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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Showing 73 posts in LLC Agreements.

Court Of Chancery Rescinds LLC Agreement For Fraud In The Inducement

Posted In LLC Agreements

Trascent Management Consulting LLC v. Bouri, C.A. 10915-VCMR (September 10, 2018)

This is an interesting decision because it holds that an entity may bring a fraudulent inducement claim for statements made before it was formed when the statements caused it to be formed for a new business. It is also interesting because it awards attorney fees for lying during a trial.

Court Of Chancery Explains How To Interpret Interlocking LLC Agreements

Posted In LLC Agreements

Godden v. Franco, C.A. 2018-0504-VCL (August 21, 2018)

When multiple LLC agreements for several entities contain provisions that relate across the entities, deciding how to interpret those provisions is a potential problem. As this decision points out, the separate identities of the entities need to be respected. Nonetheless, when the LLC agreements create contract rights, those rights can be enforced, just as a stockholders’ agreement can be enforced to require action by the signatories to the agreement.

Court of Chancery Awards Fair Value to Forced-Out LLC Member

Posted In LLC Agreements

Domain Associates LLC v. Shah, C.A. No. 12921-VCL (Del. Ch. Aug. 13, 2018)

An LLC agreement may provide what payout a departing member receives for his or her interest.  It also may provide that a member may be forced to withdraw by his or her other members.  This decision addresses what should happen when an LLC agreement provides for a forced withdrawal but is silent on the issue of the payout.  Adopting the reasoning of a prior Delaware decision in the limited partnership context, the Court holds the forced-out member should receive the same sort of “fair value” awarded in stock appraisal cases.  This is another example of how rules of law or equity may fill in gaps in LLC agreements and why such agreements must be drafted carefully.

Court of Chancery Holds That Notice and an Opportunity To Be Heard Are Not Prerequisites to Dismissing an LLC Manager “For Cause”

Posted In LLC Agreements

A&J Capital, Inc. v. Law Office of Krug, C.A. No. 22018-0240-JRS (Del. Ch. July 18, 2018)

This decision holds that, absent contrary language in an LLC operating agreement, members do not need to provide notice and an opportunity to respond before dismissing a manager “for cause.” Note that the law governing when a corporate director can be dismissed “for cause” may require notice and an opportunity to contest the allegations against him. More ›

Court Of Chancery Applies LLC Contractual Fiduciary Duty

Posted In LLC Agreements

MHS Capital LLC v. Goggin, C.A. No. 2017-0449-SG (May 10, 2018)

Alternative entity agreements may eliminate common law fiduciary duties and often do, supplanting them with contractual fiduciary duties.  These frequently include an obligation to act “in good faith” or “in the best interests of the company,” broadly or in certain circumstances.  Thus, even with fiduciary duty exculpation clauses in LLC agreements, managers may still find themselves exposed to a member’s allegations that they failed to satisfy their standard of conduct, as this decision illustrates.  This decision also is interesting for its discussion of the potential impact of bankruptcy court sale orders on the Court of Chancery’s ability to enter equitable relief.

Court of Chancery Explains What Is A Proper Claim Reserve When Dissolving

Posted In Dissolution, LLC Agreements

Capone v. LDH Management Holdings LLC, C.A. No. 11687-VCG (April 25, 2018)

Under the LLC Act, as with the DGCL, an entity planning to dissolve and distribute its assets is required to set aside some reserve of assets to pay all known claims.  Failure to set aside sufficient assets may result in revocation of the entity’s certificate of cancellation, thereby reviving the entity, as happened in this case.  This decision explains when claims are “known” by the entity (i.e., the entity has actual knowledge of the claims) and how the entity may value those claims for purposes of retaining sufficient assets to potentially satisfy them.  Importantly, the reserve need not match all potential damages dollar-for-dollar.  The value of claims may be discounted based on their lack of merit, for example.

Court Of Chancery Applies The Covent Of Good Faith And Fair Dealing To Fill A Gap

Posted In LLC Agreements

In re Oxbow Carbon LLC Unitholder Litigation, C.A. 12447-VCL (February 12, 2018)

This may be the definitive decision on when and how to apply the covenant in every LLC agreement to act in good faith and deal fairly. Here the “gap” the parties did not address in their LLC agreement concerns the rights of newly admitted LLC members to block a forced sale of the entity.  While that right was addressed in the initial LLC agreement, the terms on which new members were admitted years later were not addressed at that time. The decision is also noteworthy in how it decides to fill the gap the parties left, by deciding what they would have done had they thought about it.

Court Of Chancery Resolves Good Faith Claim In LLC Context

Posted In LLC Agreements

Miller v. HCP & Company, C.A. 2017-0291-SG (February 1, 2018)

This decision resolves the tricky issue of when the provisions of an LLC agreement do not allow “gap filling” so as to permit a claim for violation of the covenant to act in good faith and fairly. Briefly, when the LLC agreement permits the governing body of an LLC to act in its “sole” discretion and otherwise has an effective limit on the exercise of that discretion [such as permitting deals only with outsiders] then there is no reason to limit the discretion by imposing a duty to act in good faith. Of course, that may also require a waiver of fiduciary duties in the LLC agreement.

Court Of Chancery Explains Inspection Rights Under An LLC Agreement

Posted In Books and Records, LLC Agreements

Aloha Power Company LLC v. Regenesis Power LLC, C.A. 12697-VCMR (Dec. 22, 2017)

This books and records decision addresses inspection rights granted under an LLC agreement. It also is useful as a reminder that a mere decline in an entity’s performance is not a sufficient proper purpose supporting inspection.  While the “credible basis” standard for suspecting mismanagement is low, it is not that low.

Court Of Chancery Limits Creditor Standing

Posted In LLC Agreements

Trusa v. Nepo, C.A. No. 12071 (April 13, 2017)

This decision holds that a creditor lacks standing to bring breach of fiduciary duty claims arising out of the management of an LLC. Of course, creditors are better served by drafting the loan documents to protect their rights.

Court Of Chancery Explains Limitation On Fiduciary Duty Claims

Posted In LLC Agreements

CelestialRX Investments LLC v Krivulka, C.A.11733-VCG (January 31, 2017)

This decision explains how a provision in an LLC agreement waiving fiduciary duties is to be applied in the context of conflicted transactions. It is a good summary of Delaware law on that issue. 

It also has an instructive summary of the law governing contract interpretation, albeit under New York law.

Court Of Chancery Requires SLC Member Be A “Director”

Posted In LLC Agreements, Special Committees

Obeid v. Hogan, C.A. 11900-VCL (June 10, 2016)

Under the famous Zapata decision, a board of directors may take control of a derivative case, provided it meets the test set out in that opinion. But may such a board, or the managers in an LLC, delegate that authority to a non-member? This decision says that delegation is not appropriate for an LLC with a management structure similar to a corporation or in an LLC that limits the delegation authority of it member-managers.

Court Of Chancery Explains Claims Available To LLC Members

Posted In Derivative Claims, LLC Agreements

CMS Investment Holdings LLC v. Castle, C.A. No. 9468-VCP (June 23, 2015)

This is an interesting decision because it explains what direct claims are available to investors in an LLC. More ›

Court Of Chancery Orders Dissolution Despite LLC Agreement Bar

Posted In Dissolution, LLC Agreements

Meyer Natural Foods LLC v. Duff, C.A. 9703-VCN (June 4, 2015)

This decision may answer the question of whether an LLC Agreement’s bar of dissolution without a member’s consent trumps the statutory remedy of court-ordered dissolution when the entity’s purpose cannot be achieved any longer. It concludes that dissolution is proper under the facts presented where the objecting member really had no good reason to object.

Court Of Chancery Permits Equitable Dissolution

Posted In Dissolution, LLC Agreements

In re Carlisle Etcetera LLC, C.A. 10280-VCL (April 30, 2015)

In this precedent-setting decision, the Court upholds the right of an assignee of an LLC interest to petition for its dissolution. The LLC Act itself limits a dissolution petition to managers or members, but drawing on precedent upholding the broad powers of a court of equity, the Court holds that an equitable remedy exists that permits an assignee to also seek dissolution.