In P-5 GRA LLC v. Ivankovich, a minority member’s breach of contract claim against the majority member of a Delaware limited liability company (LLC) was undone by the corporate separateness doctrine and the minority member’s failure to account for this principle in an operating agreement. These factors barred the minority member’s claim to a distribution from the sale of real property owned by a subsidiary, in which the real property was not an asset of the parent company by operation of the corporate separateness doctrine and the operating agreement. As a result, the complex hierarchical structure and separate existence of the relevant entities subjected the minority member’s claim to the majority member’s discretion.
In this case, the plaintiff possessed a 7% membership interest in a Delaware LLC named Overlook Managing Member LLC. The defendant held the remaining 93% interest in Overlook and served as its manager. Overlook was the sole member of two LLCs, PILGRIM Caribbean Isle LLC and PILGRIM Forest Park LLC. The PILGRIM entities each possessed a 50% membership interest in an LLC called Alliance HTFL GP, LLC. The PILGRIM entities also held a 99.9% interest in an LLC that owned two parcels of real property in the state of Florida. In spring 2022, the Florida properties were sold for $35 million; however, none of the proceeds were sent upstream to Overlook.
Under the Overlook operating agreement, the manager possesses discretion concerning the level of cash reserves to be held and the cash available for distribution. However, the operating agreement states that if the cash available for distribution arose from the sale of assets, then the proceeds must be distributed to members of Overlook on a pro rata basis. The term “assets” is defined under the operating agreement to include property owned by Overlook.
Having failed to receive a distribution from the sale of the Florida properties, the plaintiff filed suit against the defendant for specific performance, breach of fiduciary duty, and breach of contract under the operating agreement. The court treated the specific performance claim as one for breach of contract, in which the plaintiff sought monetary damages under the Overlook operating agreement arising out of the sale of the Florida properties. The defendant moved to dismiss the complaint in its entirety. The Court of Chancery found that the Overlook operating agreement did not require a distribution from the sale of the Florida properties and granted the defendant’s motion to dismiss.
Delaware law respects the separate legal existence of corporate entities. Even if the corporate entities possess common ownership or identical leadership, the Delaware courts will presume a separate legal existence. Accordingly, the assets of a subsidiary are not the assets of a parent based on the parent’s mere ownership of the subsidiary. This fundamental principle of Delaware corporate law fatally undermined the plaintiff’s breach of contract claim because Overlook did not own the Florida properties—the real estate was the property of its subsidiary. Based on the corporate entities’ separate legal existence, the plaintiff’s claim for monetary damages failed as a matter of law.
P-5 GRA reminds us of a fundamental principle of Delaware corporate law: respect for corporate separateness. The creation of multilevel ownership structures only serves to highlight the importance of the corporate separateness doctrine. Absent a piercing of the corporate veil, the assets of one corporate entity are the property of that entity alone. Although the definition of assets under the Overlook operating agreement did not warrant considerable explanation in the court’s ruling, the contractual language restricted the circumstances under which the plaintiff could receive a distribution and served as an additional bar to the plaintiff’s claim for monetary damages. As corporate hierarchies become more complex, investors would be wise to recognize the increased need for precision when drafting operating agreements in order to realize the intended benefit of the organization.