Manager’s Efforts To Graft Prior Notice Into Operating Agreement Rejected

Manager’s Efforts To Graft Prior Notice Into Operating Agreement Rejected

      In a recent decision from the Delaware Chancery Court, it rejected the assertion of a removed manager that it’s removal for cause was ineffective because it had not received notice that it was to be removed, an explanation as to why or the opportunity to respond to the allegations. Rather, the court applied the operating agreement as written; it contained none of those requirements. Re: A&J Capital, Inc. v. Law Office of Krug, C.A. No. 2018-0240-JRS, 2018 WL 3471562 (Del. Ch. July 18, 2018).

      A & J Capital, Inc. (“A & J”) served as a manager of LA Metropolis Condo I, LLC (“LAMC”). Under the LAMC operating agreement, a majority of the members thereof could remove A & J for “gross negligence, intentional misconduct, fraud or deceit.” Those same members, after the removal of the manager, had the right to appoint a new interim manager. In this instance, after A & J was removed, the Law Office of Krug was appointed as that new interim manager.

      After majority of the members of LAMC voted to remove A & J is the manager, they delivered to A & J notice of that action. A & J, objecting to its removal, asserted that in that the operating effectively required that he could be removed only for cause, he was entitled to pre-removal notice and an opportunity to challenge that assertion.

      Cutting to the chase, after noting that an operating agreement typically will provide those procedural protections when desired, “in the absence of such provisions, the Court will not infer them or rewrite the contract to include them.” 2018 WL 3471562, *3.

      A & J’s reliance upon corporate law requiring, where a director is to be removed for cause, that there be notice and opportunity to be heard, was rejected on the straight forward basis that LLCs are not corporations.

      In that neither notice nor opportunity to object were written into this operating agreement, the court refused to write those provisions, for which there had never been negotiation, into the agreement.