## Facts

- Four individuals (Mary Marlene Grove, Larry Grove, Melba Brown, and Hubert Brown) formed a Delaware home-healthcare LLC and executed an operating agreement allocating 25% ownership to each member and requiring $10,000 initial capital contributions.
- The business quickly became profitable, and the members discussed expanding operations into Maryland and southern Delaware.
- A dispute arose when it became clear that not all members had fully satisfied the $10,000 contribution requirement; the Browns claimed their greater cash contributions increased their aggregate ownership to 63%.
- Without informing or obtaining consent from the Browns, the Groves formed and operated competing home-health entities in Maryland and southern Delaware, in markets previously discussed as expansion areas for the LLC.
- As tensions escalated, the Browns formed a new LLC wholly owned by them and purported to merge the original LLC into the new entity, excluding the Groves; Marlene Grove learned of the action after being barred from the company’s offices.
- The Groves sued for, among other claims, breach of fiduciary duty and challenged the validity of the purported merger; the Browns counterclaimed for breach of fiduciary duty under the corporate opportunity doctrine.

## Issues

1. Whether a member’s failure to fully fund an initial capital contribution automatically reduces or dilutes that member’s LLC ownership interest absent an express operating-agreement provision.
2. Whether default fiduciary duties, including the duty of loyalty and the corporate opportunity doctrine, applied to the LLC’s managing members and were breached by the Groves’ competing ventures.
3. Whether the Browns had authority to approve a merger that eliminated the Groves’ interests based on the Browns’ asserted majority ownership derived from unequal capital contributions.

## Decision

- The court held the operating agreement unambiguously fixed each member’s ownership at 25%, and failure to complete an initial capital contribution did not alter that allocation absent a contractual dilution or forfeiture mechanism.
- The court applied default fiduciary duties to the LLC’s managing members and found the Groves breached the duty of loyalty by taking for themselves an opportunity within the LLC’s line of business and contemplated geographic expansion.
- The court rejected the Browns’ asserted 63% ownership theory and concluded the purported merger into the Browns’ new LLC, premised on that theory, was unauthorized and ineffective to eliminate the Groves’ interests.
- The court found the Browns’ attempted squeeze-out conduct wrongful in connection with the invalid merger effort.

## Legal Principles

- In a Delaware LLC, ownership interests are governed by the operating agreement; absent an express term, a member’s deficient capital contribution does not automatically cause dilution, forfeiture, or reallocation of membership interests.
- The Delaware LLC Act permits parties to contract for consequences (including dilution) for failure to make required contributions, but such consequences are not imposed by default.
- Unless clearly modified or eliminated by the operating agreement, default fiduciary duties apply to LLC managers, including the duty of loyalty.
- The corporate opportunity doctrine prohibits LLC fiduciaries from appropriating for themselves, without full disclosure and consent, business opportunities within the LLC’s line of business and within its reasonable expectancy, when the LLC is able to pursue them.

## Conclusion

The court enforced the operating agreement’s equal ownership allocation despite unequal capital contributions, applied default loyalty-based fiduciary duties to LLC managers, held the Groves liable for usurping an expansion opportunity by secretly operating competing businesses, and invalidated the Browns’ merger-based attempt to eliminate the Groves’ interests because the Browns lacked the claimed majority authority.


Grove v. Brown, No. 6793-VCG, 2013 WL 4041495 (Del. Ch. Aug. 8, 2013)