Chancery Explains In Rem Jurisdiction in Challenge to Managing Member Position of LLC

Feeley v. NHAOCG, LLC, C.A. No. 7304-VCL (Del. Ch. March 20, 2012).

Issue Presented

When a managing member of an LLC is “jurisdictionally present” in Delaware, is that party also subject to the jurisdiction of the Delaware Court of Chancery on other related claims as well.

Answer: Yes

Background

This Delaware Court of Chancery opinion involves the challenge to the purported removal of a managing member of an LLC.  A motion to dismiss for lack of personal jurisdiction was filed pursuant to Court of Chancery Rule 12(b)(2).  Although this relatively short 15-page decision describes the multiple parties involved in the affiliated entities, for purposes of highlighting the key legal points addressed in this opinion, it suffices to describe the core facts as involving warring factions whose imbroglio reached a crescendo when one member of an LLC purported to remove the managing member in a manner that was allegedly at odds with the procedures required in the applicable operating agreement.  That member, “NHA,” after purporting to remove the original managing member, represented to many third parties that it was acting as the new managing member of the LLC.

This suit was filed to seek a temporary restraining order against the removal of the original managing member.  In addition to the claim seeking to determine the validity of the purported removal of the managing member, the Court explained that:  “not content with this straight-forward count, the plaintiffs added ten more.”  Two days after this complaint was filed, the Court imposed a status quo order pending resolution of the control dispute.  The next day, the defendants moved to dismiss the complaint for lack of personal jurisdiction.

Legal Analysis

The Court emphasized that the valid exercise of personal jurisdiction turns on the implied consent provisions of the Delaware LLC Act in part because the operating agreement did not have a forum selection clause.

Section 18-110 of the LLC Act grants the Court of Chancery in rem jurisdiction to determine who validly holds office as a manager of a Delaware limited liability company.  This is comparable to the corporate analog at Section 225 of the Delaware General Corporation Law.  In such a proceeding, the defendants appear before the Court “not individually, but rather, as respondents being invited to litigate their claims to the res (here, the disputed corporate office) or forever be barred from doing so.” 

The key point emphasized by the Court is that because a Section 18-110 proceeding affects the Delaware LLC and the office of the managing member, it is not necessary for all claimants to the office to be subject to the Court’s in personam jurisdiction in order for the Court to make an authoritative determination.

The Court also explained that even though it is necessary under both the statute and the constitution to take reasonable steps to notify claimants to the office of the judicial proceedings and that they have an opportunity to be heard, a plaintiff “need not name every known claimant to the office as a party defendant in order to ensure that the party receives actual notice of the claim and that the adjudication is binding.  Nevertheless, it is prudent to do so.”

The Court underscored the point that even if a claimant is not personally subject to the jurisdiction of the Court, they must realize that “their failure to participate in this adjudication will not foreclose the authoritative adjudication in this proceeding of that claim of title.”  See Haft v. Dart Group Corp., 1996 WL 255899, at *2 (Del. Ch. Apr. 26, 1996) (interpreting 8 Del. C. Section 225).

The Court also discussed Section 18-109 of the LLC Act which is an implied consent statute that empowers the Court to exercise personal jurisdiction over persons who serve as managers of an LLC for purposes of adjudicating claims for breaches of duty in that capacity-involving and relating to the business of the LLC.  In addition, the Court reasoned that Section 18-109(a) is satisfied even if one merely purports to act as the managing member of an LLC, as was true in this case.  Service of a complaint under Section 18-109 will be consistent with due process when the action relates to a violation by the manager of a fiduciary duty owed to the limited liability company.  This jurisdictional scope extends, consistent with due process, to include alleged violations by a manager of the express and implied contractual duties owed by the manager under the limited liability company agreement.

Personal Jurisdiction over other Defendants in Addition to Managing Member

The Court discussed the seminal decision of In Re USACafes, L.P. Litig., 600 A.2d 43, 53 (Del. Ch. 1991).  In that case, the Court allowed personal jurisdiction over individuals who control an entity that acts as a fiduciary, for example such as the control that a board of directors exercises over a corporate general partner of a limited partnership.  As an alternative to the jurisdiction based on an analysis used in the USACafes case, the Court referred on page 14 to the caselaw that allows the imposition of jurisdiction over those who have “personally participated in the choice to invoke the laws of the state that govern the internal affairs of the disputed entities and the contractual duties running among the members.”

Related Claims

The Court reasoned that once a defendant is subject to personal jurisdiction under Section 18-109 as to certain claims, the Court may exercise personal jurisdiction over the defendant with respect to other sufficiently related claims.  The Court referred to other cases by analogy that implied similar reasoning to corporate directors who are nonresidents based on the statutory analysis in Section 3114.