Delaware Law Updates
{ Banner Image }
PDF

R&R Capital, LLC, et al. v. Buck & Doe Run Valley Farms, LLC, et al., C.A. No. 3803-CC (Del. Ch. August 19, 2008)

August 19, 2008

The petitioner entities, two New York limited liability companies (the “Petitioners”), filed a petition seeking judicial dissolution and winding up of nine Delaware limited liability companies (the “Respondents”) pursuant to Sections 18-802 and 18-803 of the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et seq. (the “LLC Act”), or, in the alternative, appointment of a receiver forthe Respondents pursuant to Section 18-805 of the LLC Act. Notably, many of the Respondents had previously had their certificates of formation canceled for failing to designate a registered agent, for failing to pay annual taxes, or for both. The Respondents moved to dismiss the petition, and the case at issue is the in the context of such motion to dismiss.

With respect to two of the nine Respondents (the “Pandora Entities”), the Court granted the motion to dismiss the Section 18-802 and 18-803 actions for lack of standing as the Petitioners were neither members nor managers of the Pandora Entities. The Court found that, under the plain language of the LLC Act, such Sections of the LLC Act only permit a member or manager to seek judicial dissolution or the winding up of a Delaware limited liability company. Although the Petitioners were members of the sole member of the Pandora Entities, the Court found this insufficient to allow them to bring the actions under Section 18-802 and 18-803 of the LLC Act. The Court, however, stated that Section 18-805 provides for a broader class of persons to present an application thereunder for the appointment of a receiver of a Delaware limited liability company. Specifically, the statute permits a “creditor, member or manager of the limited liability company, or any other person who shows good cause therefor” to present such an application. The Court, therefore, found that the Petitioners’ had the ability to bring an application for the appointment of a receiver of the Pandora Entities pursuant to Section 18-805 of the LLC Act (which ability the Respondents did not, in fact, challenge).

The Court then turned to the remaining seven Respondents (the “Waiver Entities”). The Court found that the Petitioners were members of these entities, and, therefore, had statutory standing to seek relief under Sections 18-802, 18-803 and 18-805 of the LLC Act. However, the Court also agreed with the Respondents’ contention that the Petitioners had waived their rights to bring action under Sections 18-802, 18-803 and 18-805 of the LLC Act under the limited liability company agreement of each of the Waiver Entities, and that the Petitioners could not proceed on that basis. In arguing for its ability to bring such actions, the Petitioners asserted that the waivers were invalid as a matter of law because the LLC Act prohibits the waiver of a member’s right to seek judicial dissolution under Section 18-802. In granting the motion to dismiss with respect to the Waiver Entities, the Court found each of the Respondents’ arguments in support of its contentions unpersuasive.

Based primarily on the principals of freedom of contract and standard contract interpretation, the
Court found that the Waiver Entities’ limited liability company agreements contained the express and unambiguous waiver of each member’s rights to seek relief under Sections 18-802, 18-803 and 18-805 of the LLC Act, and that these waivers were valid and effective. First, the Court pointed to the LLC Act as its best support as the LLC Act states that “the policy of this chapter [is to] give the maximum effect to the principal of freedom of contract and to the enforceability of limited liability company agreements.” While the limited liability company agreement of each of the Waiver Entities did also contain a provision providing that a decree of judicial dissolution under Section 18-802 of the LLC Act was an event of dissolution of the entity, the Court found that this provision and the waiver could be read as consistent because Section 18-802 of the LLC Act provides for application by “or for” a member. According to the Court, the waiver contained in the limited liability company agreements was only a waiver “by” a member and, as a result, was not inconsistent with the dissolution provision of the limited liability company agreements because an application under Section 18-802 (and the resulting event of dissolution) could still potentially occur if brought “for” a member.

Second, the Court did not find compelling the Petitioners’ argument that Section 18-109(d) of the LLC Act prohibited a waiver of a non-managing members rights under Section 18-802 of the LLC Act. Pursuant to Section 18-109(d) of the LLC Act, a non-managing member may not waive its rights to maintain legal actions in the Delaware courts (other than with respect to arbitration), and the Petitioners contended that the waiver contained in the limited liability company agreements violated these rights and was therefore void. The Court, however, found that Section 18-109(d) was at most a venue provision aimed at preventing parties from barring jurisdiction in Delaware, and had no bearing on the issue or generally on members’ ability to structure their entity or their substantive rights with respect to it. According to the Court, a reading of Section 18-109(d) more broadly and in the manner in which the Petitioners argued would cause the LLC Act to conflict with itself and operate to raise questions about other matters specifically permitted under the LLC Act.

Third, and perhaps most importantly, the Court found that the language of Sections 18-802, 18-803 and 18-805 of LLC Act do not themselves prohibit a waiver of these rights, and, therefore, that Sections 18-802, 18-803 and 18-805 of the LLC Act were not mandatory sections of the statute and were waivable. The Court disagreed with Petitioners’ argument that when the LLC Act does not specifically contain the qualification “unless otherwise provided in a limited liability company agreement,” it is a mandatory, non-waivable provision of the LLC Act. Rather, the Court held that these Sections can be modified by contract because the LLC Act does not state the contrary. While the Court noted that Section 18-803 ofthe LLC Act does contain the “unless otherwise provided” phrase and Sections 18-802 and 18-805 of theLLC Act do not contain such language, the Court stated that such language was not always required for a provision of the LLC Act to nonetheless be modifiable by agreement. The Court also noted that certain provisions of the LLC Act expressly prohibit waiver (such as the prohibition contained in Section 18-1101 of the LLC Act against eliminating the implied contractual covenant of good faith and fair dealing), but that no such prohibition was expressly contained in Section 18-802 or 18-805 of the LLC Act. Indeed, the Court pointed to the permissive, as opposed to mandatory, language contained in these Sections as Section 18-802 states that the “Court of Chancery may decree dissolution” and Section 18-805 states that “the Court of Chancery . . . may either appoint” a trustee or receiver. Finally, and significantly to the Court, the Court found that none of the rights contained in these provisions and waived in the limited liability company agreements were intended to protect third parties (and, with respect to Section 18-805 of the LLC Act, such third parties where themselves permitted bring certain actions thereunder), and, therefore, permitting their waiver did not interfere with the rights of third parties.

Lastly, the Court found that public policy and notions of equity did not operate to void the Petitioners’ knowing, voluntary waivers of their rights to seek judicial dissolution and the appointment of a receiver, or cause the Court to disregard a negotiated agreement among sophisticated parties; and, if anything, weighed in favor of enforcement of such waivers. The Court stated that, as expressed in the LLC Act itself, the public policy of Delaware is the freedom of contract. In addition, the Court noted that there are legitimate business reasons why parties would want to preclude a member’s ability to petition for judicial dissolution. Further, the Court found that the implied contractual covenant of good faith and fair dealing provided inherent protection to the Petitioners such that there was no threat to equity in allowing the waivers.

The full opinion is available here