Background
Melrose Wang Capital Investments LLC, a member of Houston Hotel Partners, LLC, sued the company and fellow member AAFF–Houston Hotel Partners, LLC in a separate plenary action. It alleged that they violated the LLC operating agreement by approving distributions to AAFF contrary to waterfall provisions and by amending or modifying the agreement without Melrose Wang’s consent.
Melrose Wang then brought this action seeking advancement of its fees in the plenary case under Sections 8.1 through 8.3 of the operating agreement. A Magistrate in Chancery concluded that Melrose Wang was not entitled to advancement, and Melrose Wang filed exceptions.
The Court’s Holding
Vice Chancellor Bonnie W. David denied the exceptions and adopted and affirmed the Magistrate’s report after de novo review. The court agreed that the advancement provision covered a member potentially eligible for indemnification or exculpation under the related provisions, and that Melrose Wang’s affirmative claims were not brought on the company’s behalf or within the authority contemplated by those provisions.
The court further held that Melrose Wang would lose even if Section 8.3 were read independently. The plenary action concerned alleged conduct by the company and AAFF, not Melrose Wang’s own involvement with the company. Reading the clause to cover the suit would also make its required good-faith statement and repayment undertaking—both tied to the claimant’s compliance with a standard of conduct—illogical.
Key Takeaways
- An LLC advancement clause may be read alongside related indemnification and exculpation provisions.
- Advancement language covering proceedings relating to a member’s involvement with the company did not extend to the member’s affirmative distribution claims.
- Contractual requirements tied to the claimant’s own conduct supported denying advancement where the underlying suit did not concern that conduct.
Why It Matters
The decision underscores that advancement rights turn on the specific contractual language and the connection between the claimant’s own company-related conduct and the underlying proceeding. A member suing affirmatively to enforce economic rights under an LLC agreement cannot assume that a broadly worded advancement provision will fund that litigation.