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Chancery Court Finds That Language in an LLC Agreement That States an Assignment is "Null and Void" Trumps the Common Law and Renders Equitable Defenses Ineffective

In Absalom Absalom Trust f/k/a Anne Deane 2013 Revocable Trust v. Saint Gervais LLC, C.A. No. 2018-0452-TMR (Del. Ch. June 27, 2019), the Court of Chancery found that the transfer of membership interests in an LLC was void, rather than voidable as it ordinarily would be at common law, due to the plain language of the Company’s LLC agreement (the “LLC Agreement”). Further, the Court held that equitable defenses were unavailable to the plaintiff with regards to the transfer because the contractual language of the LLC Agreement trumped common law. Lastly, the Court found that the unambiguous contractual language controlled despite the flexibility of LLCs and the alleged purpose of the provision.

Defendant Saint Gervais LLC (the “Company”) is a Delaware limited liability company formed by Disque Deane and Carol Deane to pass on wealth to their children, Anne and Carl, while maintaining control over said wealth. Anne Deane (“Anne”) is the settlor and trustee of plaintiff Absalom Absalom Trust (“Absalom”). Anne allegedly unilaterally assigned her 35.96% membership interest in the Company to Absalom. However, language in the LLC Agreement provided that “any disposition without prior written unanimous consent of the managers is ‘null and void.’”

Counsel for Absalom sent the Company a letter demanding to inspect several categories of books and records, including balance sheets, income statements, and tax returns dating back a number of years. The LLC Agreement authorized only members to inspect the Company’s books and records. Absalom had previously been provided other documents by the Company, but the Company refused to provide the documents requested it the letter of counsel; as a result, Absalom filed suit, seeking to compel the Company to relinquish the requested documents.

The Company argued that Absalom lacked standing to seek the books and records because Anne’s attempt to transfer her membership interest was null and void. Absalom claimed that equitable principles bar the Company from raising that defense. The Court stated that the validity of the transfer was dependent on the meaning of the LLC Agreement, and that the same principles that apply in contract interpretation are used in interpreting LLC agreements. Applying these principles, the Court found that its role was to effectuate the parties’ intent, and because the language of the LLC Agreement is unambiguous, the writing itself is the sole source for gaining an understanding of intent.

The Court stated that void acts are ultra vires and generally cannot be ratified. Similarly, the Court stated that null acts are acts without legal effect or binding force. Because Anne’s transfer occurred without prior written consent of the Company’s managers, it was null and void, per the LLC Agreement. The Court therefore concluded that the transfer had no effect and Absalom held no interest in the Company.

Absalom argued that the equitable defenses of laches, waiver, equitable estoppel, ratification, and acquiescence all barred the Company’s assertion that the assignment was void. This argument was based on the Company’s granting Absalom access to some of the Company’s records, referring to Absalom as a member in some of its trial papers, and issuing Schedule K-1 tax forms to Absalom, all without reserving the right to contest Absalom’s status as a member. The Court rejected this argument by distinguishing between voidable and void acts. The Court held that while voidable acts are able to be validated by equitable defenses, because void acts are ultra vires and generally cannot be ratified, equitable defenses cannot validate them. The Court stated that at common law Anne’s transfer of her membership would likely have been voidable. However, the Court held that the language of the LLC Agreement trumped the common law, and that because the LLC Agreement states that such a transfer is void, the assignment was rendered ineffective and invulnerable to equitable defenses. Absalom then attempted to argue that the statute of limitations prevented the Company from asserting this defense, but the Court held that a statute of limitations is not available to defeat an affirmative defense.

Additionally, Absalom attempted to make a number of other arguments that, primarily relying on the plain language of the LLC Agreement, were quickly dismissed by the Court. First, Absalom attempted to argue that the informality and flexibility of LLCs should lead the court to treat Absalom as a member due to the course of dealing between Absalom and the Company, despite the language of the LLC Agreement. The Court rejected this argument on the basis that unambiguous contractual language controls over the course of dealing. Absalom then argued that the purpose of the anti-transfer provision was to ensure that transfers would not be made to strangers, and that this was of no concern because there was no real difference between Anne and Absalom. While the Court acknowledged that the purpose of a provision can influence its interpretation, it held that purpose cannot override the plain language of said provision. Finally, Absalom argued that even if it were not a member, equity should intervene and permit it to review the requested documents. The Court rejected this argument, stating that Absalom failed to explain why i should invoke equitable principles to override the plain language of the provision in light of controlling judicial precedent.

Copyright 2019 K & L Gates

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About this Author

Scott Waxman, Limited Liability Companies, Corporate, Attorney, KL Gates Law FIrm
Administrative Partner

Scott Waxman is a founding partner in the firm’s Wilmington, Delaware office and a member of the firm’s global Management Committee. His practice focuses on organizational and operational issues related to limited liability companies, limited and general partnerships, statutory trusts, and special purpose corporations, as well as general commercial and financial transactions, including structured financings, securitizations, mergers and acquisitions, joint ventures, private equity and hedge funds, preferred securities transactions, insurance premium financing transactions, life settlement...

302-416-7070
Calvin D. Kennedy, KL Gates, debt and equity financings lawyer, venture capital investments attorney
Associate

Calvin Kennedy is an associate in the firm’s Pittsburgh office. He focuses his practice on a wide range of corporate and transactional matters related to mergers and acquisitions, debt and equity financings, private equity and venture capital investments, corporate governance and general corporate law. Mr. Kennedy works with clients that range in size from emerging growth companies to some of the world’s largest corporations and operate in a variety of industries.

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