Grove v. Brown - Civil Action No. 6793-VCG, 2013 Del. Ch. LEXIS 202 (Ch. Aug. 8, 2013)

Rule:

Delaware law gives parties broad latitude as to the structure of a limited liability company and the duties of its members through the contractual provisions of their LLC agreement. Del. Code Ann. tit. 6, § 18-1101(b). Where an LLC agreement fails to address a certain issue, Delaware's Limited Liability Company Act provides default rules. Absent contrary language in a limited liability company (LLC) agreement, managing members of an LLC owe default fiduciary duties to the other members of the LLC.

Facts:

This matter involves a dispute between Plaintiffs Mary Marlene Grove and Larry E. Grove and Defendants Melba E. Brown and Hubert E. Brown Jr. In 2010, the parties started a successful home health care agency. However, while preparing their tax returns in their first year of business, the parties discovered that not all four members had made the required initial capital contribution, they, then, began to dispute the ownership of the business, and relationships in the workplace started to dissolve. Petitioners established other home health care agencies without informing the defendants. Defendants, on the other, attempted to remove the petitioners from the business by creating another limited liability company owned solely by them and merging it with the health care agency. Petitioners sued the defendants for a breach of fiduciary duty arising from the supposed merger. Defendants answered and counterclaimed for breach of fiduciary duty by petitioners and also, petitioners’ family members for aiding and abetting the alleged fiduciary duty. 

Issue:

Did the petitioners own the highest percentage of ownership interests in the home health care business?

Was there a breach of fiduciary duty arising from the supposed merger?

Answer:

No. Yes.

Conclusion:

The court held that members of a limited liability company were deemed equal co-owners, based on the unambiguous provisions of the operating agreement and their subsequent conduct, thus, the failure of some members to provide required capital did not divest them of their share. Additionally, as the Operating Agreement was silent as to how the company could merge, pursuant to Del. Code Ann. tit. 6, § 18-209(b) members who owned 50 percent of the company lacked the authority to effect a merger because approval by more than 50 percent of the members was required. The court further held that managing members violated their duty of loyalty by usurping the company's business opportunities when they expanded into other areas, and they did not show that the company disclaimed its right to pursue this corporate opportunity. Moreover, on the issue of aiding and abetting a breach of fiduciary duty, the court concluded that there was no showing that family members knowingly participated in aiding and abetting that breach.