John Klein v. Jill Sussman
Unpublished Memorandum Opinion, January 30, 2024 (2024)
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Rule of Law:
A valid Delaware Limited Liability Company (LLC) agreement, which can be written, oral, or implied, establishes membership and management rights, and parties' objective manifestations of assent, including their words and actions, can prove the existence and terms of such an agreement, even without a fully executed written document.
Facts:
- In 2018, John Klein, a carpenter, and Jill Sussman, a real estate agent, decided to go into business together to buy, renovate, and rent or sell residential properties, agreeing to leverage Klein's cash and renovation expertise and Sussman's real estate experience and credit access.
- On March 25, 2018, Sussman emailed Klein a proposed operating agreement for "DOUBLE Jr LLC," identifying both as 50% owners and co-managers, and outlining the business purpose.
- Following discussions where Klein printed the agreement and Sussman indicated she would "get the LLC done," Sussman filed a certificate of formation for Double J.R., LLC with the Delaware Secretary of State on April 11, 2018, identifying herself as the registered agent.
- On April 30, 2018, Double J.R., LLC purchased its first property on David Street; both Klein and Sussman attended the closing and signed multiple documents as "managing members" of the LLC.
- Over the following months, Klein exclusively provided over $75,000 in upfront cash for DJR to purchase four additional properties (South Governors Avenue, North New Street, North Governors Street, and Peach Basket Road), often by borrowing against his personal properties, while Sussman handled financing and refinancing.
- Sussman secretly executed a WSFS form operating agreement in May 2018, identifying herself as the sole member and manager of DJR, but never informed Klein or provided him a copy.
- In early 2019, the parties' relationship became strained due to disagreements over renovation costs, commissions, and Klein's demands for business information, leading Sussman to deny Klein was ever a member or manager of DJR.
Procedural Posture:
- On March 12, 2020, John Klein filed a verified complaint in the Delaware Court of Chancery against Jill Sussman and Double J.R., LLC, seeking a declaratory judgment that he was a 50% member and co-equal manager of DJR, an accounting, and other equitable relief.
- On August 6, 2021, Sussman and Double J.R., LLC (Defendants) answered the complaint and asserted counterclaims against Klein for breach of contract and tortious interference with contract.
- On the same day, Defendants also asserted third-party claims against Blue Water Trust and Sequel Investments, Inc. (Third-Party Defendants) for breach of contract, bad faith/willful misconduct, and breach of fiduciary duties.
- On May 23, 2022, the Court of Chancery approved a stipulation bifurcating the trial, with the first phase addressing Klein's claims for declaratory judgment, accounting, and breach of fiduciary duty.
- The Court of Chancery held a one-day trial on June 16, 2022, on the bifurcated issues.
- Following post-trial argument, the parties requested the court withhold a decision while they sought a potential resolution.
- In October 2023, the parties requested the Court of Chancery to decide the threshold question of whether Klein is a member and manager of DJR.
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Issue:
Does a valid and enforceable limited liability company agreement exist, whether written, oral, or implied, that establishes John Klein as a 50% member and co-equal manager of Double J.R., LLC, even in the absence of a fully executed written operating agreement?
Opinions:
Majority - Vice Chancellor Fioravanti
Yes, a valid and enforceable limited liability company agreement exists that establishes John Klein as a 50% member and co-equal manager of Double J.R., LLC, despite the absence of a fully executed written operating agreement. The court found that Klein and Sussman entered into an enforceable oral or implied operating agreement based on their objective manifestations of assent, as permitted by 6 Del. C. § 18-101(9), which states an LLC agreement can be "written, oral or implied." Sussman's initial email on March 25, 2018, attaching the proposed operating agreement for "Double Jr LLC" identifying both as 50% owners and co-managers, constituted an offer. Her subsequent texts and actions, such as forming the LLC with a name derived from both their names and discussing bank accounts and insurance, demonstrated her intent to be bound by the material terms of that agreement. The court rejected Sussman's claim of a "vesting agreement" or that the March 25 agreement was just for discussion, finding her testimony on these points lacked credibility and was unsupported by contemporaneous communications. The parties' conduct post-formation further evinced their mutual assent: both Klein and Sussman signed multiple closing documents for the first property as "managing members" of DJR, and Klein consistently provided all upfront cash for property acquisitions as per their initial agreement, while Sussman acknowledged his "partner" role. The court found Sussman's secretly executed WSFS form operating agreement, which identified her as the sole member/manager, to be inoperative because the pre-existing March 25 agreement required unanimous written consent for amendments, which was absent for the WSFS document.
Analysis:
This case reinforces the principle of freedom of contract under the Delaware LLC Act, particularly that an LLC agreement does not need to be a formally executed written document to be enforceable. It highlights the importance of objective manifestations of intent—words and actions—in establishing the existence and terms of an oral or implied operating agreement. The court's willingness to disregard a secretly executed document in favor of prior mutual assent provides a strong cautionary tale against opportunistic behavior by one party seeking to alter agreed-upon terms unilaterally. Future cases will likely cite this decision to emphasize that substantive conduct and communications can create binding LLC relationships, even when formal documentation is lacking or contradictory.
