Thor Merritt Square, LLC v. Bayview Malls, LLC, C.A. No. 4480-VCP (Del. Ch. March 5, 2010), read opinion here.
In this decision, the Court of Chancery allowed a claim to proceed for nullification of a Certificate of Cancellation of the Certificate of Formation of the entity involved, due to pending unresolved liabilities and a failure to provide for adequate reserves for those known liabilities.
This case arises out of the alleged failure of one party to a purchase and sale agreement for a shopping center, to perform or pay for work required under that agreement. Two of the defendants were sellers of the shopping center. The agreement required separate entities referred to as "Bayview Malls" and “Holdings” to perform certain work to bring stores into compliance with the applicable fire code. However, despite Bayview Malls and Holdings never performing the work and refusing to pay for the work when it eventually was performed by the plaintiffs, both Bayview Malls and Holdings terminated their existence without ever paying for, or making reasonable provision for payment of, the required work.
Plaintiffs sued parties described as “defendants John Doe 1-22, as managers and members of Bayview Malls and Holdings.” Although the Court did not decide the issue, the plaintiff withdrew its claim against John Doe defendants in connection with an argument no such procedure was permissible in Delaware.
On a procedural level, the Court denied the Motion to Dismiss or in the alternative for Stay of the claim for nullification of a Certificate of Cancellation.
Defendants’ position on the request for nullification was based on three grounds: (1) The provision for unmatured contract claims was made by putting funds in escrow and that was sufficient for Section 18-804(b) of Title 6 of the Delaware Code; (2) Reviving the dissolved entities would be futile because they had no assets and would file for bankruptcy; and (3) The nullification claim should be barred by the analogous statute of limitations.
The Court reviewed the familiar standard under Rule 12(b)(6) for a Motion to Dismiss and then recited the requirements under Section 18-804(b) of the Delaware LLC Act which mandate that a reasonable provision be made for unmatured contractual claims. Specifically, that section provides in relevant part as follows: “A limited liability company which has dissolved: (1) Shall pay or make reasonable provision to pay all claims and obligations, including all contingent, conditional or unmatured contractual claims, known to the limited liability company.”
The Delaware LLC Act requires a dissolving LLC to make reasonable provision for the payment of unmatured contractual claims before filing its Certificate of Cancellation. See footnote 17 which also notes that Section 18-804(b)(3) requires a dissolving LLC to make provision not only for known liabilities but also for liabilities that “have not arisen but that, based on facts known to the limited liability company, are likely to arise or to become known to the limited liability company within ten years after the date of the dissolution.”
Based on the liberal Motion to Dismiss review standard, the Court was required to accept as true the allegations in the complaint that would support an inference that the defendants failed to make reasonable provision for unmatured claims. Moreover, assertions to the contrary were merely evidence of the existence of genuine issues of material fact as to reasonable provisions being made and those issues of fact could not be determined on a Motion to Dismiss.
The Court rejected the argument that a dissolved entity could not be sued after its Certificate of Cancellation became effective. The Court cited to prior decisions which held that Section 18-803(b) does not require dismissal of a complaint that seeks nullification on the ground that an LLC failed to wind-up in compliance with the LLC Act. See footnote 18 (citing Metro Communications Corp. BVI v. Advanced MobileComm Techs. Inc., 854 A.2d 121, 138-39 (Del. Ch. Apr. 30, 2004)).
In addition, the Court rejected the arguments of defendants on procedural grounds because the arguments were not included in their opening brief. See Ct. Ch. R. 7(b) and 171. See also footnotes 20 to 22.
In addition, the Court rejected the argument that the likelihood of filing for bankruptcy if the nullification claim prevailed would make the effort futile, because the nullification of the cancellation would still facilitate, for example, the ability of the plaintiffs to pursue their related efforts to pierce the corporate veil of the dissolved entities.
In sum, the Court allowed to proceed the claim to nullify the cancellation of the Certificate of Formation of the entities that failed to make adequate reserves for claims against them.