Derivative Standing in Bankruptcy

Summary

This practice note discusses derivative standing in Chapter 11 bankruptcy cases. Prior to a bankruptcy filing, a corporation owes a fiduciary duty of care and loyalty to the corporation's shareholders but not to creditors. In bankruptcy, a Chapter 11 corporate debtor is required to exercise its fiduciary duties for the benefit of creditors and the estate. The debtor in possession obligation to act in the interests of both creditors and shareholders can create difficult conflicts (because of the competing interests between both groups). When this conflict arises and the debtor is unable or unwilling to prosecute claims in the estate's best interests, another party in interest, such as a creditors' committee, may seek to prosecute the claims in the debtor's place under the doctrine of derivative standing.