Caiola Family Trust v. PWA, LLC

Court of Chancery of the State of Delaware · 2015 · Corporations

Updated August 22, 2026

CorporationsLLC operating agreementsmanager removalfiduciary dutiescapital callsfee shiftingDelaware LLCOperating Agreement

Facts

DPW was a Delaware LLC formed to own and operate an apartment complex, with PWA as the 10% managing member and CFT as the 90% non-managing member. Plaintiffs alleged that PWA committed multiple Egregious and Impermissible Acts under the operating agreement, including improper payment of asset management fees to NDC Capital and failure of the designated Key Persons, Ward and Peter Katz, to remain actively involved in the property manager's business after Greystar replaced DRS. Plaintiffs also claimed PWA failed to fund two later capital calls and sought to treat PWA as a forfeiting member, while also seeking damages for distributions, asset management fees, and expense allocations. Defendants disputed removal, asserted laches as to older claims, and argued the capital calls were unauthorized.

Issue

Did CFT have Cause under the LLC operating agreement to remove PWA as managing member, and if so, were Plaintiffs also entitled to damages and attorneys' fees? Relatedly, did the challenged conduct constitute defined Impermissible or Egregious Acts, and were the capital calls valid under the agreement?

Rule

When an LLC operating agreement allows removal of a managing member for Cause defined to include Egregious or Impermissible Acts, the court must determine whether the alleged conduct falls within those contractual definitions. A material breach for this purpose is a failure so fundamental that it defeats the essential purpose of the contract or touches its root or essence, assessed with factors including deprivation of expected benefit, ability to compensate, forfeiture, likelihood of cure, and good faith. Claims may be barred by laches when the plaintiff was on inquiry notice more than three years before suit. A prevailing party under a contractual fee-shifting clause is the party that prevails on the chief issue, though fees may be reduced for limited success.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Harbor Flats Owner, LLC owns an apartment complex in Columbus, Ohio. Its operating agreement lets the 85% non-managing member remove the managing member for Cause, defined to include any material breach of the agreement. The agreement allows quarterly affiliate oversight fees only from available net operating cash after all third-party debts then due are paid, but the managing member causes the LLC to pay the fee every quarter anyway while vendor bills and urgent roof repairs go unpaid.

If the non-managing member sues for a declaration that the managing member was validly removed for Cause, what is the strongest argument for upholding removal?

Explanation. The majority treated improper payment of contractually restricted management fees as a material breach when the LLC lacked cash and the payments diverted funds from core business needs. A material breach is one that defeats the contract's essential purpose or touches its root or essence, assessed with factors such as deprivation of expected benefit and good faith. Here, paying affiliate fees despite unpaid debts and urgent repairs most strongly supports Cause. (Derived from Caiola Family Trust v. PWA, LLC (n.d.).)