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Julian v. Julian, et al., C.A. No. 4137-VCP (Del. Ch. Sept. 9, 2009)

September 9, 2009

In this case, the Delaware Court of Chancery found that 1) given the facts of the case, the doctrine of ripeness did not bar a claim by a resigning member of a limited liability company (“LLC”) to the fair value of his interest in the LLC pursuant to Section 18-604 of the Delaware Limited Liability Company Act (the “DLLCA”) even when such claim was filed only two days after his resignation from the LLC; 2) broadly written arbitration provisions contained in an LLC agreement require that the arbitrator decide, in the first instance, claims arising from such LLC agreement that are subject to arbitration as well as whether any such claims that have a colorable relationship to such agreement are in fact subject to arbitration; 3) the Court can decide claims that are distinct from arbitrable claims and that do not have a significant risk of injustice; and 4) a non-fiduciary of an LLC may be liable for breach of fiduciary duty where he aids and abets a fiduciary who does owe fiduciary duties with respect to such LLC.

The nine LLCs in this case each had three brother members – Gene Julian (“Gene”), Richard Julian (“Richard”) and Francis Julian (“Francis”). On May 1, 2008, Gene resigned as a member of seven of the nine LLCs. On May 3, 2008, Gene filed a complaint against Richard, Francis, and the LLCs seeking the fair value of his interests in the LLCs from which he resigned. In the complaint, he also alleged breaches of fiduciary duty by Francis and Richard for the two LLCs in which he retained membership.

The defendants’ first motion in this case sought to dismiss claims against one of the LLCs under the doctrine of ripeness. Pursuant to Section 18-604 of the DLLCA, when the LLC agreement is silent on the issue, a resigning member “is entitled to receive, within a reasonable time after resignation, the fair value of [such member’s] interest as of the date of resignation based upon such member’s right to share in distributions from the [LLC].” While the applicable LLC agreement was silent, the defendants argued that since Gene filed the complaint in this case only two days after his resignation from the LLC, he did not provide such LLC reasonable time to determine the fair value of his interest, as required by Section 18-604 of the DLLCA. The Court quickly rejected this argument and found that Gene’s claim was ripe because the Court could infer that family members engaged in multi-faceted legal battles, including pending criminal and civil matters outside the one presently before the Court, would not agree upon a fair value, regardless of how long the claimant waited to file his complaint. Further, even if the Court dismissed the claims, Gene could re-file the claims as soon as the following day and litigation on the issue would ultimately proceed.

The defendants’ second motion sought to dismiss claims against six of the LLCs because the arbitration clauses of those LLC agreements required that an arbitrator, rather than the Court, decide those claims that were subject to arbitration as well as whether such claims were, in fact, subject to arbitration. The arbitration clause stated that, “[a]ny controversy or claim arising out of or relating to the [LLC] Agreement shall only be settled in arbitration in accordance with the rules of the American Arbitration Association….” The Court applied the Willie Gary test (James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006)), which requires a court to find “clear and unmistakable evidence” that the parties agreed to arbitrate the issues presented and for the arbitrator to determine, in the first instance, the substantive arbitrability of such claims. Clear and unmistakable evidence results where the clause “1) generally refers all disputes to arbitration and 2) references a set of arbitral rules that empowers arbitrators to decide arbitrability.” The Court found that the broadest possible arbitration language, as included in the LLC agreements in this case, patently satisfies the Willie Gary test. Thus, the Court granted the defendants’ motion to dismiss and noted that the plaintiff could pursue an adequate remedy in arbitration.

The Court also suggested that a court could reasonably add a preliminary step to Willie Gary that examined whether the claims at issue in a particular case were in any way related to the subject matter of an arbitration provision. The Court suggested that this step would consider whether “there is a colorable basis for the court to conclude” that the dispute is related to the relevant agreement containing the arbitration provision and therefore potentially subject to arbitration, as opposed to a completely unrelated claim that happened to arise between the same parties. The Court reasoned that where a claim requires the Court to interpret an LLC agreement, the claim is inherently related to the subject matter covered by a broad arbitration clause contained therein.

The defendants’ third motion sought to stay claims against the three LLCs without arbitration clauses in their LLC agreements because allowing them to proceed in court while the other six LLCs proceeded in arbitration would create a “tactical race to judgment as well as the possibility of inconsistent judgments.” The Court rejected this argument, finding that the material differences in entities, LLC agreements and property characteristics sufficiently reduced the risk of conflicting results.

The defendants’ final motion sought to dismiss derivative claims against Richard for breach of fiduciary duties with respect to one LLC because he was not a fiduciary of that LLC. The Court rejected the motion, finding that even though Richard was not a fiduciary of the LLC, the Complaint offered well-pled facts to indicate that Richard could have aided and abetted Francis, the manager of the LLC, in breaching Francis’ fiduciary duties with respect to such LLC.

The full opinion is available here