Any lawyer involved in litigation about issues surrounding an LLC member’s withdrawal from an LLC should become familiar with the recent decision in 5high LLC v. Feiler, C.A. No. 2022-0108-LWW (Del.Ch. Aug. 5, 2022).
Whether one of the original 50/50 members of an LLC resigned despite no written LLC agreement and no written resignation.
Essential Background Facts
Two members formed an LLC without a written LLC agreement but agreed orally that each would have a 50% ownership interest, each would co-manage the LLC, and each contributed an equal amount of capital. Shortly after the formation, one of the 50/50 members orally resigned and took several public actions to notify vendors, customers, employees, and others that he was resigning. The other 50% member orally accepted the resignation and the parties began exchanging draft formal documents–but they never signed a formal, written agreement to memorialize the resignation.
Important Legal Principles From Court’s Opinion
- The Delaware Declaratory Judgment Act was an appropriate vehicle to present the issue for the Court to decide if one of the original 50/50 members remained as the sole member. Slip op. at 15-16 and n. 84.
- The LLC Act allows an LLC agreement to be written, oral or implied. Slip op. at 18. See Section 18-101(9) of LLC Act.
- The court defines an implied agreement and explains how one can be formed by conduct of the parties. Slip op. at 18-19.
- Subjective intent is not relevant to determining if an implied contract was formed, and silence or failure to object can be treated as acceptance. Id.
- Based on the circumstances of this case, it was not necessary to invoke the magic word “resign”, and there was ample evidence presented at trial on a paper record, to permit an objective observer to conclude that the departing member’s behavior demonstrated his intent to sever all ties with the LLC–and the remaining member accepted that offer to sever ties.
- The LLC Act provides default provisions, but the parties’ implied contract modified those default provisions. Slip op. at 20-21.
- The LLC Act’s default provisions would otherwise have prevented the resigning member from withdrawing prior to dissolution or winding up of the LLC. Id. and n. 104. See Section 18-603 of LLC Act.
- The implied agreement was not conditioned on a formal, written agreement being signed, and efforts to memorialize the implied agreement did not alter the implied agreement. Slip op. at 21.
- The court’s statement of the law and its reasoning highlighted above might possibly be applied to other situations where, for example, parties may agree–in an implied contract–to settlement terms in other contexts without signing a formal, written agreement.