Delaware Business Litigation Report

Chancery Enforces LLC Agreement Arbitration Clause and Finds that Member’s Resignation Did Not Prevent Enforcement

360 Campaign Consulting, LLC v. Diversity Communication, LLC, C.A. No. 2019-0807-MTZ (Del. Ch. Mar. 20, 2020).

Following a dispute between the two members of a Delaware LLC, Plaintiff filed an eleven (11) count complaint against the Defendant former member, the LLC, its manager and others. Defendant moved to dismiss for lack of subject matter jurisdiction based on an arbitration provision in the LLC Agreement. The Court’s threshold question was whether it (as opposed to an arbitrator) had jurisdiction to decide whether the dispute was arbitrable, an issue otherwise known as substantive arbitrability. 

Vice Chancellor Zurn noted that this question is for the Court’s consideration unless the arbitration clause provides for arbitration of all disputes and the contract incorporates a set of rules empowering the arbitrators to decide arbitrability. The Court concluded it had jurisdiction to determine arbitrability because the arbitration clause did not expressly provide for arbitration of all disputes, and the LLC Agreement also contained clauses (i) selecting Delaware’s state and federal courts as a forum, (ii) providing for equitable relief from a court of competent jurisdiction, and (iii) stating that all rights and remedies provided under the agreement were cumulative and not in substitution of each other.

Having determined that arbitrability was a matter for the Court to decide, the Court turned to the scope of the arbitration clause. Applying the standard set forth in Parfi Holdings AB v. Mirror Image Internet, Inc., 817 A.2d 149 (Del. 2002), the Court found that the arbitration provision was narrow in scope because it only required arbitration for disputes between members and of those, only disputes that arose out of or related to the LLC Agreement, not all disputes between them generally. 

The member-Plaintiff also challenged the former member-Defendant’s ability to invoke the arbitration clause because the Defendant had resigned its membership position. Without language in the LLC agreement regarding the effect of resignation on the arbitration clause, the Court rejected the Plaintiff’s argument and found it contrary to the Court’s holding in Julian v. Julian, 2009 WL 2937121 (Del. Ch. Sept. 9, 2009), that required a former LLC member to submit his fair value claim to arbitration because the relevant LLC agreement contained an arbitration clause. 

After applying the standard set forth above, the Court dismissed three (3) of the Plaintiff’s claims for lack of subject matter jurisdiction holding that they were subject to arbitration, and exercised its discretion to stay the remaining eight (8) claims pending the arbitration outcome.         

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