Georgia Bankruptcy Blog

Bill Rothschild of Ogier, Rothschild, Rosenfeld & Ellis-Monroe, P.C., has an article in the current issue of Calendar Call, a publication of the General Practice and Trial Section of the State Bar of Georgia, entitled "Bankruptcy-Proofing Your Law Judgment: How Not to Try the Same Case Twice."  The article discusses steps litigators should take in non-bankruptcy courts to increase the chances the judgment may be deemed nondischargeable in a subsequent Bankruptcy case without having to re-litigate the entire case.

Here is a brief summary of the issues addressed in the article, with a few additional comments:

• Section 523 of the Bankruptcy Code excepts some debts from discharge, including debts based upon fraud, misrepresentation, breach of fiduciary duty, and willful and malicious injury.
• If a judgment is obtained in non-bankruptcy court, and the defendant subsequently files a Bankruptcy petition, the creditor may seek to have the debt excepted from discharge pursuant to Section 523.  This includes punitive damages and perhaps other costs included in the underlying judgment.
• Collateral Estoppel may apply in the Bankruptcy proceeding, thus making it unnecessary for the judgment creditor to re-litigate the entire case.  In general, the requirements for collateral estoppel to apply are: (a) the issue in the prior action and the issue in the Bankruptcy court are identical, (b) the Bankruptcy issue was actually litigated in the prior action, (c) the determination of the issue in the prior action was a critical and necessary part of the judgment in that litigation, and (d) the burden of persuasion in the discharge proceeding must not be significantly heavier than the burden of persuasion in the initial action.
•  Judgments for fraud, misrepresentation, breach of fiduciary duty and willful and malicious injury based upon Georgia law will often meet the requirements for collateral estoppel to apply, based upon the substantive elements of state law.
• Depending on the specific language in the judgment, the Bankruptcy Court may grant partial summary judgment on the underlying claim but leaving open the issue of damages. If the underlying lawsuit included both dischargeable (such as breach of contract) and nondischargeable causes of action, and the final judgment is not clear as far as which claim the judgment was based upon, summary judgment may be denied.
• A default judgment may satisfy the requirement that the issue actually be litigated in the prior court.  I recently litigated an adversary proceeding  in which the judgment creditor received a default judgment in Oklahoma state court, but the defendant filed a Chapter 7 petition before the state court held a trial on damages.  The Bankruptcy Court, after comparing the substantive elements of Oklahoma state law,  held that collateral estoppel applied to the judgment as far as liability, but it would be necessary to hold a trial on damages.  The proceeding was resolved with a settlement.
•  An arbitration award may serve as the basis for the application of collateral estoppel in the Bankruptcy Court, if the state or federal court affirms the judgment and effectively converts it to a final judgment.  I recently obtained a judgment excepting a $1.6 million judgment from discharge, based on an arbitration award affirmed by the District Court.  The arbitration award itself was effectively a default award, as the defendant refused to participate.  Judge Mullins nevertheless found that collateral estoppel applied and the defendant had the opportunity to participate in the litigation.  Click here for a copy of the summary judgment brief (without voluminous exhibits) and click here for the Order granting summary judgment.

 Bill has several excellent tips for making your judgment as bankruptcy-proof as possible:

• Review section 523 of the Code when drafting your complaint, and separate claim that may be nondischargeable.
• Make your record by attempting to get specific findings of fact and conclusions of law, and even jury charges, that may later be consistent with the requirements of section 523. 
•  If you negotiate a consent judgment, try to include specific findings of fact that comply with the requirements of section 523.  Obviously, if you represent the defendant, you may want to avoid such admissions or conclusions, thereby making the creditor litigate the case in Bankruptcy Court.

Bill's article much more extensive that this brief summary, and he includes several case citations.  If you can get a copy of Calendar Call, or it is ultimately posted on the Georgia Bar website, read it.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

The Atlanta Journal reports that Georgia's rate of foreclosures remains among the highest in the nation.

Statewide, 12,356 properties had foreclosure filings -- including default notices, scheduled auctions and bank repossessions -- in February, RealtyTrac reported Thursday. That’s one in every 331 homes, compared with one in every 637 nationally.

Filings in February fell 0.89 percent from the previous month and marked a 3.52 percent drop from a year ago, according to the California-based firm, an online marketplace for foreclosure properties ... Atlanta ranked among metro areas with the highest foreclosure rates last month with one in every 244 homes having a filing.

Statistics maintained by the Bankruptcy Clerk's Office reveal that bankruptcy filings are also up significantly from January to February 2012.   In January 2012, there were 1,772 Chapter 7 cases and 1,283 Chapter 13 cases filed in the Northern District.  In February, the numbers rose to 2,437 Chapter 7 cases and 1,705 Chapter 13 cases.  The increase may be attributed to the end of the voluntary moratorium of some of the larger lenders in late 2011.  These numbers are still slightly lower than filings in January and February 2011.  Overall, since 2010, filings are above the benchmark level in 2005, when thousands rushed to file before the effective date of the BAPCPA.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

In In re Derrick Dewayne Gordon, Ch. 11 Case No. 11-62509, 2012 Bankr. LEXIS 2012 (Bankr. N.D. Ga. January 23, 2012)(Judge Wendy Hagenau) (click here for .pdf of 32 page opinion), the issues before the Court were: 1) Could a creditor of an individual Chapter 7 Debtor, with non-consumer debt, move to convert the case to Chapter 11 pursuant to 11 U.S.C. § 706(b), and 2) Does forcing the individual Debtor into a Chapter 11 case violate the involuntary servitude and slavery provisions of the 13th Amendment of the U.S. Constitution or the Anti-Peonage Act, 42 U.S.C. § 1994. 

The Debtor, an operational consultant with an MBA in Finance, was formerly an employee of Proudfoot Consulting Company.  After Debtor left Proudfoot and went to work for Highland Consulting Group, Proudfoot filed suit against Debtor for violating the restrictive covenants in his employment agreement.  Proudfoot ultimately obtained injunctive relief and a monetary judgment for $1,659,000 and an additional $335,050.00 for Proudfoot's fees and expenses.  The judgment was appealed, but the judgment for attorneys fees was not stayed and Proudfoot initiated garnishment proceedings against Debtor.  The Debtor responded by filing a Chapter 7 petition.

Motions to Dismiss the Chapter 7 case were filed by the Chapter 7 Trustee and Proudfoot, and the Debtor opposed both motions.  Proudfoot then filed a Motion to Convert the case to a Chapter 11 based upon Debtor's substantial income and ability to repay a portion of his debts in a Chapter 11 plan.  Debtor opposed conversion, arguing that § 706(b) does not apply to individual debtors and, even if it did, forcing him into Chapter 11 would constitute unlawful involuntary servitude prohibited by the Thirteenth Amendment, and would be unlawful peonage pursuant to the Anti-Peonage Act, 42 U.S.C. § 1994.

A hearing was held, after which Judge Hagenau ruled that 1) § 706(b) did apply to individual debtors, 2) conversion was appropriate based upon Debtor's income and ability to fund a plan, and 3) Debtor's arguments with respect to the Thirteenth Amendment and Anti-Peonage Act were without merit.  

1. Conversion to Chapter 11 was Appropriate Pursuant to 11 U.S.C. § 706(b).

The actual amount of Debtor's monthly and disposable income was disputed, but the Court concluded for purposes of the motion that Debtor had disposable income of at least $3,400 per month and as much as $10,000 per month, based on total annual income of at least $250,000.  With approximately $450,000 in unsecured debt, Debtor had the ability to pay 45-100% of claims in a five year plan.

The Court found that Debtor's argument that § 706(b)did not apply to individual debtors with non-consumer debt was without merit. 

Section 706(b) of the Bankruptcy Code clearly, on its face, applies to all debtors in Chapter 7. There are no limitations on conversion from Chapter 7 to Chapter 11 other than being eligible to be a debtor in the chapter. There is no dispute but that individuals are entitled to be debtors under Chapter 11 of the Bankruptcy Code. See 11 U.S.C. § 109(d) and 11 U.S.C. § 101(41). The Debtor urges the Court to read Section 706 to exclude individuals with primarily non-consumer debts because of certain legislative history surrounding Chapter 13. In 1977, Congress expressed concern as to whether a mandatory or involuntary Chapter 13 would constitute in-voluntary servitude under the Thirteenth Amendment. The legislative history states further that "[o]n policy grounds, it would be unwise to allow creditors to force a debtor into a repayment plan." HR REP. NO. 95-595, at 120 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6081. However, this legislative history is not directly related to Section 706(b), nor is it related to Chapter 11, and does not reflect anything about the "policy grounds" of Section 706(b)...Where the language is not unclear, there is no need to refer to a statute's legislative history. In this case, the statute is eminently clear that it is not limited to corporate debtors and the Court therefore does not need to look at the legislative history of Chapter 13 in construing the statute.

 The Court next addressed the Debtor's Constitutional and Anti-Peonage arguments (after the jump). 

On December 5, 2011, Facebook, Inc. filed an adversary proceeding in the Northern District of Georgia seeking a determination that a debt arising from alleged "typosquatting" by the debtor should be excepted from the debtor's discharge.  The proceeding is Facebook, Inc. v. Souza, A.P. No. 11-05684 (N.D. Ga. filed December 5, 2011) (click here for .pdf copy of Complaint).

This lawsuit as well as similar lawsuits in other jurisdictions have been the subject of articles in the Atlanta Business Chronicle, and other publications.  The meat of the Complaint is as follows:

20. On information and belief, Souza intentionally engaged in a scheme or multiple schemes to exploit and profit from Internet domain names that are confusingly similar to Facebook’s famous and distinctive mark, FACEBOOK.

22. As used in this Complaint, “typosquatter domain name” means a domain name that is confusingly similar to a protected mark. A typosquatter domain name may be confusingly similar to a protected mark either because it incorporates the protected mark (e.g., “facebookmarketingforresults.com”) or because it is an intentionally misspelled or corrupted version of the protected mark that is similar to the protected mark in sight, sound, and meaning (e.g., “faceboook.com”). Souza is or has been a registrant, owner, or operator of typosquatter domain names and/or has profited from typosquatter domain names that are confusingly similar
to Facebook’s famous and distinctive mark, FACEBOOK.

24. As described below, Souza intentionally and fraudulently used at least one typosquatter domain name and one landing website to divert consumers from Facebook’s online location and profit from consumers’ confusion.

25. On information and belief, Souza intentionally and fraudulently used other typosquatter domain names and other landing websites of which Facebook is not yet aware to divert consumers from Facebook’s online location and profit from consumers’ confusion.

26. On information and belief, Souza has also induced or encouraged others to participate in schemes identical or substantially similar to the one described below.

27. Souza registered the domain name facebookmarketingforresults.com and made it accessible to Internet users at http://www.facebookmarketingforresults.com.

28. The facebookmarketingforresults.com domain name incorporates Facebook’s famous and distinctive mark, FACEBOOK. Souza intentionally and fraudulently used the FACEBOOK mark to suggest, falsely, that the facebookmarketingforresults.com domain name and the http://www.facebookmarketingforresults.com website were connected to or approved by Facebook.

 29. If a consumer typed “facebookmarketingforresults.com” into his web browser on July 19, 2011, his browser would have been redirected immediately to an intermediate landing website, http://1939.com, and then to the landing website http://social.worldrewardcenter.com/.

34. On information and belief, that survey was pretextual and false. Visitors who
completed the survey did not receive the prizes and awards as promised. They were, however, presented with various advertisements and offers, some of which required visitors to divulge personal information.

35. On information and belief, Souza received payment each time a consumer visited http://social.worldrewardcenter.com/ via http://www.facebookmarketingforresults.com, clicked on one of the offers or advertisements on http://social.worldrewardcenter.com/, bought goods or
services on http://social.worldrewardcenter.com/, and/or divulged personal information on http://social.worldrewardcenter.com/.

In Perkins v. Haines, et al, No. 10-10683 (11th Cir. October 27, 2011) (click here for .pdf of opinion), the 11th Circuit took a direct appeal of the Bankruptcy Court's order concerning the "value" defense in fraudulent transfer proceedings.

The basic facts are as follows.  International Management Associates, LLC and related entities were operated as a Ponzi scheme by Kirk Wright).  "Wright used the Debtors to operate a fraudulent Ponzi scheme whereby capital contributions made to the Debtors by later equity investors were used to repay earlier investors more than their investments were actually worth, as well as fictitious profits."

Perkins, the Trustee, filed adversary proceedings against several defendants for the recovery of fraudulent transfers.Each of the defendants in the appeal were individuals who made a capital contribution through a limited liability company agreement, limited partnership agreement or subscription agreement.  Each of the defendants received transfers consisting a return of capital and/or "profits" from their investment.

The general rule for fraudulent transfers in a Ponzi Scheme case is that the transferee has an immediate claim for fraud against the debtor at the time of the original investment.  A recovery of the transferee's initial investment, therefore, is treated as a release of the claim against the debtor, and provides the transferee with an affirmative defense in an action to recover the fraudulent transfer. The defense is not available for transfers over and above the initial investment, or "profits," and a trustee can normally recover those transfers.

Most of the cases involving Ponzi schemes and adversary proceedings to recover fraudulent conveyances involve loans or investments to the debtors.  In the cases on appeal, the defendants were equity holders in debtors.

The Trustee argued that the affirmative defense should not be available to the defendants because the transfers operated to redeem their worthless equity interests and were not made in satisfaction of a debt.  

The Trustee hangs his hat on a line of cases holding that transfers to redeem an equity investment in an insolvent entity (initially made free of fraud) cannot constitute a transfer “for value.” See e.g., Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 982 (1st Cir. 1983); Schafer v. Hammond, 456 F.2d 15, 17-18 (10th Cir. 1972); Lytle v. Andrews, 34 F.2d 252 (8th Cir. 1929); M.V. Moore & Co. v. Gilmore, 216 F. 99, 100-01 (4th Cir. 1914). In each of these decisions, investors exchanged shares of stock for other security interests, notes, or real property, all at a time when the corporations were insolvent. The courts held that the exchanges constituted fraudulent transfers because the stock returned to the corporations as part of the exchange was, at that time, virtually worthless due to the corporate insolvency. As such, the corporations received “less than a reasonably equivalent value.” See Roco Corp., 701 F.2d at 982; Schafer, 456 F.2d at 16-18; Lytle, 34 F.2d at 253-54.

The Circuit panel disagreed. None of the cases cited by the Trustee involved Ponzi schemes.  Rather, they involved insolvent corporations paying off equity holders at the expense of creditors. 

In sum, the Trustee asks the court to focus solely on the form of the investment to the exclusion of all other factors, and to ignore the realities of how Ponzi schemes operate. As the bankruptcy court correctly noted, however, no court to date has applied this form over substance rule in fraudulent transfer actions involving Ponzi schemes. More specifically, no court has distinguished between equity investments and debt-based claims when applying the general rule to fraudulent transfer actions arising out of a Ponzi scheme. To the contrary, the Ninth Circuit – the only court of appeals to address this issue to date – applied the general rule to equity investors in a Ponzi scheme, and rejected any attempts to distinguish between the forms of the investment.[In re AFI Holding, Inc.,525 F.3d 700, 704 (9th Cir. 2008)]...

 The [AFI] court emphasized that the limited partners in AFI Holding “were defrauded into their limited partnership role by the operator of the Ponzi scheme.” 525 F.3d at 708. The AFI debtors operated the Ponzi scheme before McKenzie made his principal investment, and the Ponzi scheme continued to exist well before any transfers were made back to him. Accordingly, McKenzie “acquired a restitution claim at the time he bought into [the] Ponzi scheme, . . . [and] [i]t is this restitution claim, in toto, that McKenzie exchanged when AFI returned McKenzie’s principal ‘investment’ amount.” 525 F.3d at 708.“Although circumstances of the exchange were cloaked in terms of a partnership interest, [we have looked] beyond the ‘form’ to the ‘substance’ of the transaction.” Id. Whether the debtor was insolvent at the time was irrelevant. The fact that McKenzie and the other investors held equity interests was also of no moment. The general rule applies in a Ponzi scheme setting regardless of whether good faith investors have an equity interest in, or some other form of claim against, the legal entity constituting the instrument of the fraud. We agree with that analysis and the result.

Virtually identical facts are presented in this case. The Trustee agrees that the investor defendants purchased limited partnerships from the Debtors at a time when the Ponzi scheme was already in operation and a claim for fraud or restitution was created in favor of the investors based on the Debtors’ fraudulent activity. Under AFI Holding and the general rule, later transfers from the Debtors up to the amount of the investment satisfied the investor defendants’ restitution or fraud claims and provided value to the Debtors. 

[emphasis in bold added].  The Bankruptcy Court's denial of summary judgment to the Trustee was therefore affirmed.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

The Atlanta Law Office of Scott B. Riddle represents clients in corporate litigation, derivative actions, real estate litigation and general business disputes throughout the state of Georgia. Mr. Riddle has been counsel in several high profile mortgage fraud cases as well as disputes involving commercial and golf course developments.

Scott represents clients in many aspects of complex business and commercial litigation, including:

• Contract negotiation and disputes, including the negotiation of the sale and purchases of businesses or business assets.
• Trademark and trade secret disputes, including the use and disclosure of customer lists and other confidential information.
• Corporate governance disputes, including the representation of corporations and individual officers and directors in breach of fiduciary proceedings.
•  Derivative actions.
•  Business torts.
•  Partnership, limited liability company and joint venture disputes.
•  Employment agreements.
• Covenants not to compete and other restrictive covenants related to employment agreements or the sale of businesses.
• Temporary Restraining Orders and other emergency injunctive relief

 
Many disputes occur at the stage of formation of corporate business entities or commercial ventures, or take place later due to poor planning and execution of the formation documents. Other disputes arise in the normal course of business, and can involve suppliers and vendors, customers and consumers, officers or shareholders, employees, or competitors. All of these disputes drain the resources of the company and take time and attention away from business operations. If left unresolved or unattended, they can ruin the company. Prompt and efficient action by a knowledgeable and skilled business litigation attorney is essential to resolving business disputes. Even where the dispute does not end in litigation, careful planning and a strong litigation posture are essential to a favorable settlement or other resolution.

In addition to the firm's litigation practice, Mr. Riddle represents clients in bankruptcy proceedings, representing debtors and creditors in individual bankruptcies and business bankruptcies and restructurings. Please see the bankruptcy page for further information.

The Atlanta Law Office of Scott B. Riddle represents individuals and businesses in  real estate litigation and construction disputes in metro Atlanta and throughout Georgia. Scott has handled many high-profile cases in these related areas of the law.

Real Estate Litigation

Scott has significant experience in commercial and residential real estate and title litigation in state and federal courts, including the following:

• Representation of parties in several of the most high-profile mortgage fraud cases in the State of Georgia.
• Representation of residential and commercial owners of real estate in contract disputes and litigation.
• Representation of several title insurance companies in cases involving title disputes.
• Representation of several golf course and other commercial real estate developers.
• Representation of large churches and religious institutions in out-of-court loan modifications and workouts.
• Counsel to a Receiver appointed by the District Court in the Northern District of Georgia for a real estate investment company.
• Counsel to the Committee of Unsecured Creditors in the Chapter 11 bankruptcy case of Greater Atlanta Brokerage Solutions, LLC (dba Re/Max of Greater Atlanta), formerly one of the largest residential real estate brokers in the United States.

 
Construction Litigation

Scott has extensive experience prosecuting and defending cases in several jurisdictions in industrial and commercial construction litigation. Scott has acted as counsel to national industrial contractors, including a national contractor with a multi-million dollar claim against a Vermont power generation plant, a Louisiana based chemical company, and a national hotel contractor. Mr. Riddle has represented a national HVAC/Air Filtration company in several lawsuits regarding toxic mold in homes. He has represented homeowners and builders in water runoff litigation, contract disputes, and latent defects.

Common claims in the construction industry include:

• Soil and slope instability problems.
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Scott Riddle has over 20 years experience representing parties in bankruptcy proceedings and workouts.  Scott began his career as a judicial law clerk to the Honorable W. Homer Drake, Jr., United States Bankruptcy Judge for the Northern District of Georgia.  Scott subsequently spend several years in the bankruptcy section of a large Atlanta-based law firm prior to starting his own practice.

Scott is admitted and has practiced in Bankruptcy Courts for the Northern, Middle and Southern Districts of Georgia, as well as other state and federal courts.

Scott represents Chapter 7 and 11 debtors, creditors, Chapter 7 and Chapter 11 trustees, receivers, committees and other interested parties in bankruptcy cases and bankruptcy litigation. Scott also has significant experience in litigating breach of fiduciary duty and other corporate governance claims in the context of bankruptcy proceedings.

Scott's bankruptcy experiences and services include:

• Representing debtors, creditors, trustees and other parties in Bankruptcy Court
• Acting as general counsel and special counsel to Chapter 7 and Chapter 11 trustees and creditors committees.
• Acting as local counsel to out-of-state firms in Bankruptcy cases.
• Representing individual and corporate debtors in complex bankruptcy cases involving significant debt and assets, including business or real estate debt.
• Representing debtors, principals, purchasers, and creditors in connection with non-bankruptcy business reorganization and workouts.
• Representing creditors in consumer and business bankruptcy cases, and in adversary proceedings filed in Bankruptcy Court, including proceedings to recover fraudulent or preferential transfers.

Cagle's Farms filed Chapter 11 Petitions in the Northern District of Georgia on October 19, 2011.  The related cases are In re Cagle's, Inc. (dba Integrated Poultry Company), Ch. 11 Case No. 11-80202 and In re Cagle's Farms, Inc., Ch. 11 Case No. 11-80203.  The cases are jointly administered under Cagle's Inc.  Click here for the skeletal Chapter 11 Petition and the 30 Largest Unsecured Creditors.

The Atlanta Journal has an article about the case, and the declining poultry business in Georgia:

It was the latest bad sign for the industry, worth $4.2 billion to Georgia farmers. Production prices have increased as prices for chicken have dropped. As Georgia producers lower their output to get in balance with demand, employment in processing plants has dropped.

Cagle's, which began 60 years ago as a chicken shop in downtown Atlanta, listed $92 million in assets and $62.9 million in debts in papers filed Wednesday in the U.S. Bankruptcy Court in the Northern District of Georgia. Chapter 11 bankruptcy protects a company's assets while a business continues to operate and work out payments with creditors.

It is the 21st largest producer in the U.S., according to the U.S. Poultry and Egg Association.

One creditor has already filed a Notice of Reclamation to recover distiller's grain received by Cagle's just prior to the filing.  Creditors and other parties who provided goods to the Debtor just prior to the filing of the Chapter 11 petition need to act quickly to serve notices of reclamation in order to receive the goods or a priority claim.  More information on reclamation is found in this prior post.

In CML V, LLC v. Bax, No. 735, 2010 (Del. Supr. Sept. 2, 2011) (click here for .pdf of opinion), the Delaware Supreme Court addressed the questions of whether a creditor can file a derivative action against a limited liability company.   Plaintiff CML asserted the following derivative claims against the present and former members of JetDirect Aviation Holdings, LLC:

(1) the individual defendants breached their duty of care by approving the late 2007 acquisitions (of other entities) without informing themselves of JetDirect’s true financial condition,

(2) the individual defendants acted in bad faith by consciously failing to implement and monitor an adequate system of internal controls and—with respect to one specific individual defendant—hiding critical information from the board, and

(3) certain individual defendants breached their duty of loyalty by benefitting from self interested asset sales upon JetDirect’s asset liquidation in 2008.

 The defendant managers sought dismissal of the derivative claims on the grounds that CML, as a creditor, did not have standing.  The Court of Chancery dismissed the claims and CML appealed.  On appeal, the Delaware Supreme Court affirmed.

The central provision at issue is 6 Del. C. § 18-1002, entitled “Proper plaintiff.” That provision reads:

In a derivative action, the plaintiff must be a member or an assignee of a limited liability company interest at the time of bringing the action and:
(1)  At the time of the transaction of which the plaintiff complains;
or
(2)  The plaintiff’s status as a member or an assignee of a limited liability company interest had devolved upon the plaintiff by operation of law or pursuant to the terms of a limited liability company agreement from a person who was a member or an assignee of a limited liability company interest at the time of the transaction.

This provision is unambiguous on its face; therefore, its plain language controls...

Because section 18-1002 is unambiguous, is susceptible of only one reasonable interpretation, and does not yield an absurd or unreasonable result, we apply its plain language. Only LLC members or assignees of LLC interests have derivative standing to sue on behalf of an LLC—creditors do not. Therefore, section 18-1002 precludes CML from suing derivatively, and the Vice Chancellor properly granted the motion to dismiss.

The Delaware Court was not persuaded that LLCs should be compared with corporations:

CML contends that this result is absurd because, given the policy underlying derivative standing, there should be no difference between LLCs and corporations. CML argues that unless the Court of Chancery can vest creditors of insolvent LLCs with derivative standing in equity, there will exist no stakeholders with incentive to enforce fiduciary duties through legal action. CML may be correct that in insolvency creditors become the ultimate risk bearers in LLCs. But, the General Assembly is free to elect a statutory limitation on derivative standing for LLCs that is different than that for corporations, and thereby preclude creditors from attaining standing. The General Assembly is well suited to make that policy choice and we must honor that choice. In this respect, it is hardly absurd for the General Assembly to design a system promoting maximum business entity diversity. Ultimately, LLCs and corporations are different; investors can choose to invest in an LLC, which offers one bundle of rights, or in a corporation, which offers an entirely separate bundle of rights.

Professor Larry Ribstein has a thorough analysis of the case at his Truth on the Market Blog. 

How does this case apply in Georgia, if at all, since Georgia and most other states look to decisions of Delaware Courts for corporate matters?  The rule is essentially the same in Georgia. O.C.G.A. § 14-11-801  (2011) provides the following:

A member may commence a derivative action in the right of the limited liability company to recover a judgment in its favor if all of the following conditions are met:

(1) Either management of the limited liability company is vested in a manager or managers who have the sole authority to cause the limited liability company to sue in its own right or management of the limited liability company is vested in the members but the plaintiff does not have the authority to cause the limited liability company to sue in its own right under the provisions of the articles of organization or a written operating agreement;

(2) The plaintiff has made written demand on those managers or those members with such authority requesting that such managers or such members take suitable action;

(3) Ninety days have expired from the date the demand was made unless the member has earlier been notified that the demand has been rejected by the limited liability company or unless irreparable injury to the limited liability company would result by waiting for the expiration of the 90 day period;

(4) The plaintiff (A) is a member of the limited liability company at the time of bringing the action, and (B) was a member of the limited liability company at the time of the transaction of which he or she complains, or his or her status as a member of the limited liability company has devolved upon him or her by operation of law from a person who was a member at the time of the transaction; and

(5) The plaintiff fairly and adequately represents the interests of the limited liability company in enforcing the right of the limited liability company.

(emphasis added).  See also Ledford v. Smith, 274 Ga. App. 714 (Ga. Ct. App. 2005) (company that was not member did not have derivative standing).