## Facts

- Resource Development Company Limited, LLC (Resource) was a Delaware LLC formed to pursue oil and gas exploration and production opportunities in Moldova.
- William J. Cox, Jr., William C. Baron, and William C. Liedtke, III (the “three Bills”) were the controlling members of Resource.
- Randolph T. Walker was admitted as a member and received an 18% equity interest based on the understanding that he would provide value as a financial consultant.
- Walker’s expected contribution was to help secure financing, particularly by connecting Resource with Stephen L. Norris, the founder of an investment fund with substantial resources and Middle East connections.
- The financing effort produced little progress. The three Bills concluded Walker was not performing as promised and had exaggerated his credentials; they also observed conduct they believed was inconsistent with working on Resource’s business (including extensive travel and signs of alcoholism).
- The three Bills asked Walker to travel to Moldova to meet government representatives interested in his political connections, but Walker refused.
- After determining financing from Norris was not forthcoming (and after learning of what they viewed as an improper compensation arrangement tied to the financing effort), the three Bills decided to remove Walker.
- Rather than using any buyout, removal, merger, dissolution, or other mechanism provided by the operating agreement or statute, the three Bills sent a letter stating Walker’s membership interest was terminated “for breach of trust,” and they treated his 18% interest as forfeited without paying him fair value.
- The operating agreement did not contain a provision authorizing the majority to expel a member and confiscate the member’s equity interest without fair compensation.
- Walker sued in the Delaware Court of Chancery seeking recognition of his continuing ownership and the value of his 18% interest.

## Issues

1. Whether Resource’s operating agreement or the Delaware Limited Liability Company Act authorized the majority members to remove Walker and declare his 18% membership interest forfeited without paying fair value.
2. If not, whether the operating agreement was voidable because Walker procured the defendants’ assent through fraud or misrepresentation, including whether defendants proved actual reliance.

## Decision

- The Court of Chancery held the defendants lacked authority, under either the operating agreement or Delaware LLC law, to expropriate Walker’s equity interest through a unilateral letter expulsion and forfeiture.
- The court refused to treat general management or majority-control provisions as granting a power to strip a member of ownership without compensation.
- The court rejected defendants’ fraud/misrepresentation theory because they failed to prove actual reliance on any alleged misstatement or omission when they agreed to admit Walker and execute the operating agreement.
- Walker remained entitled to his 18% equity interest, and the LLC’s ownership records/capitalization had to reflect that continuing interest.

## Legal Principles

- In a Delaware LLC, members’ rights and remedies are primarily defined by the operating agreement; courts look first to the contract the parties made.
- A forced expulsion coupled with forfeiture of a member’s equity interest (without fair compensation) must be authorized by the operating agreement or a specific statutory provision; absent that, the remedy is unavailable.
- Courts will not infer a drastic forfeiture power from broad governance language such as general majority management authority.
- Fraudulent inducement and misrepresentation require proof of actual reliance; without reliance, a party cannot avoid the operating agreement on that ground.

## Conclusion

The Delaware Court of Chancery ruled that Resource’s majority members could not terminate Walker’s membership and confiscate his 18% ownership interest by letter because neither the operating agreement nor Delaware law granted that remedy, and the defendants’ attempt to void the arrangement for fraud failed because they did not prove they relied on any alleged misrepresentation when entering the agreement; Walker therefore kept his 18% equity interest.


Walker v. Resource Development Co. Ltd., LLC, 27 Del.J.Corp.L. 463, 791 A.2d 799 (2000)