Members Only: Delaware Court Rules that Creditors Lack Standing to Pursue Claims on Behalf of Debtor

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Creditors do not have standing to assert derivative claims on behalf of a bankrupt Delaware limited liability company, according to a recent ruling by Delaware’s bankruptcy Judge John Dorsey in In re Ector County Energy Center LLC.

The ruling, handed down orally on August 15, cuts off one avenue for creditors seeking to force a debtor to prosecute legal claims that it is otherwise unwilling to pursue. Instead, as Judge Dorsey noted, creditors taking issue with the estate’s administration should seek to oust management by moving for the appointment of a bankruptcy trustee or by seeking to convert the case to a liquidation under chapter 7.

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