2009 Caiola Family Trust, et al. v. PWA, LLC, et al., C.A. No. 8028-VCP (Apr. 30, 2014) (Parsons, V.C.)

By Nick Froio and Marisa DiLemme

In this opinion, Vice Chancellor Parsons considers the parties’ cross motions for summary judgment as to the proper interpretation of a key provision of the operating agreement (the “Operating Agreement”) of Dunes Point West Associates, LLC (the “Company”), a Delaware limited liability company, relating to the Company’s management. The plaintiffs, together, own 90% of the Company, and are the only non-managing members of the Company. The defendants are PWA, LLC (“PWA”), the Company’s managing member and the holder of a10% interest in the Company, and Ward Katz, the managing member of PWA and sole owner of the Company’s property manager, Dunes Residential Services, Inc. (“DRS”). In July 2012, plaintiffs voted to terminate DRS as property manager. Shortly thereafter, the plaintiffs voted to terminate PWA as managing member for “Cause” due to PWA having materially breached the Operating Agreement by not implementing their decision to replace DRS with a new property manager.

The plaintiffs argued that Section 8.4(a) of the Operating Agreement allows the non-managing members to mandate removal of the property manager by majority vote since one of the actions upon which the non-managing members are entitled to vote under Section 8.4(a) included the termination of the management agreement under which DRS was appointed property manager. The defendants argued that Section 8.4(a) of the Operating Agreement only gives the non-managing members a limited veto right over those Company actions. The Court found Section 8.4(a) to be unambiguous and agreed with the defendant’s interpretation of the provision as granting only a limited veto power.

The Court focused on the fact that Section 8.4(a) provided that the non-managing members’ “prior written approval” was required for the actions enumerated in Section 8.4(a) to be taken by the Company, and that the managing member was to use all reasonable efforts to implement “any of the following decisions approved by a Majority Vote of the Non-Managing Members.” The Court found that the foregoing clauses when read together provide the non-managing members with only the right to approve or reject certain actions on behalf of the Company, not the right to unilaterally cause those actions to be taken.

The Court also looked at the Operating Agreement as a whole, and found that the interpretation of Section 8.4(a) as only granting a limited veto right was additionally supported by the fact that (i) the Operating Agreement set forth a management scheme whereby the management rights and initial decision making authority was expressly vested only in the managing member, with the non-managing members having limited rights or powers to participate in the management of the Company, and (ii) there was an absence of the language “shall have the right” in Section 8.4(a), where such language is used in other sections of the Operating Agreement to confer an affirmative right on the non-managing members to take or direct action.

Based on the Court’s interpretation of Section 8.4(a) as granting a limited veto power to the non-managing members, the Court found that the plaintiffs’ vote to terminate DRS as property manager and appoint a new one was invalid and ineffective. As this vote was ineffective, the Court also found that PWA’s failure to implement the vote that replaced the property manager did not breach the Operating Agreement, and thus the non-managing members did not have cause to remove PWA as the managing member.

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