Don’t Sit on Your Legal Rights, Even with Your Family – Master in Chancery Recommends Dismissal of Former Member’s Claims Against His Family LLC, Based on Laches
In Robert Boyd Fitzgerald v. Fitzgerald Home Farm, LLC, Civil Action No. 2019-0410-PWG (Del. Ch. April 16, 2021), Master in Chancery Patricia W. Griffin (“Master Griffin”) recommended the Court of Chancery (the “Court”) dismiss a complaint seeking damages and reinstatement as a member of a family limited liability company, with prejudice. Master Griffin found that the action was barred by laches because the statute of limitations for the alleged breach had run and equitable tolling did not apply.
In 2008, Robert B. Fitzgerald (“Robert”) formed the Fitzgerald Home Farm, LLC (the “LLC”) and assigned a 9% interest to each of his four children, Kirby Fitzgerald (“Kirby”), Meghan Fitzgerald (“Meghan”), Jeffrey Semans (“Jeffrey”) and Robert Boyd Fitzgerald (“Boyd”). Kirby was later appointed manager of the LLC in 2009.
When the LLC members received cash distributions from the LLC in 2009, Boyd was forced to repay some of his Social Security Income (“SSI”). In 2010, Boyd sent a letter to Kirby (“2010 Letter”) stating, among other things, “I’ve done a lot of thinking and decided I don’t want to be a part of this LLC. I’d like my name taken off the role.” The other three LLC members agreed to allow Boyd to withdraw as a member and his interest was equally divided among them. In June 2012, Robert gave his remaining interest in the LLC to Kirby, Meghan, and Jeffrey. Boyd received no interest in the LLC. Nor did he receive any cash distributions from the LLC starting in 2010.
In June 2019, Boyd filed a complaint against the LLC in the Chancery Court alleging he had not been legally removed from the LLC and seeking reinstatement as a member and damages for his share of the LLC from 2010 to 2018.
The LLC argued Boyd’s claims involved legal rights under the LLC Agreement and were governed by the statute of limitations, which may be tolled only until Boyd had inquiry notice of his claims. The LLC argued that Boyd had such inquiry notice in 2012 or 2013, because he knew he did not receive cash distributions after he sent the 2010 Letter. The LLC also argued that: (a) in 2012, a representative from the Social Services Administration (“SSA”) called Kirby, on behalf of Boyd, to confirm Boyd had not received any cash distribution from the LLC; and (b) Boyd knew in 2013 that he could receive distributions from the LLC, but did not take any action until filing his complaint in 2019. Finally, the LLC argued that it would be prejudiced by Boyd’s late claims because the LLC had changed its membership structure since Boyd sent the 2010 Letter, and had further relied on Boyd’s withdrawal when reporting tax information.
In response, Boyd argued that the statute of limitations should be tolled because he did not have notice and never signed any legal papers to remove himself as a member of the LLC.
In her final report and recommendation, Master Griffin focused on whether Boyd’s claim was barred by laches. Laches typically requires the court to apply the statute of limitations, and then determine whether the claimant had knowledge of the claim and was unreasonably delayed in bringing the claim, which caused prejudice to the defendant.
First, Master Griffin concluded that, for purposes of calculating the statute of limitations, Boyd’s claim amounts to breach of contract, because he claimed he had not legally been removed as a member of the LLC. A breach of contract claim has a three-year statute of limitations, which starts to run at the time of breach. Master Griffin decided that the alleged breach occurred when Boyd withdrew or was removed as a member of the LLC on November 24, 2010. Thus, the statute of limitations period would have expired on November 24, 2013, absent any tolling.
Next, Master Griffin considered whether there was any basis for tolling the limitations period or, instead, whether Boyd had inquiry notice of his claims, which would stop any tolling of the statute of limitations. Inquiry notice requires that the claimant be objectively aware of the facts giving rise to the alleged wrong. Master Griffin concluded that Boyd had sufficient notice of any alleged breach when he sent the 2010 Letter, which stated that he wanted to be removed as a member of LLC.
Further, even if he was not aware that he had been formally removed from the LLC, Boyd knew that the other three LLC members received distributions between 2010 and 2019, and he did not. Master Griffin found those distributions should have raised “red flags” to put Boyd on notice that there may have been a breach. Finally, Boyd further confirmed that he was no longer a member of the LLC in 2012, when the SSA called Kirby, on his behalf, to confirm that Boyd had not received distributions since 2009.
Master Griffin concluded that these instances provided Boyd with sufficient knowledge of any breach and should have raised suspicions, but he simply chose not to act. Therefore, even if Boyd was not aware of the breach until 2012, any tolling ended—and the three-year statute of limitations period began to run—at that time. Because Boyd did not file his claims until 2019, his claims were untimely and thus barred by laches.
Julia Knitter also contributed to this article.