BET FRX LLC v. Myers

Court of Chancery of the State of Delaware · 2022 · Corporations

Updated August 22, 2026

CorporationsLLC operating agreementsfiduciary dutiesderivative litigationjudicial dissolutionimplied covenant of good faith and fair dealingDelaware LLCRule 12(b)(6)

Facts

BET bought 50% of FRX for $8 million, and FRX then loaned those investment proceeds to FarmaRX, in which FRX held an 85.21% interest. BET alleged that Myers caused FarmaRX to make undocumented intercompany loans of about $2 million to an Ohio marijuana company owned by Myers and Stephan, and also caused FarmaRX to bear payroll and utility expenses benefiting that Ohio company. The FRX LLC Agreement gave BET board participation rights and veto rights over sixteen listed categories of actions, but those categories did not include loans by FarmaRX or FRX to other entities or related-party transactions. BET further alleged that Stephan knew Myers's conduct was wrong but refused to act because he expected a personal financial benefit.

Issue

Did BET's amended complaint state claims for breach of the LLC Agreement, breach of the implied covenant, judicial dissolution, and direct or derivative breach of fiduciary duty based on the alleged diversion of FRX-related funds to the Ohio company? More specifically, did the fiduciary duty allegations state a non-exculpated derivative claim despite the LLC Agreement's exculpation provision?

Rule

To state a claim for breach of an LLC agreement, the plaintiff must identify a contractual provision that was breached. To state an implied covenant claim, the plaintiff must allege a specific implied contractual obligation and facts showing the defendant breached it; the implied covenant does not apply where the contract addresses the conduct at issue and cannot be used as a substitute for fiduciary duty review. Judicial dissolution under 6 Del. C. § 18-802 is a sparingly granted remedy available only when it is not reasonably practicable to carry on the business in conformity with the LLC agreement. Under Tooley, a claim is derivative if the entity suffered the harm and would receive the benefit of any recovery; where an LLC agreement contains an exculpation clause, a plaintiff must plead a non-exculpated fiduciary claim, such as bad-faith self-dealing or intentional failure to act in conscious disregard of a known duty.

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Harbor Peak Ventures LLC owns 40% of Cedar Grove Holdings LLC, a Delaware LLC based in Seattle. The operating agreement gives Harbor Peak's manager veto rights over ten listed actions, including issuing new units and borrowing more than $250,000, but it says nothing about loans made by a subsidiary or related-party transactions. Harbor Peak alleges the other managers caused Cedar Grove's subsidiary to lend $900,000 to a company they personally own in Portland.

If Harbor Peak sues for breach of the operating agreement based solely on those allegations, what is the most likely result?

Explanation. A breach-of-contract claim requires identification of a contractual obligation that was breached. Where the agreement lists certain veto-right categories but does not include subsidiary loans or related-party transactions, the plaintiff cannot convert general governance rights into a contract claim. Self-dealing may support fiduciary theories, but not an express contract claim without a breached provision. (Derived from BET FRX LLC v. Myers (n.d.).)