COURT OF CHANCERY
OF THE
STATE OF DELAWARE
J. TRAVIS LASTER New Castle County Courthouse
VICE CHANCELLOR 500 N. King Street, Suite 11400
Wilmington, Delaware 19801-3734
Date Submitted: September 22, 2014
Date Decided: September 24, 2014
Robert J. Katzenstein, Esquire Collins J. Seitz, Jr., Esquire
David A. Jenkins, Esquire Eric D. Selden, Esquire
Clarissa R. Chenoweth Seitz Ross Aronstam & Moritz LLP
Smith Katzenstein & Jenkins LLP 100 S. West Street, Suite 400
800 Delaware Avenue, Suite 1000 Wilmington, DE 19801
Wilmington, DE 19899
Kenneth J. Nachbar, Esquire
Lindsay M. Kwoka, Esquire
Morris, Nichols, Arsht & Tunnell LLP
1201 N. Market Street
Wilmington, DE 19899-1347
RE: Seaport Village Ltd. v. Seaport Village Operating Company, LLC, et al.
C.A. No. 8841-VCL
Dear Counsel:
Seaport Village Operating Company, LLC (the “Company”) seeks to recover from
Seaport Village Ltd. (“Limited”) the attorneys’ fees and expenses that the Company
incurred in this action and a related proceeding that Limited pursued in California.
Section 12.12 of the Company’s limited liability company agreement (the “Agreement”)
provides as follows:
If any action is brought by any party against another party, relating to or
arising out of this Agreement, or the enforcement hereof, the prevailing
party shall be entitled to recover from the other party reasonable attorneys’
fees, costs and expenses incurred in connection with the prosecution or
defense of such action. For purposes of this Agreement, the term
“attorneys’ fees” or “attorneys’ fees and costs” shall mean the fees and
September 24, 2014
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expenses of counsel to the parties hereto, which may include printing,
photocopying, duplicating and other expenses, air freight charges, and fees
billed for law clerks, paralegals and other persons not admitted to the bar
but performing services under the supervision of an attorney, and the costs
and fees incurred in connection with the enforcement or collection of any
judgment obtained in any such proceeding. The provisions of this Section
shall survive the entry of any judgment, and shall not merge, or be deemed
to have merged, into any judgment.
It is undisputed that (i) the Company was a prevailing party in this action, (ii) this action
was a continuation of the California Action, (iii) both lawsuits arose out of the
Agreement, and (iv) the amount requested is reasonable. Limited’s only defense is that
because the Company did not sign the Agreement, it is not a “party” to the Agreement.
This defense fails as a matter of law. Section 18-101(7) of the Delaware Limited
Liability Company Act (the “LLC Act”) provides that “[a] limited liability company is
bound by its limited liability company agreement whether or not the limited liability
company executes the limited liability company agreement.” 18 Del. C. § 18-101(7). By
statute, a limited liability company is a party to its own limited liability company
agreement, regardless of whether the limited liability company executes its own limited
liability company agreement.
Before 2002, Section 18-101(7) was silent on the issue of whether a limited
liability company was bound by and therefore a party to its own operating agreement. In
the Elf Atochem decision, the Delaware Supreme Court addressed the issue and held that
a “[limited liability operating agreement] is binding on the LLC as well as the members.”
Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 287 (Del. 1999). In that litigation, a
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member of the LLC sought to have this court adjudicate claims under the LLC’s
operating agreement even though the agreement contained an arbitration clause and a
forum selection provision vesting exclusive jurisdiction in the California courts for
matters not covered by the arbitration clause. Id. at 293. The plaintiff contended that
because the LLC did not sign the operating agreement, it was not a party to that
agreement and was not bound by the arbitration clause or forum selection provision. Id.
The Delaware Supreme Court was “not persuaded by this argument.” Id.
In 2002, the General Assembly amended Section 18-101(7) to codify these aspects
of Elf Atochem by adding the following language to the LLC Act: “A limited liability
company is not required to execute its limited liability company agreement. A limited
liability company is bound by its limited liability company agreement whether or not the
limited liability company executes the limited liability company agreement.” Del. SB
363, 141st General Assembly, 2002 Delaware Laws Ch. 295 (June 20, 2002). The
amendment became effective on August 1, 2002. In 2005, the General Assembly added
nearly identical language to the LLC Act to clarify that members also are bound by the
LLC’s operating agreement, regardless of whether they execute the agreement. Del. SB
86, 143rd General Assembly, 2005 Delaware Laws Ch. 51 (June 14, 2005) (adding the
words “[a] member … is bound by the limited liability company agreement whether or
not the member … executes the limited liability company agreement”). These
amendments make clear that the LLC and its members are parties to and bound by the
LLC agreement, regardless of whether they sign it.
September 24, 2014
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Basic principles of contract law support this reading. As a general matter, “only
parties to a contract are bound by that contract.” Am. Legacy Found. v. Lorillard
Tobacco Co., 831 A.2d 335, 343 (Del. Ch. 2003) (holding that an entity formed by
operation of a settlement agreement, although not a signatory, was a party to the
settlement agreement). Likewise, “only a party to a contract may be sued for breach of
that contract.” Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 817 A.2d 160, 172 (Del.
2002) (citation omitted). By binding a Delaware LLC and its members to their operating
agreement, Section 18-101(7) makes them parties to the operating agreement.
The Company is a party to the Operating Agreement and can therefore enforce the
fee-shifting provision against Limited. The Company is awarded fees and expenses in
the amount of $363,803.82. Interest is due on this amount at the legal rate, compounded
quarterly from July 2, 2014, to the date of payment. The Company also is entitled to the
attorneys’ fees and expenses it incurred bringing the motion, which are costs of
enforcement that fall within the fee-shifting provision. Counsel shall provide a Rule 88
affidavit. The parties shall implement this decision through an order that is agreed as to
form.
Sincerely yours,
/s/ J. Travis Laster
J. Travis Laster
Vice Chancellor
JTL/krw