The express wording of Section 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.”¹ The Delaware Court of Chancery recently applied Section 101(7) of the LLC Act in Seaport Village Ltd. v. Seaport Village Operating Company, LLC² Seaport), finding that a limited liability company could enforce the fee shifting provision of its limited liability company agreement, even though the company was not a party to the agreement.

The Seaport Decision

In Seaport, Seaport Village Operating Company, LLC (Seaport LLC) sought to recover attorneys’ fees and expenses pursuant to a fee shifting provision of its limited liability company agreement that allowed the prevailing party in an action “brought by any party against another party” to recover reasonable attorney’s fees, costs and expenses incurred in the prosecution or defense of such action.³ Seaport Village Ltd. argued that because Seaport LLC had not signed its limited liability company agreement, it was not a “party” to the agreement and therefore could not recover its fees and expenses pursuant to the agreement.⁴ The Chancery Court was unpersuaded by the argument, finding that the defense failed as a matter of law.⁵ The Court summarized the statutory history of Section 101(7) of the LLC Act, which was amended in 2002 to codify case law holding that the limited liability company agreement of a Delaware limited liability company was binding on the company and its members, whether or not signed by the company.⁶

Implications of the Seaport Decision and Section 101(7) for Members of Delaware Limited Liability Companies

The Seaport decision is not surprising given the unambiguous language of the LLC Act. Section 101(7), however, contains provisions that reach beyond the question at issue in Seaport. As the Chancery Court pointed out in Seaport, Section 101(7) was further amended in 2005 to clarify that members also are bound by the limited liability company agreement, whether or not they execute the agreement.⁷ Section 101(7) provides that a limited liability company agreement may be any agreement, written, oral or implied, of the members as to the affairs of a limited liability company and the conduct of its business. It also states that a written limited liability company agreement may provide that an assignee of membership interest may become a party to the limited liability company agreement without executing the agreement, if the assignee complies with the conditions of becoming a member as set forth in the limited liability company agreement or any other writing.

Seaport highlights the critical importance of setting out the terms that will govern the limited liability company and its members in a written agreement that is signed by all members and the company, and revisiting the agreement anytime membership interest is issued or assigned. Members who begin operating a limited liability company based on a loose set of oral understandings while they work out the details of a written agreement may find they are bound by an ambiguous and unwritten operating agreement. Likewise, an assignee of a membership interest may be bound by the company’s existing operating agreement, including capital call provisions, transfer restrictions and limitations on management rights, even if the assignee never signs the agreement.

¹_{The full text of Section 101(7) of the LLC Act, which defines limited liability company agreement, reads as follows: “‘Limited liability company agreement’ means any agreement (whether referred to as a limited liability company agreement, operating agreement or otherwise), written, oral or implied, of the member or members as to the affairs of a limited liability company and the conduct of its business. A member or manager of a limited liability company or an assignee of a limited liability company interest is bound by the limited liability company agreement whether or not the member or manager or assignee executes the limited liability company agreement. 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. A limited liability company agreement of a limited liability company having only 1 member shall not be unenforceable by reason of there being only 1 person who is a party to the limited liability company agreement. A limited liability company agreement is not subject to any statute of frauds (including Section 2714 of this title). A limited liability company agreement may provide rights to any person, including a person who is not a party to the limited liability company agreement, to the extent set forth therein. A written limited liability company agreement or another written agreement or writing: a. May provide that a person shall be admitted as a member of a limited liability company, or shall become an assignee of a limited liability company interest or other rights or powers of a member to the extent assigned: 1. If such person (or a representative authorized by such person orally, in writing or by other action such as payment for a limited liability company interest) executes the limited liability company agreement or any other writing evidencing the intent of such person to become a member or assignee; or 2. Without such execution, if such person (or a representative authorized by such person orally, in writing or by other action such as payment for a limited liability company interest) complies with the conditions for becoming a member or assignee as set forth in the limited liability company agreement or any other writing; and b. Shall not be unenforceable by reason of its not having been signed by a person being admitted as a member or becoming an assignee as provided in paragraph (7)a. of this section, or by reason of its having been signed by a representative as provided in this chapter.”}  

²_{Seaport Village Ltd. v. Seaport Village Operating Company, LLC, 2014 WL 4782817 (Del. Ch. Sept. 24, 2014).}

³_{Id. at 1-2.}

⁴_{Id. at 2.}

⁵_Id.

⁶_{Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 287 (Del. 1999).}

⁷_{Seaport, 2014 WL 4782817 at 3.}

Contributing Author: Jennifer Brady is a freelance writer and attorney admitted in the State of New York.