Delaware Business Litigation Report

Delaware Supreme Court Permits Substitution of Bankruptcy Trustee as Plaintiff to Resolve “Procedural Conundrum”

Lenois v. Lawal, No. 33, 2021 (Del. Dec. 9, 2021)
A company’s bankruptcy filing during an appeal of a dismissal of a derivative action presents questions of who, if anyone, has the standing to pursue the company’s potential claims. As this case shows, Delaware is loathe to permit such claims to abate merely because the procedural path forward is unclear.

Lenois appealed the dismissal of his derivative action alleging that Erin Energy’s controller, Lawal, caused Erin Energy to enter into a conflicted transaction. During the pendency of Lenois’ appeal, Erin Energy filed for bankruptcy, and the bankruptcy trustee sought to substitute as plaintiff (or alternatively, substitute as nominal defendant and then realign as plaintiff) and to pursue Lenois’s allegations directly on behalf of Erin Energy. The Delaware Supreme Court dismissed Lenois’s appeal as moot and remanded the matter to the Court of Chancery to consider the trustee’s requests. In analyzing the trustee’s requests, the Court of Chancery conducted a Rule 60(b) analysis into whether relief from its dismissal order was warranted and denied the trustee’s motions. The trustee appealed.

The Delaware Supreme Court reversed and directed the Court of Chancery to substitute the trustee and realign the trustee as plaintiff. Because the bankruptcy mooted Lenois’s appeal through no fault of Lenois, and because the trustee had steadfastly pursued substitution, the Supreme Court concluded that substitution provided “an equitable resolution of the procedural conundrum” so that the matter could be resolved on the merits rather than a technicality.

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