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The Court of Chancery Determines the Membership and Future of a LLC Using a "Substance over Form" Approach

Posted In LLC Agreements
In re Grupo Dos Chiles, LLC, C.A. No. 1447-N, 2006 WL 668443 (Del. Ch. Mar. 10, 2006). This case involved a dispute over the membership and future of a Delaware limited liability company. Petitioner sought a reformation of the LLC's certificate of formation to the effect that he and Respondent were members of the LLC. Applying a "substance over form" approach, the Court of Chancery concluded that the petitioners were members of the LLC by interpreting the LLC agreement and turning to documentary evidence regarding the parties' portrayal of their relationship. Respondents, Yolanda Martinez and her son Jamie Rivera, argued that because the LLC's certificate of formation only named Rivera as the "initial member," the membership of the LLC could not change without an amendment to the certificate. A month after the certificate was filed, Petitioner Shriver and Martinez entered into a LLC agreement naming themselves "managing partners." Respondents argued that the certificate was correct in showing the intent of the parties to make Rivera the sole member of the LLC. Shriver argued that the certificate should be reformed or amended to reflect that he and Martinez are the members of the LLC. The court found the certificate arguments to be immaterial because the LLC agreement superseded the certificate and made clear that Shriver and Martinez were the members of the LLC. The fact that the LLC agreement used the term "partners" as opposed to "member" was not significant because documentary evidence, i.e., the course of dealing between the parties and the way they held themselves out to the public, made clear that the parties intended Shriver and Martinez to be the members of the LLC. The court also dismissed the amendment argument because according to the LLC Act, a certificate of formation should be amended if it becomes false or was false when made, or corrected if defective or erroneously executed. None of these circumstances occurred in this case, so the court did not find the need to amend the certificate. Authored by: Fotini Antonia Skouvakis 302.888.5202 fskouvakis@morrisjames.com