Huatuco v. Satellite Healthcare, C.A. No. 8465-VCG (Del. Ch. Dec. 9, 2013) (Glasscock, V.C.)

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In this memorandum opinion, the Court of Chancery granted the defendant’s motion to dismiss the plaintiff’s complaint, pursuant to which the plaintiff sought judicial dissolution of a limited liability company.  The Court of Chancery held that the plaintiff did not have the right to seek judicial dissolution of the limited liability company because the parties had agreed, under the terms of the limited liability company agreement, to eliminate the default statutory right to seek judicial dissolution. 

In August 2007, plaintiff Dr. Aibar Huatuco (“Huatuco”) and defendant Satellite Health Care (“Satellite”) entered into the limited liability company agreement (the “LLC Agreement”) of Satellite Dialysis of Tracy, LLC, a Delaware limited liability company (the “Company”).  The LLC Agreement contained a clause (the “Limited Rights Clause”) providing as follows:  “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.”  Further, the LLC Agreement provided that dissolution required a super-majority vote of the members.  Importantly, the LLC Agreement did not expressly provide members the right to seek judicial dissolution of the Company. 

On April 8, 2013, following disputes between Huatuco and Satellite—each a holder of a fifty percent interest in the Company—about the past and future operations, as well as ownership, of the Company, Huatuco filed a complaint in the Court of Chancery.  Though Huatuco alleged in his complaint that Satellite breached the LLC Agreement in several respects which, if proven, would permit Huatuco to purchase Satellite’s interest in the Company, Huatuco did not seek the right to purchase Satellite’s interest in the Company.  Instead, Huatuco sought judicial dissolution of the Company under 6 Del. C. § 18-802.  Satellite moved to dismiss Huatuco’s complaint, contending that the Limited Rights Clause precluded Huatuco from seeking judicial dissolution of the Company. 

In analyzing whether Huatuco was entitled to seek judicial dissolution of the Company, the Court of Chancery focused on the language of the Limited Rights Clause.  The Court of Chancery concluded that the parties’ use of the phrase “any and all rights” in the Limited Rights Clause demonstrated that the parties intended the clause to apply to both economic and noneconomic rights, including the right to seek judicial dissolution.  The Court of Chancery reasoned that, by (i) specifically addressing dissolution and certain dissolution rights in the LLC Agreement, (ii) failing to include an express right to seek judicial dissolution in the LLC Agreement, and (iii) including the Limited Rights Clause in the LLC Agreement, the parties intended to exclude from their bargain the right to seek judicial dissolution.  Further, the Court of Chancery concluded that a right to seek judicial dissolution under 6 Del. C. § 18-802 is not required by law. 

The Court of Chancery also rejected Huatuco’s contention that, as a matter of public policy, Huatuco should not be deprived of the remedy of judicial dissolution.  In doing so, the Court of Chancery reasoned that permitting judicial dissolution would fundamentally change the bargain the parties made pursuant to the LLC Agreement.  Further, the Court of Chancery noted that the LLC Agreement provided Huatuco with the right to withdraw from the Company, albeit, on terms that might not be favorable to Huatuco.  In addition, Huatuco retained the ability to pursue an action against Satellite for breach of the LLC Agreement, which, if successful, would allow Huatuco to recover his economic interest in the Company.  In light of the alternative remedies available to Huatuco, the Court of Chancery found no compelling equitable grounds to impose judicial dissolution. 

The Court of Chancery, therefore, concluded that Huatuco did not have the right to seek judicial dissolution of the Company and granted Satellite’s motion to dismiss because (i) a right to seek judicial dissolution under 6 Del. C. § 18-802 is not required by law, and (ii) the parties had agreed, under the terms of the LLC Agreement, to opt out of the statutory default provided under 6 Del. C. § 18-802.  However, the Court of Chancery did not address whether parties may, by contract, divest the Court of Chancery of its authority to order a dissolution in all circumstances. 

The full opinion is available here.

Topics:  Corporate Dissolution, Dissolution, LLC, Operating Agreements

Published In: Business Organization Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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