (the only section of the DGCL addressing derivative standing) assumes the right of stockholders to sue derivatively but restricts the stockholders who can sue derivatively to those who owned their stock at the time of the alleged wrongful act or whose stock devolved upon them by operation of law from a stockholder who owned stock at that time. Therefore, the judicial extension of derivative standing to creditors in the corporate context was not an issue of statutory construction but rather an extension of a judicially-created equitable doctrine, consistent with the principles of equity, to address new circumstances. However, the statutes at issue in this case deal not with the corporate context but rather with limited liability companies, a form unknown at the time of separation. Therefore, the Court held that the Delaware Constitution did not preclude limitations on the scope of LLC derivative standing. Rather, courts adjudicating the rights, remedies and obligations associated with LLCs must look to the LLC Act, which alone created those rights, remedies and obligations. In the face of unambiguous statutory language expressly limiting derivative standing to members or assignees, the Chancery Court has no equitable power to override such limitations. The Court also noted that even if the Chancery Court had the jurisdiction to extend derivative standing to the plaintiffs, such jurisdiction should only be exercised absent an adequate remedy at law and where there is a threat of failure of justice. According to the Court, such remedy at law did exist and the paucity of remedies available to the plaintiffs was a function of their own contractual choices and did not carry a threat of failure of justice. The Court suggested potential terms that the plaintiffs might have bargained for, including a provision converting the creditors’ rights to that of an “assignee” in the event of insolvency, or a term that would have given the plaintiff management control of the LLC. Link to Supreme Court opinion: http://courts.delaware.gov/opinions/download.aspx?ID=159960. Link to Chancery Court opinion: http://courts.delaware.gov/opinions/download.aspx?ID=146170.
