Delaware LLC and Its Members Bound to LLC Agreement Whether or Not They Execute the Agreement

by Anthony Santoriello on January 10, 2015

in Commercial Litigation

Delaware LLC and Its Members Bound to LLC Agreement Whether or Not They Execute the AgreementIn September 2014, the Delaware Court of Chancery found that a limited liability company (“LLC”) could enforce a fee shifting provision of its LLC agreement even though the LLC was not a party to that agreement.

Through its decision in Seaport Village Ltd. v. Seaport Village Operating Company, LLC, 2014 WL 4782817 (Del. Ch. Sept. 24, 2014), the Court applied Section 101(7) of the Delaware Limited Liability Company Act. In pertinent part, this act provides a “limited liability company is bound by its limited liability company agreement, whether or not the limited liability company executes the limited liability company agreement.”

Defendant Seaport Village Operating Company, LLC (“Seaport LLC”) sought to invoke a fee shifting provision in its LLC agreement that enabled Seaport LLC to recover attorneys’ fees and expenses from a California action where it had prevailed. That provision allowed for the prevailing party in a legal action “brought by any party against another party” to recover attorneys’ fees and expenses from the prosecution or defense of the action.

Plaintiff Seaport Village Ltd. contended that since Seaport LLC had not signed its LLC agreement, it was not a “party” to the agreement and should be barred from recovering fees and expenses per the agreement’s fee shifting provision. The Court disagreed, finding that the plaintiff’s defense failed as a matter of law since “by statute, a limited liability company is a party to its own limited liability company agreement, regardless of whether the limited liability company executes its own limited liability company agreement.”

In addition, the Court noted that a 2005 amendment to Section 101(7) clarified that an LLC’s members are bound by the LLC agreement whether or not they signed it.

Under Section 101(7), an LLC agreement is defined as “any agreement (whether referred to as a limited liability company agreement, operating agreement or otherwise), written, oral or implied, of the member or members as to the affairs of a limited liability company and the conduct of its business.”

The Seaport decision highlights the importance of establishing a written agreement to govern the LLC and its membership, and the need for any parties who are assigned a membership interest to review the agreement to which they are now bound.

PIB Law is a multi-service law firm serving clients throughout New York, New Jersey, Massachusetts, Pennsylvania, Illinois and Texas. For more information, contact one of our experienced commercial litigation attorneys at 908-725-9700.

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