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Ross Holding and Management Co., et al. v. Advance Realty Group, LLC, et al. , C.A. No. 4113-VCN (Del. Ch. September 2, 2010)

September 2, 2010

In this memorandum opinion, the Court of Chancery granted plaintiffs’ motion to amend their complaint in part, and denied their motion to appoint a receiver for Advance Realty Group, LLC, a Delaware limited liability company (“ARG”) conducting business as a real estate investment and development company. Plaintiffs, all of whom are members of ARG, initially brought claims for breach of fiduciary duty and contract against ARG and the other defendants, which include members of ARG’s managing board (the “Board”), its senior management, and its principal investors.

The Court denied plaintiffs’ motion to amend their complaint to add a count under Section 18-305(g) of the Delaware LLC Act. That section provides, in pertinent part, that amendments to the limited liability company agreement of a Delaware LLC restricting rights of a member or manager to LLC books and records must be approved or adopted by all of the members of such LLC, or in compliance with the applicable requirements of the limited liability company agreement of such LLC. Plaintiffs argued that through a series of amendments to the limited liability company agreement of ARG (the “ARG LLC Agreement”), their informational rights provided pursuant to §18-305(a) of the Delaware LLC Act were restricted or  eliminated. Those amendments deleted an obligation by the Board to provide certain reports and information. 

to members, and changed the law governing the ARG LLC agreement from Delaware to New York. The Court reasoned that the deletion of such obligation did not restrict the rights of ARG’s members to obtain any information pursuant to Section 18-305(a). It also determined that plaintiffs did not establish how the governing law modification affected members’ rights to ARG books and records, if at all.

A majority of the opinion focuses on plaintiffs’ motion to appoint a receiver for ARG. Plaintiffs requested that the Court appoint a receiver to avoid further purported harm to plaintiffs by the Board’s alleged gross mismanagement and self-dealing. As explained by the Court, and acknowledged by the parties to this case, the Delaware LLC Act is silent on the issue of when the appointment of a receiver is appropriate, except with respect to situations described in Section 18-805 thereof. That section provides for the appointment of a receiver for an LLC after the LLC’s certificate of formation has already been cancelled. Section 18-805 says that a Court may appoint a receiver to take charge of an LLC’s property, to collect the debts and property of such LLC, prosecute and defend suits to enforce such LLC’s rights, and take other actions necessary for the final settlement of the unfinished business of such LLC. The ARG LLC Agreement was also silent with respect to the appointment of a receiver.

Plaintiffs contended that the statutory standard established under Section 291 of the Delaware General Corporation Law, which provides for the appointment of a receiver when a corporation is insolvent, should be applicable in the LLC context. The Court, while acknowledging that Delaware courts deciding LLC cases do borrow from the extensive corporate case law under certain scenarios, decided that there was no reason do so here. Plaintiffs offered as analogous the example of other Delaware courts looking to corporate fiduciary duty principles when deciding LLC cases. The Court decided this was an inappropriate example because common law fiduciary duty principles were borrowed in those cases due to the Delaware LLC Act’s silence as to the contours of default fiduciary duties owed in the LLC context, even though the Delaware LLC Act mentions fiduciary duties. Conversely, the Delaware LLC Act expressly provides what the parameters should be for when a receiver should be appointed for an LLC, and seemingly omits intentionally the lesser standard for doing so provided under the Delaware General Corporation Law. 

The Court ultimately held that there is no need to borrow from the corporate statutory provisions with respect to the appointment of a receiver because Delaware case law is well established with respect to this issue, and includes a more general standard than that of the corporate statute that the Court may apply in accordance with its equity powers. The Court applied such well-established case law to the alleged wrongful acts of defendants and concluded that plaintiffs could not, at the time of plaintiffs’ motion, meet the high burden established by such law. As such, plaintiffs’ motion for appointment of a receiver was denied pending trial on the disputed facts.

The full opinion is available here