An Eckert Seamans associate prepared this overview.
In IMO Dissolution of Arctic Ease, C.A. No. 8932-VCMR (Dec. 9, 2016), the Chancery Court rejected personal jurisdiction under Delaware’s Limited Liability Company Act and the conspiracy theory of jurisdiction. The Court provides helpful guidance on when someone can be considered an LLC manager for purposes of personal jurisdiction in Delaware.
Background: In this dissolution action, members of a Delaware limited liability company filed third-party complaints against certain individuals, alleging breach of fiduciary duty, fraud, misrepresentation, and other related claims.
There were multiple parties involved in the action. Summetria, LLC (“Summetria”) was the 100 percent owner of Arctic Ease, LLC (“Arctic Ease”). A group of entities referred to by the Court as the “Forden Entities,” owned sixty percent of Summetria. Summetria’s remaining ownership was split evenly between a group of individuals referred to by the Court as the “Heck Parties,” and Costar Partners, LLC (“Costar”). William Cohen and Mitchel Weinberger were the only members of Costar. Pursuant to Summetria’s LLC Agreement, Carol Forden was the only member of Summetria.
On September 20, 2013, the Forden Entities filed a petition seeking dissolution of Arctic Ease and Summetria. Together with the Heck Parties, they also asserted third-party claims against Cohen, Weinberger, Costar, and Gawi, LLC, a company involved in the purchase of Arctic Ease and Summetria (the “Cohen Parties”).
Parties’ Allegations: The Cohen Parties moved to dismiss for lack of personal jurisdiction and failure to state a claim upon which relief could be granted. The Forden Entities and the Heck Parties opposed the motion, arguing that jurisdiction existed under the Delaware Limited Liability Company Act (the “LLC Act”) and the Delaware long arm statute through the conspiracy theory of jurisdiction. The LLC Act provides for jurisdiction over LLC managers. The conspiracy theory of jurisdiction allows for jurisdiction over an out of state defendant if the plaintiff can show that: (1) a conspiracy to defraud existed; (2) the defendant was a member of the conspiracy; (3) a substantial act or effect of the conspiracy occurred in the forum; (4) the defendant had reason to know of the act; and (5) the act was a direct and foreseeable result of the conduct in furtherance of the conspiracy.
Specifically, the Forden Entities argued that Cohen was a manager of Summetria pursuant to the LLC Act because he was an original member of the board of directors who possessed voting power. The Forden Entities and Heck Parties together asserted that there was jurisdiction over the remaining Cohen Parties under the conspiracy theory of jurisdiction.
Court’s Analysis: The Court granted the motion to dismiss, finding that it lacked personal jurisdiction over Cohen and the Cohen Parties.
The Court determined that it did not have jurisdiction over Cohen pursuant to the LLC Act, as he was not a manager of Summetria under § 18-109 of the LLC Act. The Summetria LLC Agreement made clear that Forden was the sole manager of the company. The LLC Agreement further provided that a board position did not grant membership authority to an individual. Moreover, Cohen did not control Summetria or have a decision-making role within the company under the LLC Act, even though he was involved in important financial negotiations for Summetria. In accordance with prior precedent, Cohen’s power was limited to Forden’s decision-making authority, and thus, he did not materially participate in Summetria’s management. Therefore, Cohen was not a manager pursuant to the LLC Act for purposes of finding personal jurisdiction over him.
Additionally, the Court did not have jurisdiction over Cohen under Delaware’s long arm statute because the Forden Entities alleged no facts regarding any act Cohen committed in Delaware, nor any business Cohen transacted in Delaware, either personally or through his agents. Cohen’s only connection with Delaware was his indirect ownership interest in Summetria through Costar. Therefore, neither the long arm statute nor the LLC Act provided a basis for jurisdiction over Cohen.
The Court also determined that there were no facts regarding the remaining Cohen Parties’ contacts with Delaware. The Forden Entities did not allege that Weinberger managed a Delaware entity, and there was no basis to assert jurisdiction under the conspiracy theory of jurisdiction. The Court explained that personal jurisdiction by conspiracy is not an independent basis for jurisdiction, but instead relies on the agency relationship inherent in a conspiracy and a proper jurisdictional hook for at least one conspirator. Because neither Cohen nor any of the Cohen Parties were subject to the Court’s personal jurisdiction, the Complaint did not adequately allege jurisdiction over the Cohen Parties under the conspiracy theory of jurisdiction.
Conclusion: The Court granted the motion to dismiss the Forden Entities’ and the Heck Parties’ third-party complaints for lack of personal jurisdiction. The motion to dismiss for failure to state a claim was rendered moot.