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Chancery Court Appoints Liquidating Trustee Appointed for Deadlocked LLC

By Francis G. X. Pileggi, Esq.

Spellman v. Katz, (Del Ch., Feb. 6, 2009), read opinion here. This Delaware Chancery Court opinion involved the appointment of a liquidating trustee to wind-up the LLC where the two 50/50 owners were deadlocked and their Operating Agreement already provided for dissolution.

The same vice chancellor issued a decision a few days later involving a deadlock  between two 50/50 shareholders in a closely-held corporation (as opposed to an LLC as in this case) and the appointment of a custodian in that case, which was highlighted here.

For any business litigator who deals with disputes among or between the owners of  a closely-held LLC or corporation, these two cases are must reading. For now, I will  highlight a few key points in this decision of immense practical application:

• Two doctors, who apparently could not get along together, owned an LLC that was created for the limited purpose  of  building a medical office. They remained personally liable on the mortgage as guarantors but were not otherwise able to disentangle themselves from their "now unwanted" business arrangement via their LLC.
• One doctor  sought a declaration of dissolution per Section 18-802 of the Delaware LLC Act or alternatively an order under Section 18-803(a) to appoint a liquidating trustee to effectuate the winding up of the LLC's affairs, because the operating agreement already provided for  the dissolution by agreement of the members.
• The court's reasoning for appointing a liquidating trustee, which it said it could do under either Section 18-803 or 18-802, should be read to get an understanding of the detailed facts and legal analysis on which the court relied.
• Of useful import was a discussion accompanying footnote 17 for the key principle that a party will be bound by a contract that he signs "even if he said that he did not read it".
• The court  also discussed the derivative pleading requirement and demand futility in the context of LLCs. 

Full post as published by Delaware Corporate and Commercial Litigation Blog on February 20, 2009 (boomark / email).