Delaware Corporate and Commercial Litigation Blog : Delaware Litigation Lawyer & Attorney : Francis G. X. Pileggi : Corporate, Business, Commercial, Delaware Chancery Court

Harris v. RHH Partners, LP, et al., No. 1198-VCN, (Del. Ch., January 27, 2010), read letter decision here. A prior decision in this case by the Delaware Court of Chancery was highlighted here.

Why This Short Ruling is Noteworthy

This decision in noteworthy because it applies a statute that, comparatively speaking, does not enjoy a copious body of case law interpreting it. The statute in question is the dissolution statute for LPs, Section 17-802 of Title 6 of the Delaware Code. Decisions interpreting this dissolution statute have also been applied by analogy to the counterpart statute in the Delaware LLC Act, Section 18-802. These statutes allow for one to petition to dissolve an LP or an LLC when: "it is not reasonably practicable to carry on the business in conformity with the partnership [or LLC] agreement."

Background

This case involved two parties who owned an LP, called RHH Partners, that in turn owned the personal residence of the sole limited partner who owned 99% of the LP. The remaining 1% was owned by a former friend who was also the general partner. Harris, the 99% owner and general partner, was a New York lawyer by training and appeared in this case pro se, as did the general partner.

Court's Reasoning

Despite a general purpose clause authorizing the LP to operate "for all lawful purposes", the Court  found after hearing testimony that the purpose of the LP "was not entirely clear" though it likely evolved over time. The Court concluded that: "its purpose, however ill-defined, ceased to exist", and therefore, based on Section 17-802, the court held that "it is not reasonably practicable for RHH to carry on the business in conformity with the partnership agreement."

Moreover, the Court reasoned that: (i) leaving the two partners "in any kind of business relationship would serve no useful purpose"; and (ii) there is no apparent purpose for the LP; and (iii) using the LP as a vehicle to own Harris' residence "has no cognizable relationship to any business purpose for which RHH might exist."

Winding-up

Ordering dissolution did not end the discussion. For the winding-up aspect of the case, the Court divided ownership of the sole asset of the LP, the personal residence of Harris, in the same proportion as the two men owned the LP. Thus, Harris received a "99 % fee simple interest " in the real estate, and the other partner received a "1% undivided fee simple interest". The Court noted that before distribution of the assets could be made, Section 17-804 required that creditors be paid.

Postscript

Notwithstanding the unusual procedural aspect of both parties appearing pro se, thus resulting in a less developed factual record and fewer formal legal arguments presented, the issue the Court addressed is sufficiently important, and the case law on the dissolution statute sufficiently meager--by comparison to many corporate statutes for example, that this ruling merited a quick overview.

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In re: 14 Realty Corp., No. 20129-VCS (Del. Ch., August 5, 2009),  read opinion here.

This 30-page letter decision reviews de novo the determinations of a Trustee who was appointed to oversee the winding-up of a corporation.

Overview

This litigation began as a dissolution proceeding pursuant to DGCL Section 273 due to the sibling owners being deadlocked. The court granted dissolution and appointed a trustee to windup the affairs of the dissolving company and pursuant to that appointment signed an Order that set forth the powers and duties of the trustee in connection with winding up the affairs of the dissolving company.

Summary of Decision

The court reviewed the objections to the determinations of the trustee based on a de novo standard. However, in footnote 3, the court described that choice of a standard of review as follows: “This was a regrettable choice of review standard and not one I will sanction in my future orders. As this case amply demonstrates, de novo review of the determinations of a skilled and experienced trustee is duplicative and wasteful of judicial resources and parties’ time and money. Were the standard of review closer to a business judgment standard - - as it should have been - - this motion could have been decided far more expeditiously and efficiently on the basis of the trustee’s well reasoned determinations.” The trustee appointed in this matter was a retired Delaware Supreme Court Justice.

The court reviews the extensive factual background as part of its decision, but those detailed and extensive facts are beyond the scope of this short blog summary.

The point of this case, in which the court affirmed the determinations of a trustee appointed to oversee the winding up of a dissolved corporation, is that one should be careful to provide for a standard of review for a trustee’s determination in a dissolution matter that is "closer to a business judgment standard" in order to avoid what the court described in this opinion as a duplicative and wasteful review process by the court.
 

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In Re Nextmedia Investors, LLC, Del. Ch., No. 4067-VCS (May 6, 2009), read opinion here.

This Delaware Chancery Court opinion includes instructive recitations of Delaware law on a topic of relevance to all those who labor in the field of business litigation. A key focus in this case was to address in what situation it is appropriate for a court to grant summary judgment regarding the interpretation of a contract, and the corollary standards to determine in what circumstances:  “the plain language of the relevant terms of the LLC Agreement gives rise to only one reasonable meaning . . .”

The central issue in this case turned on whether the consent of the petitioners was needed in order to amend the LLC Agreement to extend the date of the dissolution that was provided for in the original LLC Agreement.  The court ruled that the agreement was unambiguous that such consent was required. However, the LLC Agreement granted certain parties authority to appoint a liquidating trustee and the court determined that it would have to wait until after full discovery and a trial,  before the court could determine that there was a sufficient basis to prevent the appointment of a liquidator pursuant to the agreement of the parties, which altered the default rule for the appointment of a liquidating trustee pursuant to Section 18-803 of the Delaware Limited Liability Company Act (at Title 6 of the Delaware Code).
 

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In Re: Arrow Investment Advisors, LLC, Del. Ch., No. 4091-VCS (April 23, 2009), read opinion here.

This Chancery Court decision dismissed a petition seeking a dissolution of an LLC pursuant to Section 18-802 of the Delaware LLC Act. Although each year brings more case law interpreting this statute, there is still a comparative paucity of decisions interpreting this section of the LLC Act; thus, this ruling is helpful for purposes of determining when the court will grant a judicial dissolution under the applicable statutory standard.

Prerequisites for Seeking Judicial Dissolution of an LLC

Section 18-802 gives the court the discretion to order judicial dissolution of an LLC  when one demonstrates that: "it is not reasonably practicable to carry on the business in conformity with [the]limited liability agreement." This opinion collects and discusses the Delaware decisions that have discussed this statutory dissolution standard (which reasonable people can easily differ about regarding its application.) See footnotes 10,12,13,14,15, 20, 23, 24 and 28.

Anyone who is involved in the analysis of whether a Delaware LLC can be judicially dissolved  upon the request of only one member or manager, needs to read this decision. In essence, the court reasoned, in part,  that although the member seeking dissolution:

...might be disappointed that he has been ousted from the management of the company, disagree with the tack its current managers are taking, and wish to take his capital out of the company, these are not circumstances from which I can reasonably infer that it has become impracticable for Arrow to provide a return for its investors....

Reasoning for Denying Dissolution

In sum, at the risk of oversimplifying the extensive factual and legal analysis that the opinion provides, the request for dissolution was rejected, and the motion to dismiss the petition was granted, because the LLC agreement had a very broad "purpose clause" that  the LLC was still operating within, and it was not enough that the original business plan was not being followed, nor that the minority member was unhappy with the management or direction of the company.

Even with a broad purpose clause, however, in theory the court explained that dissolution is still possible if it can be established that perpetuation of the entity would be "obviously futile and would not result in business success." (See, e.g., case cited in footnote 20)

Procedurally, the court also observed that asserting claims for breach of fiduciary duty as part of  the petition for dissolution in this case did not strengthen the arguments for dissolution. Moreover, the petitioner did not follow the derivative procedures required for the fiduciary claims that were made. Lastly, as a procedural matter, dissolution proceedings are narrow in scope and usually do not include ancillary claims. See footnote 28.

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In Re Seneca Investments LLC, 2008 WL 4329230 (Del. Ch., Sept. 23, 2008), read opinion here. The Chancery Court in this opinion, on a motion for judgment on the pleadings under Rule 12(c), "puts meat on the bones" of Section 18-802 of the Delaware LLC Act, which is the provision that allows a member of an LLC to petition for dissolution when it "is not reasonably practicable [as compared to practical ] to carry on the business in conformity with the Operating Agreement".

There are precious few Delaware decisions interpreting this statute, so court decisions such as this "can be manna from heaven" for those of us who toil in the fields with these statutes as our tools. I say that they merely can be such, because depending on what argument one needs to make, one is "stuck" with the relatively few opinions to pick from, relative to the copious opinions available on interpretations of the DGCL. Enough pontificating.  Here are some highlights of the court's opinion:

• The non-moving party in a motion for judgment on the pleadings pursuant to Rule 12(c) is entitled to the same benefits as the non-moving party in a motion under Rule 12(b)(6).
• Cases interpreting an analogous and almost identical provision in the L.P. statute were relied on by the court to interpret Section 18-802 of the Delaware LLC Act as allowing dissolution in the following two circumstances:

• when there is a deadlock that prevents the entity from operating; or

• "where the defined purpose of the entity was fulfilled or impossible to carry out" (citations omitted).

• There was no allegation here of deadlock, so in order to determine whether it "was reasonably practicable to carry out the business purpose of the entity", the court looked to the purpose clause of the governing instruments.

• As is often the case, the purpose clause here allowed the entity to be operated for any "proper purpose", making it very difficult to satisfy the "second option" above.

• The court cited to other opinions to support its finding that even if an entity serves no other purpose than that of a passive instrumentality to hold investments, such a purpose is both permissible and commonly utilized.

Curiously,  the LLC involved here chose to have its operations governed by the DGCL as opposed to the Delaware LLC Act, which the court found to be quite allowable. Thus, DGCL Section 226(a)(3) was also analyzed.

DGCL Section 226(a)(3) allows the court to appoint a receiver or a custodian for a corporation when: "the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets".

Importantly, however, the court reasoned that the threshold under that section was not triggered under the facts of this case because Delaware law does not require an entity to do any of the following:

1. have a business plan;
2. hire employees;
3. make investments; or
4. seek to find a buyer

Rather, the court held that as a passive investment company, it was enough that the entity was pursuing counterclaims in this dissolution action, which the court held to be an "acceptable and legitimate business activity." ( I can't help but make the obvious observation that validating such a business purpose is good for such an entity's lawyers. Of course, that's not a bad thing ,as it is one of the things that helps me to put food on my family's table.)

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