In re: Dissolution of T&S Hardwoods KD, LLC
Letter Decision, not reported in traditional reporter (2023)
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Rule of Law:
The Delaware Court of Chancery may decree judicial dissolution of a limited liability company under 6 Del. C. § 18-802 when it is not reasonably practicable to carry on the business in conformity with the LLC agreement, particularly in cases of managerial deadlock where no equitable contractual exit mechanism exists.
Facts:
- In 2016, T&S Hardwoods, Inc. (lumber processor, manager Lawrence N. Thompson) and Robinson Lumber Company, Inc. (RLC, lumber wholesaler, president William Garner Robinson) formed T&S Hardwoods KD, LLC (the "Company") through an LLC Agreement and Joint Venture Agreement.
- The Company was formed to buy graded lumber from T&S for resale by RLC and to provide financing to T&S, with T&S and RLC each owning a 50% interest, and Thompson and Robinson serving as the two managers.
- The LLC Agreement required unanimous agreement for most management decisions, and RLC and Robinson were responsible for controlling the Company’s books, records, finances, and payments to T&S.
- Thompson provided a personal guaranty for any funds the Company borrowed under RLC's credit agreement.
- By March 2022, the Company, controlled by Robinson, allegedly stopped paying T&S for over $9 million in lumber purchased between October 2021 and May 2022, despite having sufficient cash and receivables.
- In April 2022, Robinson unilaterally terminated T&S’s and Thompson’s viewing access to the Company’s bank and loan accounts.
- Due to nonpayment, T&S stopped selling lumber to the Company on May 5, 2022, effectively frustrating the Company's core business purpose.
- On July 8, 2022, T&S sent RLC a buy-sell purchase option notice under the LLC Agreement, but Robinson and RLC rejected the offer without making an election.
- Thompson and T&S alleged RLC and Robinson made improper distributions, manipulated financial records, withheld information, and directed the lender not to communicate with T&S.
Procedural Posture:
- On May 13, 2022, Robinson Lumber Company, Inc. (RLC) filed a derivative action against Lawrence N. Thompson and T&S Hardwoods, Inc. (T&S) in the Delaware Court of Chancery (Civil Action No. 2022-0423-MTZ), alleging breach of fiduciary duties.
- On August 31, 2022, T&S filed a complaint against Robinson in the Superior Court of Baldwin County, Georgia (the "Georgia Action"), alleging breach of fiduciary duty.
- On September 2, 2022, T&S Hardwoods, Inc. and Lawrence N. Thompson (Petitioners) filed this action in the Delaware Court of Chancery (Civil Action No. 2022-0782-MTZ), petitioning for judicial dissolution of T&S Hardwoods KD, LLC under 6 Del. C. § 18-802.
- On September 9, 2022, Robinson and RLC (Respondents) filed a motion to dismiss this dissolution petition for failure to state a claim, or, in the alternative, to dismiss or stay pending resolution of other litigation.
- The parties fully briefed the motion to dismiss, and the court held oral argument on November 17, 2022.
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Issue:
Does a petition for judicial dissolution of a 50/50 manager-managed LLC state a claim for relief under 6 Del. C. § 18-802 when the managers are deadlocked, the company's core business purpose is frustrated, and the LLC agreement's optional buy-sell provision does not provide an equitable exit mechanism, especially when a member would remain personally liable on company debt?
Opinions:
Majority - Vice Chancellor Zurn
Yes, a petition for judicial dissolution states a claim for relief under these circumstances. The Court denied the Respondents' motion to dismiss, finding that the Petitioners adequately alleged managerial deadlock, a frustrated business purpose, and the absence of an equitable contractual exit mechanism. The relationship between the 50/50 managers, Thompson and Robinson, has "splintered and then collapsed," demonstrating clear deadlock due to the Company's nonpayment to T&S, T&S's subsequent cessation of lumber supply (which frustrates the Company's core purpose), Robinson's unilateral termination of T&S's access to financial records, and the initiation of multiple lawsuits between the parties. The 50/50 ownership structure, requiring unanimity for most decisions, coupled with the symbiotic nature of the joint venture, amplified the untenable situation, leading to the conclusion that it is no longer reasonably practicable to carry on the business. The court looked beyond the LLC Agreement's broad purpose clause, which stated the Company's purpose was "to engage in any lawful activities," and instead considered the foundational Joint Venture Agreement, which defined the Company's specific purpose as buying lumber from T&S for resale. Since T&S stopped supplying lumber, this core purpose is frustrated. Finally, the LLC Agreement's Buy-Sell Purchase Option was deemed not to be an equitable exit mechanism that would preclude dissolution because it was optional, not mandatory, and critically, even if exercised, Thompson would remain personally liable as a guarantor on the Company’s credit agreement, which the court found inequitable as it would leave him with considerable downside risk without upside potential, consistent with the precedent of Haley v. Talcott. The court also consolidated this case with a related Delaware action (Robinson Lumber Company, Inc. v. Lawrence N. Thompson, III, et al., C.A. No. 2022-0423-MTZ) with the parties' consent to promote efficiency.
Analysis:
This decision reaffirms Delaware's high standard for judicial dissolution while clarifying what constitutes 'not reasonably practicable' and an 'equitable exit mechanism' in the LLC context. It establishes that courts will look beyond broad purpose clauses in LLC agreements to discern the actual foundational purpose of the venture, especially when multiple related agreements exist. Crucially, the ruling emphasizes that an exit mechanism must be mandatory or, if optional, actually equitable in its operation, meaning it must fully and fairly separate the parties, including relieving them of ongoing personal liabilities related to the entity. This case serves as a warning to drafters of LLC agreements to include robust, mandatory, and truly equitable exit provisions for deadlocked entities.
