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Court of Chancery Dissolves LLC that is Deadlocked and was Arguably Formed as Part of Scheme to Deceive Investors

In re: Silver Leaf, LLC, C.A. No. 20611, 2005 WL 2045691 (Del. Ch. Aug. 18, 2005). Plaintiff and the defendants formed Silver Leaf, LLC ("Silver Leaf") to market a new vending machine that was to produce French fries. In connection with the formation of the entity, the parties signed a stock purchase agreement and a sales and marketing agreement with Tasty Fries, which owned the manufacturing rights to the vending machines. After the relationship between the parties deteriorated, Tasty Fries terminated the sales and marketing agreement over a dispute related to the stock purchase agreement. Plaintiff petitioned the court to dissolve Silver Leaf because the members were deadlocked: each side had 50% ownership, but the operating agreement required a majority vote for critical actions. The defendants counterclaimed that plaintiff was in default of its LLC obligations and was not allowed to vote its units because of breach of contract, breach of fiduciary duty, and tortious interference, all relating to the terminated sales and marketing agreement. The court held that Silver Leaf should be dissolved because not only were the members deadlocked and the businesses purpose moot, but it appeared as if Silver Leaf was formed as part of a scheme to deceive innocent investors. (Silver Leaf was to market the Tasty Fries machine, yet Tasty Fries failed to produce a single operating product, issued false public filings, and sold unauthorized stock and spent over $40 million in investor money.) In addition, the court applied the unclean hands doctrine to bar defendants' counterclaim. Authored by: R. Christian Walker 302-888-6974 rwalker@morrisjames.com