Chancery Rejects Challenge to Delaware as Proper Venue in Books and Records Action

Morris James LLP

Stanco v. Rallye Motors Holding, LLC, C.A. No. 2019-0751-SG (Del. Ch. Dec. 23, 2019). 

Delaware courts generally respect contractual forum selection provisions. When it comes to Delaware LLCs, however, the Delaware statute expressly precludes a non-managing member from waiving its right to a Delaware forum for proceedings involving the LLC’s internal affairs.  6 Del. C. § 18-109(d). And, in general, any waiver of rights must encompass knowledge of the right and clearly expressed intent to relinquish it. This case discusses the interplay between these rules.

Here, the plaintiff demanded to inspect the books and records of Rallye Motors Holding, LLC, a limited liability company of which he was a member. The defendant argued that the Court of Chancery should dismiss the plaintiff’s case because Delaware was not a proper venue for the claim under the LLC Agreement, which specified that, “[a]ny and all disputes relating to this Agreement shall be venued in [New York courts].” The LLC Agreement also provided a right to its members to inspect its books and records. The plaintiff was a manager of the LLC for some time, including when the LLC Agreement was entered into, but had been removed and was only a member when he filed suit. 

The Court of Chancery upheld Delaware as a proper venue in denying the defendant’s motion to dismiss. In doing so, the Court observed potential ambiguity in Section 18-109(d) of the Delaware LLC Act concerning its application to former managers, like the plaintiff in this action. But the Court found it unnecessary to resolve that potential ambiguity. The Court’s decision, instead, turned on the threshold question of whether, under the LLC Agreement’s terms, the parties waived the plaintiff’s right to a Delaware venue for a statutory books and records claim. When reading the LLC Agreement in light of Section 18-109(d), the Court found no clear intent to waive the plaintiff’s right to a Delaware venue for a statutory books and records claim. In reaching that conclusion, the Court observed, among other things, that the forum selection provision applied to disputes arising out of the contract, while the plaintiff’s claim also arose out of a statutory right to books and records as a member. 

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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