Topic: Dissolution

CHANCERY COURT NULLIFIES DISSOLUTION OF LIMITED LIABILITY COMPANIES FOR FAILURE TO SET ASIDE A RESERVE TO SATISFY KNOWN CLAIMS

By: Scott E. Waxman and Calvin D. Kennedy

In Kevin Capone and Steven Scheinman v. LDH Management Holdings LLC, et al., C.A. No. 11687-VCG (Del. Ch. April 25, 2018), the plaintiffs, Kevin Capone (“Capone”) and Steven Scheinman (“Scheinman”), and the defendants, LDH Management Holdings LLC (“Management Holdings”), LDHMH MM, LLC (together with Management Holdings, the “LLCs”), Castleton Commodities International LLC (f/k/a Louis Dreyfus Highbridge Energy LLC (“LDH”)) and certain members of the Board of Directors of LDH, each moved for summary judgment regarding the plaintiffs’ claim that the defendants violated Delaware law by cancelling the LLCs without setting aside a reserve for the plaintiffs’ breach of contract claims.  The court granted the plaintiffs’ motion for summary judgment and held that the defendants were aware of the plaintiffs’ non-frivolous claims for breach of contract against the LLCs and, therefore, the defendants acted in violation of Delaware law when they failed to create a reserve to cover the plaintiffs’ claims when the LLCs were dissolved.

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Too Many Cooks in the Kitchen – Deadlocked Management Leads to LLC Dissolution

By Scott E. Waxman and Reese Brammell

In In re GR BURGR, LLC, C.A. No. 12825-VCS (Aug. 25, 2017), the Delaware Court of Chancery exercised its power under Section 18-802 of the Delaware Limited Liability Company Act to effect the judicial dissolution of GR BURGR, LLC (“GRB”). GRB was a Delaware limited liability company formed by an entity affiliated with celebrity chef Gordon Ramsay (“GRUS”) and Rowan Siebel, each owning a 50% membership interest. This structure, along with the LLC Agreement’s lack of a tiebreaker, effectively turned any action requiring a majority vote of the managers into a unanimous vote. The relationship between the members eventually deteriorated, and the company, formed for the purpose of developing and operating burger restaurants, became locked in a stalemate regarding its future operations. GRUS petitioned for dissolution Section 18-802. The Court found that the undisputed facts entitled GRUS to such relief and, rejecting Siebel’s claims that dissolution was not equitable, granted the same.

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Testimony Regarding Timeliness of Election to Continue an LLC Found to be Untrustworthy, Resulting in LLC Dissolution

By: Scott Waxman and Ernest Simons

In Delaware Acceptance Corporation, CACV of Colorado, LLC and 202 Investments, Inc., v. Estate of Frank C. Metzner, the Court of Chancery removed the executrix of an estate for breaching her fiduciary duty to a creditor of the estate. The case hinged on the authenticity of several documents, which if found to be forged would lead to the dissolution of an LLC and a distribution of its assets. The Court of Chancery found that the executrix was not a credible witness, and, therefore, it could not trust the authenticity of documents that she presented in support of the continued existence of the LLC. Read More

The Court of Chancery Orders Dissolution of a Limited Liability Company Solely on Equitable Grounds

By Eric Feldman and B. Ashby Hardesty, Jr.

The Delaware Chancery Court held that the assignor of a limited liability company interest and its assignee, neither of which was a member or manager of the limited liability company, both lacked standing to petition for judicial dissolution of the limited liability company under Section 18-802 of the Delaware Limited Liability Company Act (the “LLC Act”). However, the Court went on to further hold that the assignee nonetheless had standing to seek judicial dissolution of the limited liability company in equity. Subsequent to such decision, the Court later issued an order granting the petitioners’ motion for summary judgment seeking judicial dissolution, representing the first time that a Delaware court has dissolved a limited liability company entirely on equitable grounds.

In In re Carlisle Etcetera, Well Union Capital Limited (“WU Parent”) and Tom James Company (“Tom James”) formed a two member Delaware limited liability company (the “LLC”), adopting a very basic operating agreement, with the intent to later amend and restate the operating agreement. The LLC was managed by a four member board, with each member entitled to appoint two of the board managers, and the entire board designated as the “manager” of the LLC. Additionally, a Tom James executive was appointed by the board as the CEO of the LLC.  After formation, WU Parent transferred all of its limited liability company interest in the LLC to its wholly-owned subsidiary (“WU Sub”), of which Tom James was aware, and to which it did not object. The parties later began to negotiate an amended and restated operating agreement, which reflected Tom James and WU Sub as the members of the LLC.

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It’s a Family Affair… but Not Any More, as Chancery Court Grants Motion to Dissolve General Partners Under Section 273 of the DGCL

By Annette Becker and Lauren Garraux

The Chancery Court granted a petition in accordance with Section 273 of the Delaware General Corporation Law to dissolve two Delaware corporations, the general partners of two Massachusetts limited partnerships, initially formed by the patriarchs of the Grossman and Cohen families to own three real estate properties for the benefit of their respective family members, after the families reached an impasse as to how to dispose of the assets of the business.

In 1992, the patriarchs of the Grossman and Cohen families formed two Massachusetts limited partnerships (the “Partnerships”) to own three real estate properties for the benefit of their family members (at the time of this dispute, 25 Grossmans and 6 Cohens), who are limited partners in the Partnerships.  The general partners of the Partnerships (the “General Partners”) are two Delaware corporations, each of which is a joint venture corporation with two 50% stockholders, at the time of the dispute, the petitioner, Louis Grossman (“Louis”), and the respondent, Claire Cohen (“Claire”).

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Lake Treasure Holdings, Ltd., et al v. Foundry Hill GP, LLC, et al and Foundry Hill Holdings, LP and CP-1 LLC, C.A. No. 6546-VCL (October 10, 2014) (Laster, V.C.)

By Eric Feldman and Porter Sesnon

In Lake Treasure Holdings, Ltd., the plaintiffs, investors in a now-defunct start-up, Foundry Hill Holdings LP (the “Partnership”), sued the Partnership, one of its founders (Ulric Taylor (“Taylor”)),  one of Taylor’s subsequent business partners (Christopher Klee (“Klee”)), and various other Partnership-related entities and operating subsidiaries for breach of fiduciary duty and aiding and abetting the breach of fiduciary duty, as well as under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) and Delaware Uniform Trade Secrets Act (“DUTSA”), in connection with a series of transactions whereby all of the assets of the Partnership were ultimately transferred to entities owned and/or controlled by Taylor and Klee. 

Taylor controlled the Partnership through his control of the Partnership’s general partner.  As a result, the Court initially found that Taylor owed fiduciary duties, including the duty of loyalty, to the Partnership and its limited partners.  In analyzing the transactions at issue, the Court further found that Taylor stood on both sides of such transactions and that therefore the entire fairness standard applied in analyzing such transactions.  In applying the entire fairness test, the Court held that Taylor had breached his duty of loyalty when he granted a security interest in all of the assets of the Partnership, including its primary asset, high frequency trading software, to Klee in exchange for a $28,000 loan from Klee to the Partnership.  Prior to the $28,000 loan by Klee, Taylor and Klee had previously contemplated Klee purchasing the software for $500,000 with an enterprise valuation of $3 million. 3 months following the granting of the security interest, as foreseen by Taylor and Klee at the time the loan was made, the Partnership defaulted on the loan, Klee foreclosed on the security interest, and Taylor amicably surrendered all of the assets of the Partnership, including all interest in the software, to an entity controlled by Klee.  The Court determined that Taylor and Klee “acted in concert to move the Partnership’s high frequency trading software out of the Partnership and into an entity where Taylor and Klee could enjoy its benefits.”  Upon finding the fiduciary duty breach by Taylor, the Court then also found that Klee had aided and abetted such breach of fiduciary duty.

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In re Interstate General Media Holdings, LLC, C.A. No. 9221-VCP (Apr. 25, 2014) (Parsons, V.C.)

By Scott Waxman and Zack Sager

In In re Interstate General Media Holdings, LLC, the managing members of Interstate General Media Holdings, LLC, a Delaware limited liability company (the “Company”), sought judicial dissolution of the Company.  Both managing members agreed that the Company was deadlocked and judicial dissolution was necessary, but they disagreed about whether the Company should be sold at a private auction or a public auction.  The limited liability company agreement of the Company (the “LLC Agreement”) did not explicitly address how the Company was to be dissolved and liquidated.  Nonetheless, one of the managing members argued that the Court of Chancery should look to the intent and provisions of the LLC Agreement for guidance in fashioning an appropriate remedy.  The court rejected this argument holding that because the LLC Agreement did not explicitly address the procedures for dissolution and liquidation, it was essentially irrelevant in determining the issue.  Further, because the managing members sought judicial dissolution, which was not proscribed by the LLC Agreement, the Company submitted itself to the discretion of the court to determine how the Company was to be dissolved and liquidated.  The court ultimately ordered the dissolution of the Company and a sale of the Company via a private auction, finding that this method would maximize the value of the members’ limited liability company interests in the Company.

InReInterstate

Huatuco v. Satellite Healthcare, C.A. No. 8465 (Dec. 9, 2013) (Glasscock, V.C.)

By Scott Waxman and Zack Sager

Huatuco v. Satellite Healthcare is about one member of a Delaware limited liability company (the “Company”) applying for judicial dissolution of the Company pursuant to Section 18-802 of the Delaware Limited Liability Company Act, which permits the Court of Chancery to dissolve a limited liability company when it is not reasonably practicable for the limited liability company to carry on its business in conformity with its limited liability company agreement. In stressing the principle of freedom of contract with respect to limited liability company agreements, the Court of Chancery dismissed the action because the limited liability company agreement of the Company (the “LLC Agreement”) did not permit a member to apply for judicial dissolution. The LLC Agreement expressly provided that, except as required by law, the members were only entitled to the rights expressed in the LLC Agreement. Because the right to judicial dissolution is not required under Delaware law (i.e., the right can be waived) and was not granted in the LLC Agreement, the Court dismissed the action.

Huatuco v Satellite Healthcare and Satellite Dialysis of Tracy LLC

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