The Court of Chancery recently concluded that a member of a Delaware LLC could reach an implied contractual agreement to withdraw as a member of the LLC, even if the LLC does not have a written operating agreement.
In 5high LLC v. Howard Feiler, et al., C.A. No. 2022-0108-LWW (Del. Ch. Aug. 5, 2022), the two 50-50 members of an LLC disagreed on how to address the company’s significant cash flow issues. They initially decided to each contribute additional capital to keep the company afloat; however, following a disagreement, one member (AHJ&R Business Development LLC, owned and controlled by Howard Feiler) informed the other member (5high LLC, an entity owned and controlled by Lawrence Arin) that he no longer wanted to be involved with the company and requested the return of his check for the additional capital. Arin did not object and proceeded to serve as the only manager of the company. Feiler announced his resignation to customers and personnel and had his name removed from the company’s credit card and bank account.
Feiler and Arin discussed memorializing Feiler’s resignation as a member of the company, but they were unable to reach an agreement. Later, Feiler demanded books and records under 6 Del. C. § 18-305. The company denied the demand on the basis that Feiler was no longer a member.
Plaintiff 5high LLC filed a declaratory judgment action seeking a declaration that it was the sole member of the company. Feiler and AHJ&R filed a counterclaim seeking a declaration that he held a 50% membership interest.
The Court explained that a member’s withdrawal from an LLC is governed by the company’s operating agreement. An agreement governing the business and affairs of a limited liability company may be “written, oral, or implied.” An implied contract is “inferred from the conduct of the parties, though not expressed in words.” In the absence of an operating agreement, or where the agreement is silent, the LLC Act’s default provisions control, and a member may not withdraw prior to the dissolution and winding up of the LLC.
The Court determined that the parties entered into an implied agreement that modified the LLC Act’s default provision that otherwise would have precluded Feiler’s withdrawal prior to dissolution and winding up. Feiler’s actions manifested his intent to resign as a member. Feiler argued that he never used the word “resign,” but the Court found that no special words are required. He repeatedly expressed his intention to leave the company such that an objective observer would conclude that Feiler had resigned his position.
The Court also found that 5high manifested its acceptance of Feiler’s withdrawal. Arin returned Feiler’s check as requested, removed Feiler’s name from the company’s bank account (at Feiler’s request), and never objected to Feiler’s exit. The Court further determined that the parties’ subsequent efforts to reach a written agreement concerning Feiler’s departure did not undermine the conclusion that an implied agreement already had been reached. The parties attempted to reach a written agreement to “tie up loose ends”, not to effect Feiler’s resignation. There was no question that Feiler had withdrawn from the company.
For these reasons, the Court determined that Feiler resigned from and withdrew as a member of the company and that 5high was the sole member. The Court did not reach the question of whether Feiler was entitled to any value for his interest in the company as of the date of his resignation.
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