Topic: LLC Agreement

Court of Chancery Dismisses Breach of Fiduciary Duty Claim as Duplicative of Breach of Contract Claim

By: Scott Waxman and Zack Sager

In MHS Capital LLC v. Goggin, the Delaware Court of Chancery granted a motion to dismiss a breach of fiduciary duty claim against the manager of a Delaware limited liability company because all of the manager’s conduct that could have formed the basis of such claim was covered by the duties of the manager delineated in the limited liability company agreement.  The Court also analyzed and dismissed claims for, among other things, fraud, breach of the implied contractual covenant of good faith and fair dealing, unjust enrichment, and misappropriation of trade secrets.

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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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Court of Chancery finds personal jurisdiction over out-of-state trust due to trustor’s involvement in the formation of Delaware LLC

By:  Scott E. Waxman and J. Tyler Moser

In Terramar Retail Centers, LLC v. Marion #2-Seaport Trust U/A/D/ June 21, 2002, Civil Action No. 12875-VCL (Del. Ch. August 18, 2017), the Delaware Court of Chancery denied an out-of-state defendant’s motion to dismiss for lack of personal jurisdiction, finding that defendant’s trustor was actively involved in negotiating both the underlying business deal and the terms of the operating agreement of the Delaware limited liability company at issue. Read More

Chancery Court Rules Against Enforcement of a Call Right Due to Failure to Tender the Contractual Consideration

By: Jill B. Louis and Gilbert A. Perales

In Simon-Mills II, LLC, et al., v. KanAm USA XVI Limited Partnership, et al., C.A. No. 8520-VCG (Del. Ch. March 30, 2017), the Court of Chancery denied Plaintiffs’ request to enforce its call right and granted Defendants’ request for declaratory judgment when the contracted consideration for the call right could not be tendered.

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Failure to Make Demand to the Board of Directors Dooms 50% Owner’s Breach of Fiduciary Duty Claims Against Co-Owner

By: Michelle McCreery Repp and Benjamin Kendall

In Dietrichson v. Knott, C.A. No. 11965-VCMR (Del. Ch. Apr. 19, 2017), the Chancery Court dismissed the entire complaint brought by  one member of a limited liability company against another member for paying himself an unauthorized salary and misappropriating the proceeds of a sale of the company’s assets, concluding that the claims made were derivative rather than direct stockholder claims.  The Court also held that plaintiff’s claims were not “dual-natured” (i.e., having both direct and derivative aspects), because the plaintiff failed to plead that the transaction resulted in both an improper transfer of economic value and voting power from the minority equity holders to the controlling equity holder.

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Chancery Court Enters Declaratory Judgments in Favor of Plaintiff and Finds that Defendant’s Actions Justify Sanctions

By: Scott E. Waxman and Stephanie S. Liu

In Ensing v. Ensing, C.A. No. 12591-VCS (March. 6, 2017), Vice Chancellor Slights entered declaratory judgments in favor of the plaintiff, concluding that the defendant’s actions were null and void as a matter of law. A husband and wife, Dr. Hans Ensing (“Hans”) and Sara Ensing (“Sara”) own and operate a winery and boutique hotel in Italy. The businesses operate indirectly through two Delaware limited liability companies. Prior to the events leading up to this litigation, Sara was a manager and member of one of the entities and, through that entity, was manager of the other. Hans was neither a member nor manager of either entity. When Hans purported to remove Sara and appoint himself as manager of one of the two entities and then engaged in a series of transactions to divest Sara of her interests in the winery and hotel, Sara initiated this action.

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Chancery Court Confirms that Broad Arbitration Clauses Cover Questions of Substantive Arbitrability

By Scott Waxman and Will Smith

In Bennett J. Glazer, et al. v. Alliance Beverage Distributing Co., LLC, Civil Action No. 12647-VCMR (Del. Ch. Ct. March 2, 2017), the Delaware Court of Chancery granted the defendant’s motion to stay, holding that the Court lacks subject matter jurisdiction to decide the question of substantive arbitrability when the disputing parties are bound by an LLC agreement containing a broad arbitration clause.

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Chancery Court Interprets Contractual Provisions, the Elimination of Fiduciary Duties and Standard to be Applied for Self-Dealing Transactions under LLC Agreement

By Nicholas I. Froio and Rachel Cheasty Sanders

In CelestialRX Investments, LLC and Krittika Life Sciences, LLC v. Krivulka, et al., C.A. No. 11733-VCG (Del. Ch. Jan. 31, 2017), the Delaware Court of Chancery addressed two preliminary issues before it on motions for partial summary judgment filed by the various defendants.  The plaintiffs include CelestialRX Investments, LLC (“CelestialRX”), one of three members of the Delaware limited liability company Akrimax Pharmaceuticals, LLC (“Akrimax”).  The defendants include Leonard Mazur and Joseph J. Krivulka (“Krivulka”), the two other members of Akrimax, along with various entities Krivulka controls or in which he has invested.  These entities entered into a number of transactions with Akrimax, these transactions being at the heart of this dispute.  The Court first considered whether a release agreement dated July 1, 2013 (“Release Agreement”) barred CelestialRX from bringing causes of actions against the defendants which occurred prior to the release.  After applying rules of contract interpretation, the Court, in dismissing the motion for partial summary judgment, held that the plaintiff was not a “Releasing Party” as defined in the Release Agreement and thus had not released any claims existing as of July 1, 2013.  The Court next considered the extent to which the LLC Agreement of Akrimax and its July 1, 2013 amendment (“Amendment No. 7”) limited or modified fiduciary duties of the members, directors or managers of Akrimax, and what standard of care applied under the LLC Agreement in the context of conflicted transactions.

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Chancery Court Finds Unqualified Inspection Right in Statutory Trust Agreement Renders Default Preconditions and Defenses Inapplicable

By: Scott Waxman and Eric Jay

In Grand Acquisition LLC v. Passco Indian Springs DST, C.A. No. 12003-VCMR (Del. Ch. Aug. 26, 2016) the Delaware Court of Chancery found that under the Delaware Statutory Trust Act (the “Act”), the governing instrument of a Delaware statutory trust (DST) does not need to affirmatively disavow the preconditions and defenses applicable to inspection rights related to a DST’s books and records under Section 3819 of the Act in order to create a separate and distinct contractual right that can, in some circumstances, render statutory preconditions and defenses inapplicable to such requests. Read More

Court of Chancery Dismisses Breach of Fiduciary Duty Claim as Duplicative of Breach of Contract Claim

By Scott Waxman and Zack Sager

In CIM Urban Lending GP, LLC v. Cantor Commercial Real Estate Sponsor, L.P., the Delaware Court of Chancery dismissed a breach of fiduciary duty claim against a general partner of a Delaware limited partnership because there was no independent factual basis for the breach of fiduciary duty claim apart from the plaintiffs’ breach of contract claim.

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Court of Chancery Reallocates Limited Liability Company Distributions According to Prior Agreements between the Parties

By Andrew Skouvakis and Thomas Meyer

In Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, the Court of Chancery held that proceeds from a limited liability company’s liquidity event distributed to the members of the limited liability company should be reallocated in accordance with prior agreements between the members. The Court found that an integration clause in the limited liability company agreement did not supersede allocation provisions in the prior agreements.

In 2003, Zubin Mehta and Gregory Shalov formed Finger Lakes Capital Partners, LLC (“Finger Lakes”) to sponsor investments in portfolio companies. Lyrical Partners, L.P. (“Lyrical”) provided the majority of the capital for these investments. In 2004, Mehta, Shalov, and Lyrical executed a binding term sheet (the “Term Sheet”) addressing the ongoing business relationship between Finger Lakes and Lyrical. Under the Term Sheet, Lyrical received a 25% ownership interest in Finger Lakes and was entitled to a percentage of portfolio company management fees that would otherwise go to Finger Lakes.

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Delaware Chancery Court Addresses Alleged Breaches of LLC Agreement

By Scott Waxman and Sophia Lee Shin

NewYork.com Internet Holdings, Inc. v. Entertainment Benefits Group, LLC, et al., involves a dispute between the two owners, each with a 50% interest, of NewYork.com Entertainment Group, LLC (“NYEG” or the “Company”). The plaintiff alleged that the Company’s board (the “Board”) was deadlocked because it had been excluded from all decision-making and sought dissolution, and the defendant counterclaimed for various breaches by the plaintiff of the Company’s operating agreement; the plaintiff then moved to strike the defendant’s counterclaim or dismiss it in its entirety. In this opinion, the court granted in part and denied in part the plaintiff’s motion to strike, and denied in its entirety the plaintiff’s motion to dismiss.

The plaintiff and defendant in this case were the two owners of NYEG. The principals of the plaintiff, NewYork.com Internet Holdings, Inc. (“NYIH”), were the original registrants of the domain name NewYork.com, a website that sells and markets travel and entertainment tickets in New York. The defendant, Entertainment Benefits Group, LLC (“EBG”), is in the business of selling and marketing travel and entertainment tickets.

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