Delaware Amends LLC Act After Supreme Court Holds that Statute of Frauds Applies to LLC Agreements

Update 11/27/10: The Delaware legislature amended the LLC Act to overrule the Halvorsen case I discuss below. "A limited liability company agreement is not subject to any statute of frauds (including § 2714 of this title)." Here’s one transactional lawyer’s opinion on the recent Delaware Supreme Court decision in Olson v. Halvorsen: the Court did not need to reach the question of whether the Delaware Statute of Frauds applies to oral LLC agreements but when it did so, the answer it gave was wrong. The result in the case was correct since the complaining member never proved an oral modification and that result was clear. Olson signed a short form LLC agreement with his partners which presumably permitted only written amendments. Another affiliated entity was formed and numerous drafts were circulated over an extended period. The Vice Chancellor found and the Supreme Court upheld that Olson did not prove an oral modification to the original LLC arrangements which even the plaintiff admitted limited his payout to “cap and comp”, his capital account and his accrued compensation. So why the fuss? The Supremes went on to specifically hold that DE’s statute of frauds was not repealed by its LLC Act which permits oral and implied LLC agreements. Huh? A later passed statute which specifically authorizes a type of agreement restricted by an earlier statute seems to me to amend the prior. The good news is that the DE legislature is pretty good about fixing its statutes when needed. But when they look at this one, they will scratch their heads. So what is a transactional lawyer to do? A few basic pieces of advice on DE LLC’s still hold: 1. Even though the statute permits an oral or implied agreement, it remains a good idea to have a written agreement. 2. If you have a writing and think that there is an amendment, you really should get the amendment in a signed writing. 3. To avoid a six-day trial and an appeal to the Supremes, when a draft is circulated that you do not accept, say so in writing and make sure you are on record that no amendment shall be effective without a signed writing. The Olson decision will only exacerbate the typical transactional lawyers distaste for any statute of frauds – it is riddled with exceptions (who knows when “part performance” will affect a result?) and whether it applies at all (must this particular agreement be performed within a year?) is a test for only the most professorial among us.

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