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Chancery Enforces LLC Agreement’s California Forum Selection Clause For Advancement Claim

Li v. LoanDepot.com, LLC, C.A. No. 2019-0026-JTL (Del. Ch. Apr. 24, 2019).

Delaware law permits parties conducting their business as limited liability companies to include mandatory arbitration or forum selection clauses in their LLC agreements, even those naming a forum outside of Delaware.  And the State’s public policy supports enforcing contracts, including forum selection clauses, unless specifically prohibited by statute or upon a showing of fraud or overreaching.  There is an important statutory exception in this context.  Under Delaware’s LLC statute, 6 Del. C. § 18-109(d), other than for arbitration, a non-managing member of an LLC cannot waive its right to sue in the Delaware courts for matters relating to the LLC’s “organization or internal affairs.”

The Li decision examines this exception while enforcing a California forum selection clause covering disputes relating to the LLC agreement.  Plaintiff, a former employee of the LLC and a non-managing member, argued that the clause did not preclude non-managing members, like himself, from bringing advancement claims in Delaware because of Section 18-109(d)’s exception.  The Court disagreed, however, finding that the plaintiff sought advancement in his capacity as a former employee and not as a non-managing member.  So Section 18-109(d)’s exception did not apply.  Notably, in reaching this conclusion, the Court observed in dicta a potential policy argument that would support reading Section 18-109(d) to encompass employees and agents of an LLC, not just non-managing members.  But since the parties did not address that issue, the Court did not decide it.