DTI-DSIC, LLC v 930-DSIC, LLC
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Attorneys and Parties
Brief Summary
This case concerns a private investment in a Delaware limited liability company (LLC) and whether a managing member and the company improperly forced the sale of a defaulting investor's membership interest, deducted amounts from the sale proceeds, and withheld payment under the company's operating agreement.
The lower court denied defendants' motion to dismiss the claims for breach of contract, breach of fiduciary duty, and accounting.
The Appellate Division modified the order by dismissing the breach of contract claim against 930-DSIC Partner, LLC, the managing member, and dismissing the breach of fiduciary duty claim, while leaving intact the breach of contract claim against the company and the accounting claim.
Under Delaware law and the operating agreement, the managing member had contractual discretion to force the sale of a defaulting member's interest, set the price, and control timing of disbursements, and it could be liable only if it acted in bad faith. The complaint did not adequately plead bad faith. The fiduciary duty claim also failed because the challenged acts were exercises of contractual rights. By contrast, the company itself was only permitted to offset amounts actually owed, so allegations of improper deductions from sale proceeds stated a contract claim. The accounting claim survived because plaintiff alleged a demand for information about the proceeds and a refusal to provide it, and the managing member still retained fiduciary obligations not expressly eliminated by the operating agreement.
Background
DTI-DSIC, LLC, a Missouri limited liability company (LLC), invested $1.85 million in 930-DSIC Company, a Delaware LLC, and received an 11.22% membership interest. The relationship was governed by an amended and restated operating agreement subject to Delaware law. In 2014, 930-DSIC Partner, LLC, the sole managing member, sent plaintiff a default notice claiming plaintiff failed to make capital contributions for management fees and administrative expenses totaling $41,927 and declared plaintiff a defaulting member under section 4.2(a) of the operating agreement. In 2021, the company informed plaintiff that part of its interest had been sold through a tender offer, that some proceeds were used to pay overdue fees and expenses, and that the balance was placed in escrow. In 2024, the managing member forced the sale of plaintiff's remaining interest under section 4.2 and issued a non-recourse promissory note. The transfer instrument stated that the sale price was determined in good faith, less the managing member's legal expenses associated with plaintiff's default and the required sale. Plaintiff then sued, alleging the forced sales were improper, deductions were improper, and proceeds were wrongfully withheld.
Lower Court Decision
Supreme Court, New York County, denied defendants' motion to dismiss insofar as it sought dismissal of the breach of contract, breach of fiduciary duty, and accounting causes of action.
Appellate Division Reversal
The Appellate Division modified the order to dismiss the breach of contract claim against the managing member and the breach of fiduciary duty claim. It held that plaintiff's own default was established by the record and that the operating agreement gave the managing member discretion to require the sale of a defaulting member's interest, determine the sale price, and decide when and how much of the proceeds would be disbursed. Because the operating agreement limited liability for discretionary decisions absent bad faith, and plaintiff failed to plead facts showing the managing member knowingly acted contrary to the agreement, the contract claim against the managing member failed. The fiduciary duty claim also failed because exercising a contractual right cannot support such a claim. However, the court allowed the contract claim against the company to proceed because the company had only a right of setoff for amounts actually owed, and plaintiff sufficiently alleged that the company deducted more than the operating agreement allowed. The accounting claim also survived because plaintiff alleged it requested an accounting of the forced sale proceeds and the managing member refused, and the operating agreement did not expressly and unambiguously eliminate all fiduciary duties.
Legal Significance
The decision reinforces that under Delaware LLC law, an operating agreement can sharply define and limit claims against a managing member. Where the agreement gives a manager broad discretion and permits liability only for bad faith, a plaintiff must plead more than disagreement with the result; it must allege facts showing intentional or knowing misconduct inconsistent with the contract. The case also distinguishes between a manager's discretionary authority and a company's narrower contractual setoff rights. In addition, it confirms that fiduciary duty claims cannot be used to recast conduct expressly authorized by contract, while an accounting claim may still lie where fiduciary obligations remain because they were not expressly and unambiguously eliminated.
If an LLC operating agreement expressly authorizes a managing member's actions and limits liability to bad-faith conduct, a plaintiff must plead specific facts showing bad faith; otherwise, only claims based on conduct exceeding the agreement's actual terms, such as improper deductions beyond a permitted setoff, are likely to survive.