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Walker v. Resource Dev. Co. Ltd., LLC

Court of Chancery of Delaware
791 A.2d 799, 2000 Del. Ch. LEXIS 127 (2000)
ELI5:

Rule of Law:

Unless expressly permitted by the operating agreement or statute, members of a Delaware limited liability company (LLC) do not have the inherent authority to unilaterally expel another member and forfeit that member's economic interest.


Facts:

  • William Cox and William Baron formed Resource Development Company, L.L.C. (REDECO) to pursue an oil concession in Moldova and needed financing.
  • Cox and Baron met Randolph Walker, who claimed to have significant financial connections, and brought him into the venture to secure funding.
  • Walker introduced REDECO to Stephen Norris of The Appian Group as a potential investor, but failed to secure any financing.
  • Cox and Baron, along with a third member, William Liedtke (collectively, the 'three Bills'), became aware of Walker's alcohol abuse, financial irresponsibility, and indebtedness to Norris.
  • Despite this knowledge, on July 25, 1995, the three Bills and Walker executed an LLC Operating Agreement that granted Walker an 18% ownership interest but contained no provision for the involuntary removal of a member for cause.
  • On August 23, 1995, the potential financing deal with Norris and The Appian Group definitively fell through at a meeting.
  • The next day, Cox, with the consent of Baron and Liedtke, sent Walker a 'Severance Arrangement' letter purporting to terminate both his membership and his 18% ownership interest in REDECO.
  • Walker refused to acknowledge the termination of his ownership interest.

Procedural Posture:

  • Randolph T. Walker filed a lawsuit against William J. Cox, Jr., William C. Baron, William C. Liedtke, III, and Resource Development Company, Limited, L.L.C. (REDECO) in the Delaware Court of Chancery (the trial court for corporate matters).
  • The defendants asserted several counterclaims against Walker, including breach of contract, fraudulent inducement, and breach of fiduciary duty.
  • A bench trial was held before the Vice Chancellor on March 15-16, 2000.
  • Following the trial, the parties submitted post-trial briefs and presented oral arguments to the Court of Chancery.

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Issue:

Does a majority of members in a Delaware LLC have the authority to unilaterally remove another member and forfeit their economic interest where the operating agreement and the Delaware LLC Act are silent on the matter?


Opinions:

Majority - Lamb, Vice Chancellor

No. A majority of members in a Delaware LLC does not have the authority to unilaterally remove another member and forfeit their economic interest where the operating agreement and the Delaware LLC Act are silent on the matter. The Delaware LLC Act prioritizes freedom of contract, making the operating agreement the cornerstone of the members' relationship. The REDECO Operating Agreement contained no provision authorizing the involuntary expulsion of a member for cause or poor performance, nor did it permit the forfeiture of a member's equity. Likewise, the default provisions of the LLC Act do not grant such a power. The defendants' claim of fraudulent inducement also fails because they could not prove justifiable reliance; they were fully aware of Walker's personal and financial problems long before they signed the agreement that confirmed his 18% interest. Thus, the defendants' attempt to strip Walker of his ownership was legally ineffective.



Analysis:

This case strongly affirms the principle that an LLC is a creature of contract, and the members' rights and duties are governed almost exclusively by the operating agreement. It establishes a clear precedent that there is no inherent or default power for a majority of members to expel another member and confiscate their equity interest; such a significant power must be explicitly contracted for. The decision underscores the critical importance of careful and comprehensive drafting of LLC operating agreements, particularly regarding member dissociation, expulsion, and buyout provisions. For future cases, this opinion serves as a stark warning to LLC members that courts will enforce the terms of the agreement as written and will not create remedies for parties who failed to contractually protect themselves from foreseeable risks, such as a partner's non-performance.

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