Dlaware Court of Chancery Finds Personal Jurisdiction Over Party Acting As Manager Under 18-109

Steven D. Goldberg, Esq. Wilmington, DE sgoldberg@stevendgoldberg.com http://www.stevendgoldberg.com Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law including Delaware Law opinions. Delaware Forms and Publications are available at http://www.delawarellclaw.com

Feeley, et al. v. NHAOCG, LLC, et al. Vice Chancellor Laster

Ak-Feel, LLC was the sole “managing member” of Oculus Capital Group, LLC (“Oculus”) an a 50% member in Oculus. Feeley was the managing member of Ak-Feely and an employee of Oculus. NHAOCG, LLC (“NHA”), a NY LLC was the remaining 50% member in Oculus.

Under the LLC agreement of Ak-Feel the managing member had complete authority to act for the LLC and no member who was not acting as the managing member had any authority to act for the LLC.

The Oculus LLC agreement similarly gave the managing member complete authority. The managing member could only be removed with the consent of both members or by NAH if Feeley is no longer an employee of Oculus, if Andrea Aikel has been terminated for “Good Cause” or if Ak-Feel has defaulted un its obligation under the Oculus LLC agreement and has failed to cure the default.

After a dispute arose, NAH purported to act for Oculus and notified Feeley that Oculus would not renew his contract (an action which could only be taken by the managing member) but stated that his employment would continue after the termination of the contract. Later it gave Feeley notice that Oculus was terminating the employment contract of Feeley. NAH purported to remove Ak-Feely as the managing member and named itself as the managing member. Feeley promptly filed the subject action and sought a TRO against his removal as the managing member of Oculus and asserted 9 claims against NAH, the individual beneficial owners of NAH as well as Aikel, claims which involved the breach of the LLC agreement, the implied covenant of good faith and fair dealing, breach of fiduciary duties, tortious interference as well as other minor claims.

The Oculus LLC agreement did not contain a consent to jurisdiction provision and the defendants do not have any jurisdictional ties to Delaware other than their action with respect to Oculus in connection to the control dispute.

Section 18-110 of the Delaware LLC Act (the “Act”) gives the Delaware Court of Chancery in rem jurisdiction to determine who validly holds office as a manager of a Delaware LLC. The Court stated that “[b]ecause a Section 18-110 proceeding affects the Delaware LLC and the office of managing member, it is not necessary for all claimants to the office to be subject to the Court’s in personam jurisdiction in order for the court to make an authoritative determination.” The Court thus found that it had in rem jurisdiction over NAH.

Section 18-109(a) of the Act is an implied consent statute which grants the court personal jurisdiction over persons who serve as managers of a LLC for  the purpose of adjudicating claims for breach of duty in the capacity as manager involving or relating to the business of the LLC. The complaint alleges that NAH “participated materially in the management of Oculus by taking actions that fell within the exclusive authority of the Managing Member under the Oculus LLC Agreement.” The Court found that NAH had indeed participated beyond merely exercising a claimed right to remove Feeley and Ak-Feel.

The individual defendants moved to dismiss, the Court deferred decision on the motion to dismiss them pending further discovery and the scheduled one day hearing. The Court considered whether it had jurisdiction over the individuals by looking though the entities in a manner authorized in the USACafes case discussed in an earlier Blog. This case involves another layer of entities between the individuals and NAH which further caused the Court to defer a ruling.

The Court found pendent jurisdiction under 18-109 based in large measure by applying law developed under the DGCL and its application to corporate directors. “Once a defendant is subject to personal jurisdiction under Section 18-109 as to certain claims, the Court may over the defendant with respect to other sufficiently related claims. Asssist, 753 A.2d at 981; see Infinity Investors 2000 WL 130622, at *6 (‘[O]nce jurisdiction is properly obtained over a non-resident director defendant pursuant to Sec. 3114, such non-resident director is properly before the Court for any claims that are sufficiently related to the cause of action asserted against such directors in their capacity as directors.’)”.

I can be reached at sgoldberg@stevendgoldberg.com, my direct dial number is 302.351.4490

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