Delaware Chancery Court Finds Limited Liability Companies Can Be Liable For Advancement To Members, Even Under Delaware Corporate Law
On April 30, 2019, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery held that plaintiff Freeman Family LLC (“Freeman”), a member of Park Avenue Landing LLC (the “Company”), is entitled to advancement pursuant to Delaware corporate case law. Freeman Family LLC v. Park Avenue Landing LLC, No. C.A. 2018-0683 (Del. Ch. April 30, 2019). In January 2017, plaintiff was sued by the Company’s managing member in the United States District Court for the District of New Jersey (the “New Jersey action”). Thereafter, plaintiff argued the Company must provide advancement of legal fees arising from the New Jersey action because its operating agreement provides that all members shall receive advancement if they are made party to an action as a result of their status as a member. In granting plaintiff’s motion for judgment on the pleadings, the Court first found that Delaware corporate case law applied “by analogy” because the advancement provision in the Company’s operating agreement incorporated language from the Delaware General Corporation Law, 8 Del. C. § 145. However, the Court found that plaintiff was nevertheless entitled to advancement because a “causal relationship” existed between the New Jersey action and plaintiff’s official capacity as manager.
The Court first assessed whether the operating agreement should be governed by principles of contract interpretation—as is typical in the Delaware limited liability company context—or Delaware corporate case law. The Court analyzed several Delaware cases involving similar questions of operating agreement interpretation, concluding that the cases “show that parties are free to contract into corporate case law (or not) when they create LLCs, and courts will respect that choice.” Pursuant to this rule, Court reasoned that the “logical conclusion” for why the parties decided to incorporate language that mirrors 8 Del. C. § 145 is that they sought to “import a predictable and well-defined rule from corporate statutory and case law.”
Having found that 8 Del. C. § 145 case law applied, the Court then assessed whether the operating agreement obligated the Company to pay plaintiff advancement. The Court found that plaintiff was entitled to advancement because there was a “causal relationship between [plaintiff’s] official capacity and the lawsuit.” According to the operating agreement, plaintiff was responsible for negotiating a property exchange on the Company’s behalf and finding reputable real estate developers to assist the Company in developing the property to be exchanged. Thus, because the New Jersey action arose as a direct result of plaintiff’s purported failure to carry out these responsibilities, the Court found that the dispute “fully implicates” whether plaintiff carried out its official duties.