Posts in LLCs

Chancery Addresses Claims Arising Out of LLC Dispute Involving Parallel Venture

Largo Legacy Group, LLC v. Evens Charles, C.A. No. 2020-0105-MTZ (Del. Ch. June 30, 2021)
In this LLC dispute, an investor in a hotel development company alleged that the company principals breached the operating agreement and their fiduciary duties by implementing a fraudulent scheme whereby a parallel venture, that they owned and controlled, was provided with certain adjacent land and company funds in a manner that improperly advantaged the parallel venture and the principals while harming the plaintiff. The plaintiff also alleged that the defendants had breached their fiduciary and contractual duties by refusing to provide it with financial information that it was entitled to under the operating agreement. The defendants moved to dismiss. The Court of Chancery, finding, as an initial matter, that laches did not block the claims, held that while plaintiff had failed to plead its fraud claim with adequate particularity, it had properly pled both its breach of fiduciary duty claim in connection with the alleged scheme and its breach of contract claim in connection with the company’s refusal to provide certain financial information. In addition to dismissing the fraud claim, the Court also dismissed plaintiff’s duplicative breach of fiduciary duty claim relating to the withheld financial information.  More ›

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Delaware Court of Chancery Applies Direct/Derivative Distinction In Voting Context

Clifford Paper, Inc. v. WPP Investors, LLC, 2021 WL 2211694 (Del. Ch. Jun. 1, 2021)
The disenfranchisement of an investor with voting or consent rights often is considered to be a direct harm, thus permitting the investor to bring direct claims. Sometimes, however, the alleged harm from the violation of voting rights is to the company, and it does not directly affect the investor. The Court of Chancery’s recent decision in Clifford Paper, Inc. v. WPP Investors, LLC, 2021 WL 2211694 (Del. Ch. Jun. 1, 2021), illustrates that, in such instances, a court applying Delaware law may treat those claims as derivative. More ›

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Implied Covenant of Good Faith and Fair Dealing Saves Employee’s Claim for Improper Termination Under Company’s LLC Agreement

Smith v. Scott, C.A. No. 2020-0263-JRS (Del. Ch. Apr. 23, 2021)
The Delaware LLC Act provides that fiduciary duties may be expanded or limited by the provisions of an LLC agreement. If the agreement is silent, then traditional corporate fiduciary duties apply. However, if the agreement unambiguously disclaims fiduciary duties, then the only duties that exist are those specified contractually in the LLC agreement and the implied covenant of good faith and fair dealing.  More ›

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Chancery Finds It Reasonably Conceivable that Judicial Dissolution May Be Warranted When LLC’s Deadlock Provision Failed

Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. Mar. 30, 2021)
On application from a member or manager of an LLC, the Court of Chancery may dissolve an LLC whenever it is not reasonably practicable for the LLC to carry on the business in conformity with the LLC agreement. Several factors may suggest a lack of reasonable practicability, including that the members are deadlocked at the board level, the operating agreement gives no means for navigating around the deadlock, and due to the financial conditions of the LLC, there is effectively no business to operate. In this case, the Court held that the petitioner adequately pled board deadlock and ongoing negative financial performance due to the parties’ inability to agree. In rejecting the respondent’s argument that the parties’ “I cut; you choose” deadlock procedure precluded a judicial decree of dissolution, based on the pleaded facts, the Court found that it was reasonably conceivable that the deadlock procedure had broken down irretrievably. Because the contractual procedure did not mandate a price, pricing formula, or a closing timeline and the plaintiff adequately alleged that the parties were not dealing with each other in good faith and in a commercially reasonable manner, it was reasonably conceivable that judicial dissolution might be warranted. The Court therefore denied the respondent’s motion to dismiss.

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Court of Chancery Harmonizes Operating Agreement Governance Provisions To Resolve LLC Control Dispute

Pearl City Elevator, Inc. v. Gieseke, C.A. No. 2020-0419-JRS (Del. Ch. Mar. 23, 2021)

Under Delaware law, limited liability company agreements are interpreted like other contracts; they are read as a whole in light of the commercial context, in a manner that gives effect to and harmonizes all of their terms. In this expedited control dispute, the Court of Chancery applied those canons to consider whether certain of the plaintiff’s purchases of units from other members complied with transfer restrictions. More ›

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Chancery Confirms that the Implied Covenant Imposes a “Good Faith” Component to an Agreement to Negotiate

DG BF, LLC v. Ray, C.A. No. 2020-0459-MTZ (Del. Ch. Mar. 1, 2021)

The Operating Agreement for an LLC involved in the cannabis industry provided for a five-member board of managers, with one Independent Manager appointed by a process of negotiation between two other managers (the plaintiff in the action and one of the defendants). Under the process set forth in the Operating Agreement, either side could present various candidates until there was agreement, which was supposed to happen within a 180-day period. The parties could also mutually agree to extend the deadline. More ›

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Chancery Finds Implied-in-Fact LLC Agreement

Robinson v. Darbeau, C.A. No: 2019-0853-KSJM (Del. Ch. Mar. 1, 2021)

As Robinson v. Darbeau demonstrates, Delaware law recognizes implied limited liability company agreements. Plaintiff operated a daycare as a sole proprietor and without any formally organized business entity. After Plaintiff began a personal relationship with Defendant, Defendant became involved in day-to-day activities at the daycare, invested in the business (including through the co-purchase of the property where the daycare was operated) and was held out publicly as the daycare’s co-director. Through the use of an online incorporator, and with Defendant’s assistance, Plaintiff filed a certificate of formation for a Delaware limited liability company. The certificate listed both parties as members (allegedly without Plaintiff’s knowledge) and further provided that management of the company was vested in the members. No written LLC agreement was ever executed. More ›

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Chancery Holds That a Deadlock Warranting Dissolution Can Be Genuine Even If the Circumstances Giving Rise to the Deadlock Were Contrived

Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021)

In a dispute over the validity of the dissolution of a limited liability company, the Court of Chancery held in a post-trial opinion that a deadlock between LLC managers was genuine and deserving of legal effect, even though the circumstances giving rise to the deadlock were contrived. More ›

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Chancery Finds Company Responsible for Advancing Costs of Defense to Its CEO in a Claim Brought by the Company

International Rail Partners LLC v. American Rail Partners, LLC, C.A. No. 2020-0177-PAF (Del. Ch. Nov. 24, 2020)

The Delaware Limited Liability Company Act (the “LLC Act”) allows a limited liability company (“LLC”) to provide for indemnification as to “any and all claims and demands whatsoever” against an LLC manager or officer, “[s]ubject to such standards and restrictions, if any, as are set forth in [the] limited liability company agreement.” 6 Del. C. § 18-108. The statute prescribes that the LLC agreement may indemnify any person to the fullest extent possible by contract. The only restrictions are those expressly set forth in the relevant LLC contract provisions. An LLC agreement is construed in accordance with Delaware law regarding contract interpretation. More ›

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Chancery Interprets Right of First Refusal Provision in LLC Agreement

HUMC Holdco, LLC, et al. v. MPT of Hoboken TRS, LLC, et al., C.A. No. 2019-0972-KSJM (Del. Ch. July 2, 2020)

Litigation arose among members of a limited liability company regarding the operating agreement’s right of first refusal provision after certain members entered in an agreement to sell membership interests and certain real estate to a third party. While the Court of Chancery denied defendants’ motion for judgment on the pleadings, the Court offered notable guidance on the interpretation of first-refusal right provisions. More ›

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Chancery Offers Guidance on the Effect of Charging Orders on Contractual Obligations

GMF ELCM Fund L.P. v. ELCM HCRE GP LLC, C.A. No. 2018-0840-SG (Del. Ch. May 18, 2020)

Charging orders authorized by 6 Del. C. § 18-703 of the Delaware Limited Liability Company Act offer judgment creditors of LLC members a collection method. These orders function as a lien against the membership interest and grant the judgment creditor the right to monetary distributions that would otherwise be funneled to the member. The imposition of a charging order does not, however, afford the judgment creditor the right to obtain possession of or exercise remedies, legal or equitable, with respect to the LLC’s property. More ›

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