Olson v. Halvorsen, No. 1884-VCL (Del. Ch., May 13, 2009), read opinion here

Two prior Delaware Chancery Court opinions in this case were previously summarized here.

This most recent iteration of a bitter dispute between three co-founders of a hedge fund addressed whether a departing member of an LLC was only entitled to the limited amount of compensation covered by an oral agreement among the members, which excluded any deferred compensation. The court found that the departing member was bound by the oral agreement and was therefore not entitled to an equity interest that may otherwise have been available under the LLC Act. Other claims were also raised and rejected as listed below.

Legal Issues Addressed by the Court

The panoply of legal issues addressed by the court included: (i) breach of contract; (ii) breach of fiduciary duty; (iii) civil conspiracy; (iv) right to fair value of departing LLC member per Section 18-604 of the Delaware LLC Act; (v) unjust enrichment; (vi) accounting; (vii) equitable estoppel;  and (viii) promissory estoppel.

Legal Analysis

The court discusses each of the elements of each of the above claims, and why each of them was found wanting, but I will only focus on a few notable points in this summary.

One of the prior decisions in this case linked above made the important legal ruling that an oral operating agreement for an LLC is enforceable, as here, if “…it is possible that it could be completed in the span of one year.” (see footnote 31 in the instant case)(emphasis in original).

The court cited to Section 18-1101(a) of the LLC Act for the principle that there can be no liability of an LLC manager for breach of fiduciary duty based on a good faith reliance on an operating agreement. In this case, that section was applied to the oral operating agreement of the parties to reject the fiduciary duty claims. The court also held that the departing member was limited by the oral agreement to his accrued compensation as opposed to “fair value” that he may have sought, in the absence of a contrary agreement, pursuant to Section 18-604 of of Title 6 of the Delaware Code (the Delaware LLC Act).