Real Estate Law Blog

Delaware is famous for upholding contractual provisions between members of an LLC absent very rare breaches of the unwaiveable duty of good faith and fair dealing.  The holding in Huatuco, which involved disputes over a healthcare partnership, may take this to the next level.  You see, the contractual provision did not actually mention dissolution.  In the LLC Agreement's section discussing distributions the following sentence was included:

"Except as otherwise required by applicable law, the Members shall only have the power to exercise any and all rights expressly granted to the Members pursuant to the terms of this Agreement."

Section 18-802 of the Act provides:

"On application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement."

The decision is a stretch because the sentence in the LLC Agreement does not refer to dissolution or even purport to "waive" anything. (Delaware law has long held that a contractual waiver of statutory provisions can occur unless the statute specifically says it can't be waived.) 

Glasscock leaves open the possibility that even an explicit waiver of court ordered dissolution may not be enforceable depending on the equities in a footnote:  "Whether the parties may, by contract, divest this Court of its authority to order a dissolution in all circumstances, even where it appears manifest that equity so requires leaving, for instance, irreconcilable members locked away together forever like some alternative-entity version of Sartre’s Huis Clos – is an issue I need not resolve in this Memorandum Opinion.  As I find below, considerations fundamental to equity are absent here."

Frankly, it never occurred to me that members could waive Delaware’s judicial dissolution provision but after thinking about it, I suppose it makes sense.  Why can't a managing member say to a non-managing member, "only I can go to court to dissolve based on impracticality"? 

After reading the opinion, I immediately updated my basic form of Delaware LLC agreement but I did not use the Huatuco clause - I'm not sure that clause was a true waiver - I just added the following to my dissolution section:  "provided only the Managing Member may petition for dissolution under section 18-802 of the Act."