Background
Melrose Wang Capital Investments LLC is an 8.25% member of Houston Hotel Partners, LLC, a Delaware LLC. Another member, AAFF-Houston Hotel Partners, LLC, holds a 45.375% interest and has rights to appoint half the board, cast a tie-breaking vote after certain deadlocks, and participate in preparing the annual operating budget.
Melrose alleged that the Company made more than $3 million in distributions to AAFF without making corresponding distributions to Melrose. It claimed those payments violated the LLC agreement’s distribution waterfalls and sought a declaration that provisions concerning AAFF’s first-priority contribution and reserves did not independently authorize the payments. Defendants moved to dismiss based on a Florida forum-selection clause, lack of personal jurisdiction over AAFF, failure to state a claim, and failure to join indispensable parties.
The Court’s Holding
Vice Chancellor Bonnie W. David denied the venue challenge. Although the LLC agreement selected courts in Hillsborough County, Florida for disputes related to the agreement, 6 Del. C. § 18-109(d) prevents a non-managing member from waiving its right to bring Delaware litigation concerning the internal affairs of a Delaware LLC. This dispute concerns internal affairs because it requires interpretation of the LLC agreement to determine members’ rights and managers’ obligations concerning Company distributions.
The court deferred decision on personal jurisdiction over AAFF and ordered jurisdictional discovery. Melrose’s allegations that AAFF had governance rights and may have orchestrated the disputed payments provided a sufficient indication that AAFF could be a de facto manager subject to Delaware jurisdiction. Because jurisdiction is a threshold issue, the court also deferred the merits-based dismissal motion and the indispensable-party argument.
Key Takeaways
- A non-managing member cannot contract away its right under Section 18-109(d) to sue in Delaware over a Delaware LLC’s internal affairs, except through an agreement to arbitrate arbitrable matters.
- A dispute over distributions under an LLC agreement can concern internal affairs when it implicates the rights of members and obligations of managers.
- Allegations of substantial governance authority and involvement in challenged conduct can justify jurisdictional discovery into whether a nominally non-managing member is a de facto manager.
Why It Matters
The decision limits the force of non-Delaware exclusive forum clauses in Delaware LLC agreements as applied to non-managing members pursuing internal-affairs claims. Contract drafters and litigants should account for Section 18-109(d) when selecting an exclusive litigation forum.
The ruling also illustrates that the Court of Chancery may permit targeted discovery before deciding whether an LLC member’s contractual powers and conduct establish personal jurisdiction as a de facto manager.