C.A. No. 3869 (Del. Ch. Apr. 1, 2009)
In this letter opinion, the Court of Chancery denied defendant’s motion for summary judgment that Plaintiff, Elaine Mickman, was not entitled to inspection of the books and records of a limited liability company. Defendant, LFF, L.L.C. (“LFF”) had refused Plaintiff’s books and records request on the grounds that Plaintiff was not a member of LFF. The Court distinguished the law concerning such records requests in the alternative entities context from that of corporations and found that sufficient genuine issues of fact existed so that Defendant’s summary judgment motion should be denied.
Plaintiff had brought an action for inspection of books and records of a Delaware limited liability company under 6 Del. C. § 18-305. Section 18-305 provides in pertinent part that, “[e]ach member of a limited liability company has the right … to obtain from the limited liability company from time to time upon reasonable demand for any purpose reasonably related to the member’s interest as a member of the [LLC] … [various records of the LLC]” (emphasis in original). The opinion revolved around factual issues as to whether Plaintiff was a “member” within the meaning of Section 18-305. LFF argued that it had a formal operating agreement and that neither the operating agreement nor any amendments to it listed Plaintiff as a member of LFF. Plaintiff conceded that she herself was not listed in the list of members to the operating agreement. Plaintiff instead pointed to certain contemporaneous documents filed with the Internal Revenue Service by her now divorced husband, who was listed as a member in the operating agreement. These documents submitted by Plaintiff’s ex-husband to the IRS, which included a tax return and a document signed under penalty of perjury, listed Plaintiff as a joint member along with him of LFF and, thereby, by inference, Plaintiff was a member as well.
In support of its arguments, LFF analogized the LLC statute to a similar statute concerning corporations. Specifically, LFF noted that, in the case of a corporation, only stockholders listed in the stock ledger are recognized as holders of record of stock for purposes of a request for inspection of books and records under the equivalent Section 220 of the Delaware General Corporation Law (as in effect before the 2003 amendments to Section 220 permitting beneficial holders to demand inspection as well). Similarly, LFF argued that since a formal operating agreement was in existence, only the members listed in LFF’s operating agreement should be recognized as members with a right to inspect books and records under Section 18-305. In ruling against LFF, Vice Chancellor Parsons distinguished a case cited by Defendant in this respect, Shaw v. Agri-Mark, Inc., 663 A.2d 464 (Del. 1995). There, the Delaware Supreme Court had held that a party who supplied equity to a stock corporation, but was not a stockholder of record, had no right to inspect the corporation’s books and records. The Court, however, found that decision was inapposite, ruling that the holding of that decision was limited to stock (as opposed to non-stock) corporations. Moreover, Vice Chancellor Parsons distinguished the case of a book and records request of an LLC from that of a corporation on policy grounds. Vice Chancellor Parsons noted that “LLCs generally are created on a less formal basis than corporations and are basically creatures of contract.” Given the flexible and less formal nature of LLCs, the Court held that it was reasonable to consider evidence beyond the four corners of the operating agreement. Notwithstanding that the operating agreement did not list Plaintiff as a member, the contemporaneous tax documents that Plaintiff cited to raised sufficient factual issues as to whether Plaintiff was a member of LFF entitled to inspect the books and records of LFF under Section 18-305. As such, the Court denied LFF’s motion for summary judgment in its favor.
The full opinion is available here.