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Related Westpac LLC, et al. v. JER Snowmass LLC, et al., C.A. No. 5001-VCS (Del. Ch. July 23, 2010)

July 23, 2010

In this action, one member of a pair of Delaware limited liability companies (the “LLCs”) sued another member of the  LLCs over the defendant member’s unwillingness to consent to certain actions and to meet capital calls. The LLCs were created in connection with the development of the vacation destination of Snowmass Village, Colorado. Among other claims, the plaintiffs alleged that the defendant member of the LLCs (1) breached the operating agreements of the LLCs (the “Operating Agreements”), (2) breached the implied contractual covenant of good faith and fair dealing, (3) was unjustly enriched at the expense of plaintiffs, and (4) breached its fiduciary duties to the member plaintiff. The Court dismissed the complaint in its entirety.

The plaintiffs were allegedly harmed by the defendant member’s unwillingness to provide consents necessary for the LLCs to effect certain transactions. Specifically, those transactions were (1) the exercise of an option to purchase certain property, (2) the sale of certain property, and (3) the extension and refinancing of a $110 million loan. The Court  held that each of those actions fell within the definition of a “Material Action” under the Operating Agreements. Although the defendant member could not unreasonably withhold its consent as to certain matters, the Operating Agreements unambiguously authorized it to withhold consent as to Material Actions, regardless of whether its decision to withhold such consent was reasonable or motivated by self-interest. 

Plaintiffs also alleged that defendant wrongly caused the member plaintiff to make large capital contributions to the LLCs because defendant failed to comply with capital calls. Under the Operating Agreements, the plaintiff member’s sole remedy with respect to such failure was to withdraw the capital contribution it made at the time of such failure by defendant, or to agree to contribute the amount that the non-contributing member failed to contribute and be granted a commensurate interest in the LLCs for such additional amount contributed. The Operating Agreements expressly provided that “[n]o Member . . . shall have any personal liability to provide” additional funds with respect to any capital calls. 

The Court first disposed of the breach of contract and implied contractual covenant of good faith and fair dealing claims by holding that the claims were plainly inconsistent with the Operating Agreements’ provisions regarding the right of the defendant member to withhold consent as to Material Actions without consideration of whether withholding such consent might adversely affect any other member.  Under Delaware law, every contract contains an implied covenant of good faith and fair dealing. However, that implied covenant cannot be invoked where the contract itself expressly covers the subject at issue as the Operating Agreements did in this case. In dealing with the implied contractual covenant of good faith and fair dealing claim, the Court refused to imply judicially an obligation on the defendant member to have acted “reasonably” because the operating agreement clearly excluded such an obligation with respect to the types of actions complained of here. The Operating Agreements also expressly precluded the imposition of personal liability on the defendant member for failure to contribute after a capital call by specifically providing for agreed-upon limited remedies. 

Similarly, the Court disposed of the unjust enrichment claim by holding that the Operating Agreements, which governed the plaintiffs’ relationship as members, already provided a bargained-for contractual remedy in the case of failures to contribute capital. The Court followed precedent of previous decisions holding that claims of unjust enrichment cannot stand when the complaint alleges an enforceable contract that controls the relationship at issue. 

The Court also refused to imply judicially default fiduciary duties against the defendant member because the members to the LLCs expressly covered the conduct at issue in this case. The Operating Agreements expressly contemplated the authority of the defendant member to refuse the requested consents. Because the fiduciary duty claims were plainly inconsistent with the text of the Operating Agreements, the Court dismissed the claims.

The full opinion is available here