Delaware Business Litigation Report

Court of Chancery Enforces Arbitration Clause of LLC Agreement Because Claims "Arose Under" the Agreement

CAPROC Manager, Inc. v. The Policemen's & Firemen's Retirement System of the City of Pontiac, 2005 WL 937613 (Del. Ch. April 18, 2005). This case stemmed from a dispute between shareholders of the Delaware limited liability company, CAPROC LLC, which is governed by a Limited Liability Company Agreement. Defendants sought to remove CAPROC Manager as the Managing Shareholder of CAPROC and purport to have done so by a majority shareholder vote. In response to Defendants' actions, CAPROC Manager and CAPROC brought this suit for, among other things, entry of a status quo order and a declaration under 6 Del. C. - 18-110 that CAPROC Manager remain the Managing Shareholder of CAPROC. The court granted Defendants motion to dismiss in favor of arbitration because Plaintiffs' claims were subject to arbitration under the LLC Agreement.

When determining the arbitrability of a claim the court is faced with two issues. First, the court must determine whether the arbitration clause is broad or narrow in scope. Second, the court must apply the relevant scope of the provision to the asserted legal claim to determine whether the claim falls within the scope of the contractual provisions that require arbitration. If the arbitration clause is broad in scope, the court will defer to arbitration on any issues that touch on contract rights or contract performance. In assessing arbitrability, the court may not determine the merits of the dispute. The CAPROC LLC Agreement contained a broad arbitration provision providing that "[a]ny dispute or controversy arising under this Agreement shall be submitted to binding arbitration." Having concluded that the arbitration provision was broad, the court then applied it to Plaintiffs' asserted claim to determine the question of whether the CAPROC Manager remained as the Managing Shareholder of CAPROC depended upon the interpretation of the parties' rights and obligations under the LLC Agreement. The court found that the removal of a manager "arose under" the LLC Agreement; therefore, the court dismissed Plaintiffs' complaint concluding that CAPROC's claims were arbitrable and that arbitration offered CAPROC an adequate and complete remedy at law.

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