Waiving Right to Judicial Dissolution. R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC. (Del. Ch.)

In R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC., C.A. No. 38033-CC, 2008 WL 3846318 (Del. Ch. Aug. 19, 2008) (see below for link to the slip opinion), the Delaware Chancery Court granted a motion to dismiss a suit brought by members of several related LLCs seeking court dissolution under Sec. 18-802 of the Delaware LLC Act, on the grounds that it was not "reasonably practicable to carry on the business in conformity with a limited liability company agreement."  The LLC Agreements all contained a provision whereby each member

• "accept[ed]" the  dissolution provisions of the LLC Agreement as the only basis for dissolution of the LLC, and also
• "waive[d] and renounce[d]" the right to judicial dissolution under Sec. 18-802.

2008 WL 3846318, at *3. 

The first problem with the waivers were that the dissolution provisions of the LLC agreements included judicial dissolution under Sec. 18-802.  2008 WL 3846318, at *3.  The Court purported to "harmonize" the provisions by noting that Sec. 18-802 allowed actions for judicial dissolution to be brought "by or for a member or manager."  The Court reasoned that the waivers applied only to actions by members, and not for members.  2008 WL 3846318, at *3.

The court relied primarily on Sec. 18-1101(b)'s well-known declaration:

It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.

As we have come to expect of Delaware courts, the Court rhapsodized at length on freedom and flexibility in private ordering, citing, among others, Larry Ribstein and the article by Chief Justice Steele discussed in Mere Contractual Entities?  UBEs and Fiduciary Duties.  Indeed, the tenor of the incidental remarks (dicta) in the opinion show a clear mere contractual entity approach.  Not surprisingly, Larry Ribstein likes both the approach and the result.  But more on that later.

The problem is the Delaware LLC Act's antiquated statutory structure.  Like the UPA (1914), the Delaware LLC Act is replete with provisions that expressly contemplate party autonomy by the addition of "unless otherwise provided" in the statutory language.  Indeed, as recognized by the Court, Sec. 18-803 includes that qualification in Sec. 18-803(a), though not in sub-section (b).  Similarly, parts of Sec. 18-801 include the qualification, and others do not.  The natural implication is that the legislature knew how to signal when party autonomy was allowed; the omission of qualifying language in a part of the Act suggests that party autonomy is not permitted.  The Court rejected this argument; from its point of view, the question was whether party autonomy was limited, as in Sec. 18-1101(c) & (e).  2008 WL 3846318, at *5-*7.

Oddly enough Sec. 18-1101(c) & (e) played no direct role.  Those provisions focus on limiting duties, and liability for breach of duty.  Those provisions do not otherwise address limiting a party's rights under unqualified parts of the Act.

This opinion in R & & Capital, LLC v. Buck & Doe Run Valley Farms, LLC. illustrates the wisdom of the statutory structure of the RUPA, Re-RULPA, ULLCA and RULLCA.  In those Acts, the drafters eliminated all the "unless otherwise provided" clauses in favor of a central provision that

1. provided for party autonomy as the general rule, except as to rights of third parties, and
2. listed of all parts of the Act in which party autonomy was limited in some way.

See, e.g., RUPA §§ 103(a) (general rule) and 103(b) (list of limits).

Although the Court tried to imply that general approach from Sec. 18-1101(a), the statute remains a patchwork of (i) a multitude of provisions with "unless otherwise..." qualifications, (ii) two subsections with express limits on waivers of duties or liability, and (iii) a multitude of provisions silent as to party autonomy or its limits.  At least in this regard, the legislature needs to follow the example of the NCCUSL.  Time for some housework.

Hat Tip:  Francis G.X. Pileggi

Update:  A link to the slip opinion in R & R Capital, LLC, via Richard, Layaton & Finger, is on Chancery Court Champions Contractual Flexibility of LLC Act and Allows Waiver of Member's Right to Seek Dissolution   (Del. Corp. & Comm. Litigation Blog).