Delaware Chancery Court’s contractarian approach to all things LLC, embedded statutorily in Section 18-1101(b) of the Delaware LLC Act (“It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements”), has been no less forceful in its rich body of caselaw tethering LLC members to the text of their operating agreement when addressing applications for judicial dissolution of LLCs under Section 18-802 of the Act.

Section 18-802, which closely resembles New York’s LLC Law Section 702, authorizes Chancery to decree dissolution of an LLC “whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” In a string of seminal decisions including Haley (2004), Silver Leaf (2005), Seneca (2008) Fisk Ventures (2009), and Arrow (2009), Chancery developed a two-prong standard for judicial dissolution either where there exists deadlock that prevents the LLC from operating with no mechanism in the operating agreement to break deadlock, or where the LLC’s purpose as defined in the operating agreement cannot be carried out.

In Vice Chancellor Laster’s 2015 Carlisle opinion, which I wrote about here, the court broke new, not-so-contractarian ground by holding that it could order the dissolution of an LLC under the court’s traditional equity jurisdiction at the behest of a non-member assignee of a membership interest who otherwise lacked standing to seek dissolution under Section 18-802.

But that’s not the sort of equitable dissolution I want to focus on. The sort I have in mind is where the court entertains and grants a statutory claim for judicial dissolution of an LLC where the facts don’t fit neatly or at all the articulated standard yet the equities as between the parties demand dissolution as a matter of good old-fashioned fairness. Delaware’s contractarian LLC jurisprudence does not welcome that definition of equitable dissolution, nor can I point to any examples of Chancery decisions that fit that bill.

Until now, at least arguably.

In a post-trial opinion handed down earlier this month by Vice Chancellor Will in Gibson v Konick, the court ordered dissolution of an LLC formed for the purpose of owning a vacation home. The LLC had two, formerly romantically involved, 50/50 members. The operating agreement named one of them sole manager, hence there was no deadlock as that term is normally used to refer to the contractual inability to exercise managerial authority. The operating agreement’s stated purpose was to acquire, develop, and own residential property. Those purposes either were achieved or remained attainable.

So how did the court conclude grounds for dissolution under Section 18-802? As I see it, in a word: fairness.

Background

The court’s 31-page opinion recounts the facts that emerged at trial, which I’ll only briefly summarize.

The plaintiff, Ms. Gibson, and the defendant, Mr. Konick, a lawyer, first met in 2017 when she sought to engage him for legal advice on a potential divorce. After she separated from her spouse she became romantically involved with Konick, who was 29 years her senior.

In 2018, by which time they were a couple, they began discussing purchasing together a vacation home belonging to the family of Konick’s childhood friend. The dilapidated house needed major renovation.

In 2020, Gibson and Konick bought the property for $550,000. To do so they formed a Delaware LLC to hold title. Each contributed $100,000, with the $350,000 balance financed by the seller. Thereafter they did extensive renovations of the property.

Their relationship began to deteriorate in late 2021, and was on and off until it broke irreparably in August 2022. In that period, they refinanced the balance of the seller’s loan with a $300,000 bank loan. Concurrently with the refinancing they entered into an LLC agreement prepared by Konick, which I’ll describe below.

As described in the opinion, the “break-up was far from amicable.” Gibson told Konick she no longer wanted to own and share the property; Konick cleared out Gibson’s personal belongings and refused to let her visit the property outside his presence; Konick cut off her access to the LLC’s bank account.

The LLC Agreement

Around the time of the March 2022 refi, Konick presented Gibson with, and they both signed, an LLC agreement that he drafted, back-dated to October 2020 when they bought the property. I can only speculate that the LLC agreement was required by the bank. The agreement stated that the LLC’s sole purpose was to acquire, develop, own, and lease residential property in Sussex County, Delaware. It confirmed their 50/50 ownership and equal $100,000 initial investments.

Although the agreement titled itself a “member-managed” LLC, it designated Konick as the “initial and sole Manager” who could only be removed by 2/3 vote. It also required unanimous member approval for certain decisions including the LLC’s dissolution.

The agreement prohibited a transfer of membership interest without the other member’s consent and forfeited all member rights of the transferee in the event of a non-approved transfer. It also provided that a member who withdraws voluntarily is not entitled to receive the fair market value of the member’s interest.

The opinion does not offer any detail surrounding the signing of the agreement, such as whether Gibson signed it on the spot or had time to review and seek counsel, or whether the two were in a reconciliation or separation phase of their on-and-off relationship. Nowhere in the opinion does it suggest that Konick coerced or fraudulently induced Gibson to sign the agreement.

The Lawsuit

In late 2022 Gibson represented by counsel filed suit against Konick primarily seeking judicial dissolution under Section 18-802 along with other, related claims that I’ll leave aside.

Konick appeared pro se and, according to the opinion, “filed a barrage of motions” all of which were denied.

The court held a one-day trial in February 2024.

The Opinion

The court’s analysis, after summarizing the familiar governing principles, initially focuses on the deadlock prong of the dissolution standard. While acknowledging that Konick is the LLC’s sole manager, the court states that the two members are “hopelessly deadlocked” as evidenced by “the very fact of this lawsuit” in which Gibson “desire[s] to dissolve the Company and recover her investment” whereas Konick wants to keep the property and the LLC intact. The opinion notes that Konick “cruelly rebuffed” Gibson’s attempts to communicate with him before and during the litigation and denied her access to the property. The opinion further comments on the current state of their relationship:

The end of Gibson and Konick’s romantic relationship has left them unable to amicably communicate for the past two years, let alone reach consensus on matters requiring 2/3 or unanimous member approval. Given the mutual hostility expressed at trial, I see no potential for them to resolve their differences in a way that provides a path forward. Gibson has proven deadlock.

The opinion next determines that the LLC agreement offers no deadlock breaking mechanism, finding that the “exit mechanisms” in the agreement “are insufficient alternatives to dissolution” and “would not permit Gibson [a co-guarantor on the bank loan] ‘a fair opportunity’ to ‘exit and receive the fair value of her interest'” (quoting Haley).

The opinion next finds that the stated purpose of the LLC as set forth in the LLC agreement (“to buy, sell, own, trade in, develop, lease, manage, and otherwise deal in real property in Sussex County, Delaware”), which the court recharacterizes as the parties’ “intended purpose of using the Property for pleasure and long-term investment,” has been “meaningfully frustrated.”

Having found both deadlock without a deadlock breaking mechanism and frustration of the LLC’s stated purpose, the opinion concludes that “it is not reasonably practicable for the Company’s business to continue” and that dissolution under Section 18-802 “is warranted.”

Fitting Equity’s Square Peg in the Statute’s Round Hole?

Is anyone else having a hard time reconciling the court’s analysis in Gibson with Chancery’s long line of case precedent in LLC dissolution cases holding members to the bargain they made in their LLC agreement?

• The opinion cites no evidence to suggest that Konick pressured Gibson into signing the LLC agreement or didn’t give her time to read it and ask questions of him or seek out independent counsel.
• The LLC agreement made Konick sole manager. Other than a handful of major decisions requiring unanimous member consent, it’s reasonable to assume (the opinion doesn’t mention otherwise) the LLC agreement delegated all other decisions to Konick as sole manager.
• Since the opinion also doesn’t state otherwise, presumably the LLC’s articles of formation and the LLC agreement provide for the LLC’s perpetual term.
• The restrictions on transfer of membership interests and withdrawal as described in the opinion strike me as mainstream provisions in LLC agreements.

As for the opinion’s two key holdings:

• The court’s deadlock analysis at its core seems to boil down to (i) the LLC agreement requires Konick’s consent to dissolve, (ii) Konick doesn’t agree to dissolve, (iii) Gibson has sued for judicial dissolution, (iv) ergo, deadlock. Unanimous consent to voluntary dissolution is a standard feature of many, many LLC agreements. Taken to it’s logical extreme, under that analysis judicial dissolution is there for the asking anytime a member wants out.
• The opinion quotes the LLC agreement’s actual stated purpose, which is commonly found, generic language for realty holding LLCs, but then materially recharacterizes it before finding frustration of purpose.

Don’t get me wrong. Based on the court’s description of the Konick’s behavior which I’ve only partially highlighted in this post, the presumed trust the non-lawyer Gibson had in her much older lawyer/romantic partner, and on the unfairness of the position Gibson was left in after the ugly break-up, having to continue paying half the mortgage loan on a property she can no longer use, I am 100% aligned with the case outcome.

What’s more, as a New York business divorce lawyer who witnesses first hand courts of New York that frequently factor into their decisions the equities of the case alongside the parties’ agreements — especially in cases involving lopsided familial relationships — I’m gratified to see a Chancery Court decision that seems to do the same, even if the court effectively has to reshape equity’s square peg in the round hole of Delaware’s contractarian jurisprudence.

Tulane Law Professor Ann Lipton, one of the foremost experts on Delaware law, wrote about the Gibson case on the Business Law Prof Blog which you can read here. She also concludes that the outcome “certainly seems like a fair resolution” but goes on to comment that the decision “also reflects the awkwardness of trying to shoehorn what was fundamentally a family dispute into laws designed for business relationships” and that “[t]here really should be a better framework.”

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