Limited Liability Companies
LLC Certificate of Cancellation Nullified Where Reserve for Known Claims Was Not Established
By Lawrence A. Goldman, Gibbons P.C.
In Kevin Capone, et al. v. LDH Management Holdings LLC, et al, the issue was whether an LLC had been dissolved in violation of Section 18-804(b)(1) of the Delaware Limited Liability Company Act which requires that the dissolving company pay or make provision to pay all claims, “including all contingent, conditional or unmatured contractual claims known to the [LLC].” Plaintiffs’ interests in the LLC had been redeemed and they contested the valuation utilized for the redemption payments. The subject LLC was dissolved and no reserve was set aside with respect to plaintiffs’ claims. Defendants contended that the valuation for purposes of the redemption payments had been consistent with the terms of the LLC agreement, no contractual breach had occurred and, accordingly, no reserve was required for claims that they believed would be unsuccessful. The Chancery Court stated that plaintiffs’ claims of a contractual breach were not frivolous, and that because defendants were aware of such claims at the time of the LLC’s dissolution, the LLC Act required the creation of a reserve to cover the claims. Thus, the Court held that LLC was dissolved in violation of Section 18-804(b)(1) and the certificate of cancellation was nullified.