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Cline v. Grelock, et al., C.A. No. 4046-VCN (Del. Ch. March 2, 2010)

March 2, 2010

In this case, the Court of Chancery found that it would not impose or order remedies, whether legal or equitable, for the plaintiff’s claims pertaining to membership in, and wrongful dissolution of, American Asset Recovery, LLC, a Delaware limited liability company (the “Company”), because the plaintiff did not prove the extent of the remedies to which he was entitled. The Court did, however, order that the defendant bear the costs of litigation because he breached his fiduciary duties when he unilaterally dissolved the Company.

In October 2007, plaintiff Jeremy Cline (“Cline”) and defendant Ryan Grelock (“Grelock”) formed the Company to operate as a recovery and towing business. To organize the Company, Grelock and Cline contacted an accountant, who provided forms to create the Company but did not see to the signing of the limited liability company agreement or the tailoring of the forms to the Company’s needs. The Company’s limited liability company agreement (the “LLC Agreement”) provided that, as a member of the Company who held a 50% interest in the Company, Cline was required to contribute $25,000. The parties agreed that Cline did not make any capital contribution to the Company. Despite his lack of capital contribution, Cline was treated as a member of the Company throughout its existence.

The relationship between Cline and Grelock quickly deteriorated, and, in 2008, Grelock dissolved the Company, even though he did not have the authority to do so unilaterally. Grelock then started a new recovery and towing business that used a logo similar to that used by the Company, a vehicle used in the business of the Company and acquired through a loan guaranteed by Cline (and Grelock), and a customer list of the Company.

In this litigation, Cline argued that, despite his lack of capital contribution, he retained the status of a 50% owner and member of the Company. Cline further argued that Grelock breached his fiduciary duties when he unilaterally dissolved the Company and used the Company’s assets in his new business without any payment to Cline for their use. Grelock counterclaimed that the Court should compel Cline to pay the capital contribution as provided in the LLC Agreement.

The Court rejected all of the parties’ arguments, finding that although Cline may have been entitled to remedies for Grelock’s breaches and unilateral dissolution of the Company, he had not sufficiently proven the amount of the damages to which he was entitled or offered an acceptable equitable remedy. The Court also found that, although the parties did not offer sufficient evidence to prove that Cline signed the form LLC Agreement, it was unreasonable for Cline to claim an interest in the Company and yet deny that he had any obligation to contribute capital. Finally, the Court found that because Grelock had deprived Cline of any benefit that might have resulted from the continuation of the Company, however marginal, when he unilaterally dissolved the Company, the Court would not compel Cline to make the capital contribution set out in the LLC Agreement.

The Court then ordered that Grelock bear the costs of the litigation due to his breach of fiduciary duties.

The full opinion is available here