In Eureka VIII, LLC v. Niagra Falls Holdings, LLC, download file, the Delaware Chancery Court recently ruled that as a remedy for the material breach of the Operating Agreement by a 50% member of an LLC, that member would lose its status as a member, thereby leaving the other 50% member as the sole member of the LLC. The breaching member, Niagra, would be left with the rights of an assignee under Section 18-1002 of the Delaware LLC Act which, in essence, means that despite not having the benefits of “membership” Niagra would retain its economic interest in profits, losses and distribution rights. Without voting rights, for example, the breaching member, Niagra, is left with an assignable interest in the LLC for dividend distributions and future sale proceeds.
The court reasoned that the remedy was appropriate in part because the breach created the exact problem that the LLC Agreement was designed to avoid. That is, due to financial problems, Niagra allowed a creditor to take control of it, and thus the remaining LLC member, Eureka, now found itself with a de facto partner that it never agreed to do business with and who had a very different objective, i.e., to cash-out its interests as fast as possible.
Likewise the court denied a counterclaim of Niagra for dissolution of the LLC based on allegations of incompatibility of 2 members owning 50% of an LLC, because the remedy left the LLC with only one member. Niagra also tried to assert a breach claim itself against Eureka but the court found that Niagra materially breached prior to any alleged breach by Eureka, thereby barring a counterclaim for specific performance (in addition to laches barring Niagra).
This case is a good illustration of the wide range of authority and flexibility that the Chancery Court has to customize equitable relief that fits the unique or special factual circumstances of each case that comes before it, in business litigation or otherwise.
Also noteworthy about this decision is a discussion at page 25 of the slip opinion and at footnotes 26 and 27, regarding those circumstances in which an oral waiver might prevail despite an express requirement in an agreement that any waivers must be written in order to be effective. Yes, it is possible and the opinion provides the policy reasons for such a result, in certain situations.
For comparison, see the recent decision, summarized here, by the same Vice Chancellor in which he used a similar remedy and removed from a management position the 90% owner and general partner of a limited partnership due to egregious breaches of fiduciary duties.