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Absalom Absalom Trust v. Saint Gervais LLC

Court of Chancery of Delaware

June 27, 2019


          Date Submitted: April 16, 2019

          Kevin R. Shannon, Christopher N. Kelly, and Jay G. Stirling, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Nathan M. Bull, Adam K. Magid, and Ailsa H. Chau, CADWALADER, WICKERSHAM & TAFT, LLP, New York, New York; Attorneys for Plaintiff.

          Davis S. Eagle and Sean M. Brennecke, KLEHR HARRISON HARVEY BRANZBURG LLP, Wilmington, Delaware; Kenneth E. Warner, WARNER PARTNERS, P.C., New York, New York; Richard A. Greenberg, Steven Y. Yurowitz, and William J. Dobie, NEWMAN & GREENBERG LLP, New York, New York; Attorneys for Defendant.



         In this action, plaintiff seeks to compel defendant, a limited liability company, to turn over certain financial records based on plaintiff's status as a member of defendant. Defendant resists, arguing that plaintiff is not a member. For the reasons that follow, I hold that plaintiff is not a member and is not entitled to the records it seeks.

         I. BACKGROUND

         These are my findings of fact based on the parties' stipulations, documentary evidence, and arguments during a half-day trial.[1]

         Defendant Saint Gervais LLC (the "Company") is a Delaware limited liability company formed in 1997.[2] Disque D. Deane and Carol G. Deane formed the Company to pass on wealth to their children, Anne and Carl, while maintaining control over that wealth.[3] The Company is governed by the Amended and Restated Operating Agreement for Saint Gervais LLC of June 30, 2006, as amended (the "LLC Agreement").[4]

         Non-party Anne Deane is the settlor and trustee of Plaintiff Absalom Absalom Trust ("Absalom").[5] Anne owned a 35.96% membership interest in the Company, which she purported to assign to Absalom.[6] Absalom brings its claims as a purported member of the Company.

         The LLC Agreement places restrictions on transfers of membership interests. Section 5.1 defines disposition to include any type of transfer of membership. Types of disposition include "sale, assignment, transfer, exchange, mortgage, pledge, grant, hypothecation or other disposition."[7] Section 5.2 provides that any disposition without prior written unanimous consent of the managers is "null and void."[8]Section 5.3 declares any substitution of members without prior written consent of all of the managers is "null and void."[9]

         On June 7, 2018, counsel for Absalom sent the Company a letter demanding to inspect certain categories of documents (the "Demand Letter").[10] The Demand Letter stated that the purposes for the inspection were to "(i) evaluate the value of [Absalom's] ownership interests, (ii) evaluate the financial condition of the Company, and (iii) investigate possible acts of mismanagement and/or improper conduct in connection with the management of the Company."[11] The Demand Letter identified as the topics for inspection "(i) [Carol]'s decision to reduce the Company's sharing ratio in Starrett City Preservation LLC," a company in which the Company has an economic interest, "(ii) [Carol]'s improper use of Company funds for personal expenses, and (iii) [Carol]'s improper refusal to provide true and full information regarding the financial and operation condition of the Company."[12]

         The Demand Letter sought seven categories of books and records: (1) "[d]etailed balance sheets for each year from 2014 through the latest available date in 2018;" (2) "[d]etailed profit and loss statements for each year from 2014 through the latest available date in 2018;" (3) "[f]ederal and state tax returns filed by the Company from 2014 through the present;" (4) "[d]ocuments sufficient to determine all payments or distributions made by the Company since 2014, including the date, amount, and recipient of all such payments or distributions;" (5) "[t]o the extent not included in the above requests, the 'complete and accurate books and records of the Company's business and affairs' kept in accordance with Section 2.1 of the LLC Agreement;" (6) "[t]o the extent not included in the above requests, the 'reports concerning the financial condition and results of operations of the Company and the capital accounts of the Members' prepared in accordance with Section 2.3 of the LLC Agreement;" and (7) "[a]ll documents relating to Carol's decision to reduce the Company's sharing ration in Starrett City Preservation LLC."[13]

         After Absalom sent its Demand Letter, the parties discussed the documents Absalom had requested, which documents the Company had already provided, Anne's assignment of her interest to Absalom, and a potential settlement.[14] These discussions lasted several weeks but ultimately did not produce a negotiated agreement.

         On June 25, 2018, Absalom filed this lawsuit.[15]

         II. ANALYSIS

         The LLC Agreement authorizes only members to inspect books and records. The Company argues that Absalom lacks standing to seek books and records because Anne's attempt to transfer her membership interest to Absalom was null and void. Absalom argues that equitable principles bar the Company from raising this defense.

         The validity of the transfer and the outcome of the standing issue turn on the meaning of the LLC Agreement. "When analyzing an LLC agreement, a court applies the same principles that are used when construing and interpreting other contracts."[16] "When interpreting a contract, the role of a court is to effectuate the parties' intent."[17]

Because Delaware adheres to the objective theory of contract interpretation, the court looks to the most objective indicia of that intent: the words found in the written instrument. As part of this initial review, the court ascribes to the words their common or ordinary meaning, and interprets them as would an objectively reasonable third-party observer.[18]

         "[W]here a word has attained the status of a term of art and is used in a technical context, the technical meaning is preferred over the common or ordinary meaning."[19]"When established legal terminology is used in a legal instrument, a court will presume that the parties intended to use the established legal meaning of the terms."[20] "If a writing is plain and clear on its face, i.e., its language conveys an unmistakable meaning, the writing itself is the sole source for gaining an understanding of intent."[21] "[W]hen we may reasonably ascribe multiple and different interpretations of a contract, we will find that the contract is ambiguous."[22]Despite that, "[t]he parties' steadfast disagreement will not, alone, render [a] contract ambiguous."[23]

         A. Absalom Is Not a Member

         The LLC Agreement forbids any "disposition" of a membership interest, including "assignment" and "transfer," absent "prior written consent of all of the Managers" of the Company.[24] Any disposition made in violation of this provision, or any substitution of members, is "null and void."[25] The Delaware Supreme Court recently examined language in an LLC agreement declaring certain acts to be void. In CompoSecure, L.L.C. v. CardUX, LLC, the Supreme Court considered an LLC agreement that provided that Restricted Activities, as defined by the LLC agreement at issue, were "void and of no force or effect whatsoever."[26] In considering whether a separate contract was voidable or void, the Supreme Court determined that "the plain language of the provision would render the [contract] void, and therefore incapable of being ratified."[27] The Supreme Court defined void acts as those that are "ultra vires and generally cannot be ratified."[28]

         The same result follows here. The language before me is functionally identical to the language before the Supreme Court in CompoSecure. Both provisions contain the word "void." "Null" means "[h]aving no legal effect; without binding force."[29] The parties agree that Anne's transfer of her membership to Absalom occurred without prior written consent. Thus, by the plain and unambiguous terms of the LLC Agreement, the transfer has no effect, meaning Absalom holds no interest in the Company.

         B. Absalom's Contextual Arguments Fail

         Absalom responds with several arguments: (1) equitable defenses bar the Company from claiming that Absalom is not a member; (2) the nature of LLCs is to be flexible and informal such that the course of conduct should control rather than the language of the LLC Agreement; and (3) the anti-transfer provision exists to prevent strangers from becoming members, and Absalom is not a stranger. All fail.

         1. Equitable defenses are not available

         Absalom argues that several equitable defenses bar the Company's assertion that the assignment is void and Absalom is not a member. Absalom points to laches, waiver, equitable estoppel, ratification, and acquiescence, [30] arguing that the Company granted Absalom access to some of the Company's records, [31] referred to Absalom as a member in some of its trial papers, [32] and issued Schedule K-1 tax forms to Absalom, [33] all without reserving the right to contest Absalom's status as a member.[34] According to Absalom, this conduct estops the Company from now disputing Absalom's status as a member and its entitlement to seek books and records.[35]

         Equitable defenses can validate voidable acts but not void acts.[36] In CompoSecure, the Delaware Supreme Court recently held that by using the word "void" in an LLC agreement, the parties to the agreement adopted the common law rule and foreclosed the application of equitable defenses. The court reasoned as follows:

The common law rule is that void acts are ultra vires and generally cannot be ratified, but voidable acts are acts falling within the power of a corporation, though not properly authorized, and are subject to equitable defenses. Ordinarily, [a contract] would be voidable for failure to comply with [a provision]. But, given the plain language of the [provision]-"void and of no force or effect whatsoever"-its application would trump the common law rule and render the [contract] void and incapable of being ratified.[37]

         Although CompoSecure addressed the defense of ratification, its logic extends to other equitable defenses as well.

         At common law Anne's transfer of her membership interest to Absalom would be likely be voidable, not void. The reasoning in CompoSecure, however, mandates that the contractual language-"void"-trumps the common law, rendering the assignment ineffective and invulnerable to equitable defenses. Thus, under CompoSecure, Absalom cannot rely on equitable defenses to validate its status as a member.

         Absalom attempts to distinguish CompoSecure, arguing that in that case, the parties "promptly" sought to enforce their rights, while here they waited.[38] Although this is a valid factual distinction, it does not impact the conclusion that using the word ...

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