Kathleen Coyne v. Fusion Healthworks, LLC, et. al, C.A. No. 2018-0011-MTZ (Del. Ch. Apr. 30, 2019) (Zurn, V.C.)
In this memorandum opinion, the Court of Chancery denied the defendants’ motion to dismiss, holding that the LLC agreement’s dissolution provision in question was ambiguous as to whether the affirmative election of members was required to dissolve the LLC following the bankruptcy and involuntary withdrawal of a member.
Fusion Healthworks, LLC (“Fusion”) was formed by four men to provide chiropractic services. James W. Sheehan, Christopher Coyne, Andrew M. Leitzke, and Sean Maas each owned a 25% interest in Fusion. In 2010, Fusion sued Maas for breaching his fiduciary duty to Fusion by providing competing services and keeping the proceeds for himself, and ultimately obtained a judgment against him. In April 2012, Coyne, Leitzke, and Sheehan executed a “Buy-Sell Agreement” pursuant to which Fusion purchased life insurance policies on each member, the proceeds of which would be used to buy the member’s interest upon his death. The Buy-Sell Agreement would terminate upon Fusion’s dissolution.
In 2013, Leitzke filed a petition for personal bankruptcy, which constituted an “Involuntary Withdrawal” under the Fusion LLC Agreement. Section 7.1.2 of Fusion’s LLC Agreement provided that Fusion “shall be dissolved . . . upon the occurrence of an Involuntary Withdrawal of a Member, unless the remaining Members, within ninety (90) days after the occurrence of the Involuntary Withdrawal, by majority vote, elect to continue the business of [Fusion].”
Leitzke did not disclose his bankruptcy petition to Coyne. Instead, he and Sheehan developed a separate business using Fusion’s assets and purported to dissolve Fusion. In May 2015, after discovering this activity, Coyne sued Leitzke and Sheehan, but took his own life before the suit concluded. Fusion received the proceeds of the life insurance policy, but refused to pay the proceeds to Coyne’s estate. The estate, lacking resources to continue litigating, voluntarily dismissed the case against Leitzke and Sheehan in August 2017.
The following year, Coyne’s widow (Kathleen Coyne) filed a pro se action seeking, among other things, a declaration that the Buy-Sell Agreement remained enforceable and an order requiring defendants to pay the life insurance proceeds to the estate. Resolution of that issue required interpretation of Section 7.1.2 of the LLC Agreement. If Leitzke’s bankruptcy triggered the dissolution of Fusion pursuant to Section 7.1.2, the Buy-Sell Agreement would also have terminated pursuant to its terms. Defendants argued that Fusion dissolved in the absence of a majority vote to continue the business, regardless of whether the members held an election on that question. Plaintiff argued that an election was required for Fusion to dissolve.
The Court denied defendants’ motion to dismiss, finding that both interpretations “appear reasonable at this stage.” While acknowledging that defendants’ interpretation “fairly tracks the plain language of the provision[,]” the Court concluded that it would create an “absurd” result by permitting Leitzke’s actions and failure to disclose his bankruptcy to control Fusion’s fate, rather than the desire of the remaining members. The Court further found that defendants’ interpretation was “inconsistent with Fusion’s managerial framework,” which vested authority in members in good standing. The Court acknowledged that plaintiff’s interpretation “requires a less straightforward reading” of the LLC agreement, but nevertheless found it reasonable because it “better harmonizes Section 7.1.2 with the remainder of the LLC Agreement.”