In anticipation of launching a chain of restaurants, three restaurant operators joined an outside investor to form a four-member, member-managed limited liability company. After the three operators had a falling out with the investor, they invoked a provision of the LLC agreement to expel the investor as a member. The investor sued for breach of the LLC agreement. The operators counterclaimed that their actions had been proper and that the investor had breached the LLC agreement.
In a post-trial opinion, the Court of Chancery determined that the operators had validly expelled the investor-member. On multiple occasions, the investor had repudiated his contractual obligations, including to provide some amount of capital contribution to help the nascent company meet its initial obligations. By the terms of the expulsion provision, this willful violation of the LLC agreement was a valid basis for the operators to expel the investor as a member. Further, the investor’s decision to terminate unilaterally a new lease was reckless, given that it created risk for the company and deprived the company of the value of the lease itself. The Court found this reckless lease termination to be a valid basis for the operators to trigger the gross-negligence term in the expulsion provision. The Court determined the operators were entitled to indemnification under the agreement, and the Court concluded the harm consisted solely of the members’ litigation expenses, including attorneys’ fees.
