A recent Delaware Court of Chancery opinion is notable for its post-trial analysis, based on a summary proceeding, of who the rightful manager of an LLC was. The court also shifted attorneys’ fees based on the bad faith exception. Ensing v. Ensing, C.A. No. 12591-VCS (Del. Ch. March 6, 2017)

Background: The introduction to the opinion begins with the idyllic observation of a couple who “made the dream of many a reality: they acquired a picturesque vineyard in Italy and moved there with their two children to operate a winery and boutique hotel on the property.”  The businesses operated indirectly through two Delaware limited liability companies.  The wife was both sole manager and member of one of the entities, and “through that entity, was manager of the other.”  Her husband was neither a member nor a manager of either entity.

Eventually the marriage ended bitterly, after which the husband purported to remove his former wife and appoint himself as manager of the entities. He then engaged in a series of transactions intended to divest his former wife of her interest in the winery and the hotel.  The wife initiated summary proceeding pursuant to 6 Del. C. Sections 18-110 and 18-111 to obtain declarations regarding the rightful owners and the managers of the entities. (DGCL Section 225 is the corporate analog to Section 18-110.)

Key Principles from the Opinion:

One simplistic way to summarize the legal discussion in this opinion is to make the observation that the husband was never properly documented as a manager or a member of the LLCs involved, and his efforts to remove his ex-wife as a manager, and thereafter attempt to transfer assets, were based on fraudulent documentation which, of course, was ineffective.

Section 18-110 of Title 6 of the Delaware Code provides that any member or manager may apply to the Court of Chancery for a determination of the validity of any removal of a manager of a limited liability company and the right of any person to continue as a manager. The ex-wife in this former business venture sought a declaration under Section 18-110 that the following actions taken by her ex-husband were void:  (1) his removal of her as a manager and appointment of himself as a manager; (2) his transfer of 70% interest; and (3) his transfer of voting control.  She won on all three counts.  First, the court rejected summarily the argument that, notwithstanding a clear and unambiguous operating agreement, there was some relevance to the fact that a non-manager provided the “financial impetus behind the acquisition and operation of the vineyard” or that he was a “de facto manager.”

In addition, a tardy attempt to request judicial notice of foreign law under Rule 202(e) of the Delaware Rules of Evidence was unsuccessful in part because the rule was not complied with. The rule requires that a party wishing to rely on foreign law needs to satisfy its burden of proving the substance of the foreign law and providing adequate notice to the opposing party, neither of which was done in this case.

The court also observed that an effort to schedule a meeting was ineffective. Instead of sending a notice of the meeting where the other party was residing, the notice was sent to a registered agent in Delaware, and the other party did not receive the notice prior to the meeting.  Therefore, the actions taken at the meeting, among other reasons, were void as a matter of law for failure to give proper notice of the meeting.

The court shifted fees for two thirds of the fees incurred by the plaintiff based on the bad faith exception to the American Rule. The court found that the defendant engaged in subjective bad faith conduct both prior to and during the litigation.  For example, the court found that frivolous positions were repeatedly advanced and documents were presented and relied on that were not authentic.  Motions to compel discovery were necessary and status quo orders of the court and discovery orders were not complied with on more than one occasion.

Notably, the court referred to what has been described in prior cases as the “pizza principle.” As outlined in connection with prior decisions highlighted on these pages, in essence, the principle provides that if a party challenges the amount of fees awarded to the other side, it will be required to produce its own billing records and fee amounts for purposes of comparison.