Olson v. Halverson, No. 338, 2009 (Del. Supr., Dec. 15, 2009), read opinion here, is a decision of the Delaware Supreme Court issued this week which affirmed a Delaware Chancery Court decision that applied the statute of frauds to an oral LLC agreement. The Chancery Court decision was highlighted on this blog here. A separate post-trial decision by the Chancery Court was summarized on this blog here.
LLC Expert Professor Larry Ribstein has already provided a scholarly analysis here, which I recommend for its insights into the key issues and policy underpinnings addressed by the Court.
The Chancery Court determined that because the oral agreement at issue could not be performed within one year, the statute of frauds prevented its enforcement. See Section 2714(a) of Title 6 of the Delaware Code.
The Supreme Court also affirmed the Chancery Court’s ruling that due to a contrary written agreement among the parties, Olson was not entitled to the fair value of his interest pursuant to Section 18-604 of the LLC Act.
Delaware’s High Court recognized that the Delaware LLC Act gives maximum effect to the principle of freedom of contract and towards that end, the LLC Act allows "written, oral or implied LLC agreements." See footnotes 23 and 24 (citing Sections 18-1101(b) and 18-101(7) of the LLC Act.) Moreover, an LLC will be bound by its operating agreement even if it did not execute the agreement. See Section 18-101(7).
The Court’s careful reasoning and statutory interpretation concluded that the LLC Act and the statute of frauds can be construed harmoniously together. The Court added that the statute of frauds does not contravene the legislative policy of giving maximum effect to LLC agreements, and there was no intent on the part of the General Assembly to remove LLC agreements from the reach of the statute of frauds. Instead, Delaware’s legislature expressed its intent to allow different types of contracts. The LLC statute does not exclude the applicability of general contract principles for LLC agreements. The Court’s opinion is only 27-pages long and deserves to be read in its entirety to fully appreciate its rationale.