Delaware Law Update—Delaware Court of Chancery Favors the Plaintiff in Finding the Defendants’ Understanding of an LLC Agreement Not the Only Reasonable Interpretation | Publications | McCarter & English
Coyne v. Fusion Healthworks, LLC, et al., C.A. No. 2018-0011-MTZ (Del. Ch. Apr. 30, 2019), Zurn, V.C.
The Delaware Court of Chancery denied defendants’ attempt to dismiss a lawsuit filed on behalf of a widow concerning the interest of her deceased husband’s estate in the assets of a Delaware limited liability company. The court found that defendants’ interpretation of certain provisions of the formation agreement was not the only reasonable interpretation, and thus, the widow’s claims survive.
This dispute concerned the dissolution of a Delaware limited liability company and competing interests in the proceeds of a life insurance policy obtained by the company to purchase a deceased member’s ownership interest. The relevant portions of the LLC agreement provided that a member’s personal bankruptcy would result in the member’s involuntary withdrawal from the company. Upon the member’s involuntary withdrawal, the company would dissolve unless a majority of the remaining members voted to continue the company. The dissolution of the company was critical to the continuation of the life insurance policy, in which the company’s dissolution would trigger the termination of the buy-sell agreement that provided for the purchase and preservation of the life insurance policy.
In this instance, one member filed for bankruptcy purportedly unbeknownst to the other members. Despite the bankruptcy filing, the remaining members failed to conduct a vote and the bankrupt member continued to participate in the management of the company. Thereafter, the bankrupt member, along with one other member, adopted a dissolution plan by written consent, engaged an accounting firm to value the company, ratified the accounting firm’s valuation by written consent, and authorized the filing of a certificate of cancellation. The third member filed a declaratory judgment action against the two members, but took his own life during the course of the litigation. The company received the proceeds from the insurance policy covering the deceased member, but failed to remit the proceeds to his estate.
The widow of the deceased member filed a separate lawsuit, in which she sought a declaratory judgment that the buy-sell agreement (1) did not terminate prior to her husband’s death and (2) it was enforceable by the parties.
Court of Chancery Decision
In response to defendants’ motion to dismiss, the court ruled that the plaintiff adequately plead a claim for declaratory relief. The result was predicated on the finding that the buy-sell agreement implicitly incorporated the LLC agreement, in which the buy-sell agreement terminated upon the company’s dissolution. The defendants argued that upon the insolvent member becoming a withdrawn member, the majority of the remaining members were required to vote in favor of continuing the business to preserve the company. Since the remaining members did not undertake a vote, the defendants insisted that the company was automatically dissolved. The plaintiff maintained that an election was a prerequisite to the dissolution of the company; in the absence of a vote, the company could not dissolve. The court found both interpretations reasonable, but defendants’ position produced an “absurd result,” while plaintiff’s “interpretation better harmonize[d]” different sections of the LLC agreement. In light of the legal standard requiring the court to make all reasonable inferences in favor of the non-moving party, the court found that it was conceivable for the buy-sell agreement to survive the member’s bankruptcy filing.
The court’s ruling reflects an application of traditional contract principles. Having found that the dissolution provision of the LLC agreement was ambiguous, the court analyzed the parties’ respective positions in the context of other provisions concerning the management of the company. Viewing the pleadings in a light most favorable to plaintiff, the court concluded that the parties’ competing interpretations were reasonable, and thus, plaintiff sufficiently plead its claims to defeat the motion to dismiss. Although defendants’ interpretation may carry the day in the end, the pro se plaintiff plead sufficient facts to preserve the estate’s claim to the life insurance proceeds.