Posts in LLC Agreements

Court of Chancery Dissolves a Deadlocked LLC

Fisk Ventures, LLC v. Segal, C.A. 3017-CC (Del. Ch. Jan. 13, 2009)

 

It has long been established that a limited partnership may be dissolved when a deadlock makes it impossible to carry on the partnership business. Here the Court of Chancery applied that same law to an LLC as the statute also provides for a judicial dissolution when it is "not reasonably practical to carry on the business" for which the entity was created.

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Court of Chancery Interprets LLC Exculpation Clause

Kahn v. Portnoy, C.A. 3515-CC (Del. Ch. Dec. 12, 2008)

 

This important decision illustrates how hard it is to make an LLC agreement cover all future events. While there is a growing school of thought that advocates letting the parties make their own bed in the form of the LLC agreement, that approach fails to appreciate how hard it is to do that well. The failure to successfully do so leaves everyone unhappy, and they would have been better off had they not tried to begin with.

 

Here the parties to an LLC agreement tried to address conflict of interest situations that were sure to occur when the entity would contract with related entities owned by its directors. They did so by a clause that was supposed to limit fiduciary duties in such cases. What happened, and it happens a lot, is that the language they used did not exactly fit the circumstances they later faced. As a result, they proceeded apparently thinking that they were alright only to be followed by the Court correctly pointing out that the language they relied upon did not work as they thought. Now they face liability under fiduciary standards they cannot meet.

 

One answer is better drafting. But given the many times that seems not to have been done, perhaps it is time to give up the effort to speak to all future events. Instead, those transactions that are expected to occur should be addressed directly and specifically. If the directors want their personal company to rent to the LLC, then they should say that is okay at least if the rent is approved by an independent third party. If they do not know what type of transactions they want to enter into, then they should fall back on the extensive fiduciary law under the Delaware corporation law that will tell them how to do a deal safely.

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Court of Chancery Refuses To Impose Costs on Proxy Loser

TravelCenters of America v. Brog, C.A. 3751-CC (Del. Ch. Dec. 5, 2008)

 

In this unusual case, the LLC sought to require the loser of a proxy contest to pay the costs. The LLC Agreement had a provision that imposed costs on those members who violated any of their obligations in the agreement. The LLC claimed that when the members put up unqualified candidates for office they should pay the costs of defeating them. The Court held that as the conditions to be a candidate were not obligations of the members, but "conditions," costs would not be imposed.

 

While the opinion does not say so, this may reflect a reluctance to discourage election contests by imposing costs on the loser.

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Court of Chancery Applies Statute of Frauds to LLC Agreement

Brian T. Olson v. O. Andreas Halvrosen, C.A. 1884-VCL (Del Ch. Oct. 22, 2008)

 

This decision invalidates a provision in an unsigned LLC agreement for violating the statute of frauds. The Delaware LLC Act permits an oral LLC agreement; however, when the promise in that oral agreement cannot be performed within a year, the promise must be in writing. Given the common existence of oral LLC agreements, this decision sounds a word of caution.

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Superior Court Denies SJ, Leaves For Jury Whether Agent Had Authority

Jack J. Morris Assoc. v. Mispillion Street Partners, LLC, 2008 WL 3906755 (Del. Super. Ct. Aug. 26, 2008). 

This decision briefly reviews the three types of authority by which an agent may bind a principal: actual authority, implied authority, and apparent authority.  The principal was a limited liability company, which failed to pay the vendor it purportedly engaged to perform marketing services. 

 

The issue that arose on summary judgment was whether the purported agent, who was removed as the general manager of the LLC two days before signing on behalf of the entity, had authority to bind the entity. The court denied the vendor’s motion for summary judgment, holding that it was up to a jury to determine that question based on the factual circumstances.

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Court of Chancery Upholds Waiver of Dissolution and Receiver Rights in LLC

R&R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, C.A. 3803-CC (Del. Ch. Aug. 8, 2008)

This decision upholds provisions in an LLC agreement that waived the rights of members to seek its dissolution or the appointment of a receiver. Thus, once again, the Court has held that the principle of freedom of contract will be enforced in Delaware. The covenant of fair dealing, which cannot be waived by statute, remains as the remedy for abuses.

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Court of Chancery Explains How To Defend In A Deadlock

Maitland v. International Registries, LLC, C.A. 3669-CC (Del. Ch. June 6, 2008)

It often occurs in a dispute between the owners of a closely held corporation or LLC that no one has enough votes to decide who should be counsel to the entity in the litigation. This decision explains how to deal with that problem. The answer is for the owner or group of owners who are not the plaintiff to intervene in the litigation to act on behalf of the entity. This avoids the tough issue of who pays the attorneys’ fees for the entity as the intervener pays her own counsel.

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Court of Chancery Upholds LLC Agreement Voting Rights

Fisk Ventuers LLC v. Segal, C.A. 3017-CC (Del. Ch. May 7, 2008)

A Delaware LLC is a creature of the members' contract. Here the LLC agreement gave voting rights to a class of members that effectively gave them veto rights over certain actions. When those members exercised those veto rights, the other members sued claiming that constituted a breach of duty. The Chancellor flatly rejected that argument as an attack on the veto rights that were given in the LLC Agreement.

The opinion also holds that a member's consultation with his designated managers on the LLC Board does not give Delaware jurisdiction over that member under the long arm statute's provisions that subject managers to jurisdiction in Delaware.

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District Court Allows Estoppel, Breach of Contract, Fraud Claims Against LLC Member, Dismisses Other Defendants

Christ v. Cormick, 2007 WL 2022053 (D.Del. Jul 10, 2007)

In this action for damages based on promissory estoppel, breach of contract, fraud and civil conspiracy, Plaintiff sued the founding member of a Delaware LLC (“Member Defendant”), as well as various foreign individuals and entities (“other Defendants”) associated with the Member Defendant. Plaintiff’s claim arose out of an alleged agreement with the Member Defendant to invest $350,000 in exchange for a 50% equity interest in a South African investment management corporation and a Delaware LLC which owned certain intellectual property rights. Plaintiff claimed that the Member Defendant accepted $250,000 from Plaintiff, but diverted the money to another entity he was affiliated with. Plaintiff further alleged that the Member Defendant promised to repay Plaintiff the $250,000 that was invested, but did not do so. The Defendants moved to dismiss the action under F.R.C.P. Rule 12(b)(2) for lack of personal jurisdiction. The Defendants also moved for dismissal of the conspiracy claim under F.R.C.P. Rule 12(b)(6) for failure to state a claim, and dismissal of both the fraud and conspiracy claims as being outside the statute of limitations. Finally, the Defendants moved for a stay of the action under principles of comity in favor of Plaintiff’s earlier filed action in South Africa. More ›

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District Court Rejects Defenses to Breach of Contract, Awards Attorneys' Fees

Chase Manhattan Bank v. Iridium Africa Corp., 2007 WL 518440 (D.Del. Feb. 16, 2007)

In this breach of contract case, the defendant members of a bankrupt LLC asserted various defenses to their alleged contractual obligation to make capital contributions after the bankruptcy. The plaintiff lender had made an $800 million dollar loan to the LLC, and asserted that the members were contractually obligated to continue capital contributions despite the bankruptcy. The District Court entered summary judgment for the plaintiff on its breach of contract claim, but delayed entering final judgment until the parties could brief remaining “open issues”. The defendants argued that the plaintiff’s alternate theory of recovery should be dismissed as moot prior to a final entry of summary judgment for the plaintiff, that the plaintiff was not entitled to attorneys’ fees, and that the Court’s grant of summary judgment had left unresolved various defenses asserted by the defendants. The Court concluded that the entry of summary judgment was appropriate without addressing the plaintiffs’ alternate theories of recovery and did not leave any defenses unresolved, and that the plaintiff was contractually entitled to attorneys’ fees. The Court therefore found that the entry of final judgment for the plaintiff was appropriate. More ›

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District Court Applies Exception to Tooley Test and Rejects Argument That Exculpatory Provisions Create Contractual Obligations

Shamrock Holdings v. Arenson, C.A. 06-62-SLR, 2006 WL 2802913 (D. Del. Sept. 29, 2006). This case involved a dispute between the Class A and Class B members of a Delaware LLC called ALH Holdings. The dispute arose after ALH faced financial trouble and the Class A members voted to sell the company over the objections of the Class B members, who eventually threatened to sue. To preempt such a suit, the Class A members brought an action for a declaratory judgment that, among others, they did not breach their fiduciary duties or the LLC's operating agreement. In response, the Class B members counterclaimed, alleging breaches of the same. Plaintiffs subsequently moved for summary judgment as to four of the counts in their complaint, and they moved to dismiss the defendants' counterclaim. The Court denied the motion to dismiss and denied the motion for judgment on the pleadings in part (and granted it in part). More › Share

Court of Chancery Affirms Application of Delaware Law to LLC

Facchina v. Malley, C.A. No. 783-N, 2006 WL 2328228 (Del. Ch. Aug. 1, 2006). In this case the Court of Chancery has again affirmed that Delaware law applies to the internal affairs of a Delaware LLC. The LLC was the result of a merger of a California corporation into a Delaware LLC. The California entity had a stockholders' agreement that the defendants wanted to enforce. The Court rejected their arguments because the California entity had ceased to exist in the merger. More › Share

Court of Chancery Upholds Drag Along Rights

Minnesota Invco of RSA #7, Inc. v. Midwest Wireless Holdings LLC, C.A. No. 1887-N, 2006 WL 1596675 (Del. Ch. June 7, 2006). In this case, the Court of Chancery was required to interpret complex agreements between the members of a Delaware limited liability company. The Court held that the defendant holding company had the right to "drag along" holders of a minority interest in an operating subsidiary of the holding company in connection with the sale of the holding company. More ›

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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. More ›

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Court of Chancery Awards Reliance Damages for Promissory Estoppel

Ramone v. Lang, C.A. No. 1592-N, 2006 WL 905347 (Del. Ch. Apr. 3, 2006). This case involved a dispute between two businessmen who hoped to work together on a project to open a swim and fitness center, but who failed to achieve this despite months of efforts and negotiations. Plaintiff and defendant intended to formalize their relationship in a written LLC agreement. Ultimately, defendant closed on the property for himself, frustrated by his inability to reach a final agreement with plaintiff. Plaintiff sued for breach of contract, breach of fiduciary duty, and promissory estoppel. The Court of Chancery found that there was no contract between the parties and that the parties were not partners, therefore defendant did not owe any fiduciary duties. The court did, however, find that plaintiff had a claim for promissory estoppel and awarded reliance damages. More ›

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