Chancery Court Enforces LLC Agreement, Further Demonstrating that LLCs are Creatures of Contract

Sep 06 2018

In A&J Capital, Inc. v. Law Office of Krug, C.A. No. 2018-0240-JRS (July 18, 2018), A&J Capital, Inc. (“A&J”) sought a declaratory judgment that it was improperly removed from its position as manager of LA Metropolis Condo, I LLC (the “Company”) because it was not given notice or an opportunity to be heard prior to removal. Vice Chancellor Slights denied A&J’s motion for summary judgment, holding that A&J’s removal was proper under both the Company’s governing documents and common law.

A&J was the designated Class B manager of the Company pursuant to the Company’s Operating Agreement and the Managing Agreement by and among the Company, A&J, and other members (collectively, the “Agreements”). The Operating Agreement gave the Class B Members the “sole and exclusive right” to remove the manager for “gross negligence, intentional misconduct, fraud, or deceit.” The Management Agreement provided that the manager could be removed by a majority vote and that the manager would then receive a written notice of termination.

A&J received a notice of removal on March 14, 2018 that was silent as to the reason for removal. Prior to receiving that notice, A&J did not receive any notice of an alleged default or of an intent to hold a vote to remove it as manager. A&J brought suit, alleging that its removal without notice was improper under both the Agreements and Delaware common law.

Chancellor Slights denied A&J’s motion for judgment, finding that the removal was permissible under both the Agreements and common law. In reviewing the Agreements first, he held that a right to pre-removal notice was neither express nor implied. He pointed to the fact that notice was explicitly required after removal but was silent about notice beforehand as an indication that the parties did not intend to require pre-notice removal. Further, he noted that when business entities want to provide such procedures, they do so expressly.

Chancellor Slights also found that a right to pre-notice removal was not required under common law. He first noted that Delaware law on limited liability companies is “contractarian,” pointing to Section 18-1101(b) of the Limited Liability Act (“LLC Act”), which states that “it is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” Thus, unlike corporations, limited liability companies derive their structure almost entirely through their operating agreements, not common law or statute. This “statutory freedom” is an integral part of their appeal. Chancellor Slights therefore rejected A&J’s argument that Section 18-1104 of the LLC Act, which provides that “the rules of law and equity” govern matters not addressed in the LLC Act, “supplanted the primacy” of LLC agreements and Section 18-1101(b).

Chancellor Slights conceded that courts had sometimes borrowed from corporate law principles when interpreting an LLC agreement including, for example, when the parties had adopted traditional corporate elements in the agreement. Here, by contrast, he viewed the Company as “expressly uncorporate” in its structure so there was no reason to look to common law.

A and J Capital Inc. v. Law Office of Krug letter opinion 180718