Manager is Entitled to Books and Records in Capacity as Manager, and as a Member Under the LLC Agreement, Despite Assertion of Improper Purpose

By: Scott E. Waxman and Douglas A. Logan

In William T. Obeid v. Gemini Real Estate Advisors, LLC, et al., (C.A. No. 2017-0510-JTL (Del. Ch. June 5, 2018)) the Court ruled the manager of a limited liability company had an essentially unfettered right to access the books and records of the company.

William Obeid (the “Plaintiff”), along with Christopher La Mack and Dante Massaro, was a member of Gemini Real Estate Advisors (the “Company” and along with Gemini Equity Partners, LLC, the “Defendants”). Each member had a 33.33% percent interest in the Company. The Plaintiff was also the Operating Manager of the Company. Through special purpose entities and fund vehicles, the Company acquired, developed, financed, and operated commercial varying real estate investments. The Company, a Delaware limited liability company, was governed by its Amended and Restated Limited Liability Company Agreement (the “Company LLC Agreement”).

On July 1, 2014, La Mack and Massaro voted to remove the Plaintiff as the Company’s Operating Manager. On the same day, La Mack and Massaro sued the Plaintiff in North Carolina state court. Later in that month, La Mack and Massaro terminated the Plaintiff’s access to the books and records of the Company despite the Plaintiff’s prior request for such books and records. Plaintiff then filed an action to obtain the books and records.

Defendants asserted that the Plaintiff had an improper purpose underlying his request for books and records because he had historically interfered with the Company’s operations and the sale of some of its assets. Defendants also asserted the Plaintiff installed improper computer monitoring software on the Company computers in furtherance of unrelated litigation between the parties. Finally, the Defendants argued that the Plaintiff had already received all the information necessary for him to discharge his duties. The Court disagreed with all of the Defendants’ arguments.

The Court ruled that the Plaintiff was entitled to access to the Company’s books and records in his capacity as a manager of the Company, under the Delaware Limited Liability Company Act. The Court stated that each “manager shall have the right to examine all of the information described in subsection (a) of this section for a purpose reasonably related to the position of manager.” Further, the court ruled that “[t]he rights of directors to access the corporate books and records are recognized by Delaware law as of fundamental importance and a necessary concomitant to the imposition upon directors of fiduciary duties.” Due to the presumption of a manager having access to the books and records of the company, the Defendants would have to show that the Plaintiff’s demand to inspect books and records in his official capacity as a manager was motivated by an improper purpose, and while alleged by the Defendants, the Court ruled Plaintiff’s actions did not rise to the level of improper. The actions asserted by the Defendants did not satisfy the heavy burden carried by the Defendants. The Court compared the right of a manager to that of director of a corporation, stating that a director’s right of access to the books and records is “essentially unfettered in nature.”

The Court also ruled that the Plaintiff was entitled to books and records under the Company LLC Agreement. The Company LLC Agreement stated, “All of the records and books of account of the Company, in whatever form maintained … shall be open to the inspection and examination of the Members or their representatives during reasonable business hours.” Because the Plaintiff was a member of the Company, he had the right to inspect the records and books of the Company during reasonable business hours. Finally, the Court withheld determination of whether Plaintiff had a statutory right as member to access the books and records of the Company because the Plaintiff had a statutory right as the manager, and a contractual right as a member under the Company LLC Agreement.

William T. Obeid v. Gemini Real Estate Advisors, LLC, et al., post-trial ruling 180605