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Court of Chancery Remedies Breach of LLC Agreement

Eureka VIII LLC v. Niagara Falls Holdings LLC C.A. No. 1203-N, 899 A.2d 95 (Del. Ch. June 6, 2006). This case illustrates the ability of the Court of Chancery to fashion a remedy that is non-traditional and fits the exact circumstances of the case before it. Here the remedy for the breach of a LLC agreement is to hold the breaching party, who is no longer a member in the LLC but only an assignee, with limited rights.

Plaintiff Eureka is a 50% member of a Delaware LLC. The other member is the defendant, Niagara. The parties' LLC agreement contained strict provisions against the individual that owned Niagara from losing control of Niagara. The Court held that those provisions were important, particularly in a LLC that was formed to develop a complex project where a working relationship between the LLC members was important. When control of Niagara was lost to the creditors of Niagara's owner, a conflict developed as those creditors wanted their money back, not to proceed with the projects for which the LLC was formed. Finding that conflict emphasized the importance of the "no-transfer-of control" provision, the Court held the transfer was a material breach of the LLC agreement. As the remedy, the Court held that it would invoke the provisions of Section 18-702(b)(3) of the Delaware LLC Act. That provision says that a member ceases to be a member upon assignment of his interest. While that had not actually occurred here, the Court held that would be the affect of an unauthorized transfer of control of a member. Thus, in those cases where there is a change of control provision in a LLC agreement, great caution should be taken before that provision is violated. Under this decision, valuable membership interests may be lost as a result.