A&J Capital, Inc. v. Law Office of Krug, C.A. No. 2018-0240-JRS (Del. Ch. July 18, 2018) (Slights, V.C.)

In this opinion, the Court of Chancery held that the common law does not alter or amend an LLC’s operating agreement with respect to “for cause” removal procedures.  At issue before the Court was plaintiff A&J Capital, Inc.’s (“A&J”) motion for summary judgment in which A&J sought a declaratory judgment that it was improperly removed as manager of LA Metropolis Condo I, LLC (“LAMC”), a Delaware LLC.  Prior to the suit, a majority of LAMC’s members purported to remove A&J as manager “for cause.”  In its motion for summary judgment, A&J argued that, prior to removal, as a matter of contract or as a matter of Delaware common law, the members of LAMC were required to provide A&J with: (1) a notice of their intent to remove A&J that contained an explanation of the grounds for removal, and (2) an opportunity to respond to the notice.

A&J is a California corporation and was the designated Class B Manager pursuant to the LAMC operating agreement.  LAMC’s operating agreement and management agreement included three removal provisions that empowered Class B members of LAMC: to remove any manager by majority vote; to remove the manager for gross negligence, intentional misconduct, fraud, or deceit; and to appoint a new Class B manager and to cause LAMC to issue written notice of termination to the former Class B manager after its removal.  In the litigation, neither party disputed that the agreements require the removal of the Class B Manager “for cause.”

On March 14, 2018, A&J received a letter notifying it that a majority of the Class B Members had voted to remove A&J as the Class B Manager and had appointed the Law Office of Krug as the interim Class B Manager.  Although the letter stated that a majority of the Class B Members had voted in writing to remove A&J as Class B Manager, it gave no explanation for why A&J was removed. 

After analyzing the language in the governing agreements, the Court determined that the agreements did not contemplate giving the Class B Manager notice and an opportunity to be heard prior to removal.  In the absence of express provisions in the agreements for such protections, the Court refused to infer them or rewrite the contracts to include them.

The Court also dismissed A&J’s alternative argument that the procedural protections arose from common law, as it is informed by Delaware corporation law.  Referring to the contractarian quality of Delaware limited liability companies, the Court refused to graft common law on to agreements that reflected the parties’ bargained-for objectives.  While the Court acknowledged that it had previously looked to corporation law when assessing the extent to which a managing member owes common law fiduciary duties when the entity’s operating agreements are not clearly defined, it would not extend this practice to rewrite clearly written procedures in an operating agreement.  Furthermore, the Court rejected A&J’s argument that 6 Del. C. § 18-1104 provides that the contractarian view of limited liability companies in some instances gives way to the common law.  In the Court’s view, this construction read too much into 6 Del. C. § 18-1104, and was at odds with the Delaware’s established pro-contractarian policy in the alternative entity space.

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