Opinion ID: 1887503
Heading Depth: 2
Heading Rank: 2

Heading: The Statute of Frauds and LLC Agreements

Text: Olson next claims that the Vice Chancellor's holding that the statute of frauds applies to LLC operating agreements, is irreconcilable with the Delaware LLC Act. Olson asserts that the policy and text of the Delaware LLC Act preclude the application of the statute of frauds to LLC operating agreements. We must decide, as a matter of first impression, whether the statute of frauds applies to LLC agreements. We have often declined to decide an issue that does not affect a case's disposition, but this issue is one that could considerably impact the drafting and enforcement of LLC agreements. For this reason and because this issue involves a question of law and statutory construction, we proceed to review it de novo. [20] The Delaware statute of frauds, which the General Assembly enacted over a century ago, bars the enforcement of an agreement that is not to be performed within the space of one year from the making thereof, unless it is (1) written and (2) signed by the party against whom the agreement is to be enforced. [21] Only if the parties cannot possibly perform the agreement within one year does the statute of frauds apply and require a writing, signed by the charged party. [22] The Delaware LLC Act seeks to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. [23] To that end, the Delaware LLC Act allows written, oral or implied LLC agreements. [24] The Delaware LLC Act also provides that [a] limited liability company is not required to execute its limited liability company agreement and that [a] limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement. [25] Thus, the Delaware LLC Act generally allows parties to enforce unwritten, unsigned LLC agreements. In this case, we must determine whether parties to a Delaware LLC agreement may enforce an unsigned or unwritten LLC agreement that would require more than a year to complete. We must adhere to the rules of statutory construction and, whenever possible, presume consistency between recent legislation and pre-existing law. [26] Laws are assumed to be cumulative, not destructive of other laws. [27] We assume[] that when the General Assembly enacts a later statute in an area covered by a prior statute, it has in mind the prior statute, and thus, statutes on the same subject must be construed together so that effect is given to every provision unless there is an irreconcilable conflict between the statutes.... [28] The Delaware LLC Act does not address the relationship between LLC agreements and the statute of frauds. Olson argues, however, that the policy and provisions of the LLC Act evidence the General Assembly's intent to preclude the statute of frauds from LLC agreements. It is possible, as a theoretical matter, that the statute of frauds may not apply to LLC agreements, as a result of the LLC Act's implied repeal of the statute of frauds. But, repeal by implication is not favored. [29] We have long recognized that unless it is expressly so provided, one act does not ordinarily repeal another, if both, in whole or in part, can be construed together. [30] We are reluctant to find repeal by implication even when the later statute is not entirely harmonious with the earlier one, and [i]f two statutes conflict somewhat, [we] must, if possible, read them so as to give effect to both, unless the text or legislative history of the later statute shows that [the legislature] intended to repeal the earlier one and simply failed to do so expressly. [31]
Based on the rules of statutory construction, we must, if possible, construe the LLC Act and the statute of frauds together. Olson argues that the Delaware LLC Act's express intent to give maximum effect to LLC agreements precludes the statute of frauds from applying to those agreements, because the conflict between the underlying intent of the LLC Act and the statute of frauds renders them irreconcilable. We disagree because we can construe the LLC Act and the statute of frauds together. We, therefore, we must give effect to both statutes. The statute of frauds does not conflict with the LLC Act anymore than the statute of frauds generally conflicts with contracts. The LLC Act does not guarantee enforcement of all oral or implied LLC agreements. Rather, the LLC Act, like many other contracts, treats LLC agreements by permitting oral, written, or implied agreements. The LLC Act's explicit recognition of oral and implied LLC agreements does not preclude the statute of frauds. Rather, such legislative recognition indicates that an LLC agreement operates like any other oral, written, or implied contract, i.e., it requires compliance with the statute of frauds. The statute of frauds does not contravene the legislative policy of giving maximum effect to LLC agreements. The LLC Act cannotand has notrendered LLC agreements impervious to all other rules and laws relating to contract law. In no way does the LLC Act limit the types of substantive agreements that contracting parties may enter. The General Assembly did not clearly indicate any intent to advance this unlikely objective.
We will find an implied repeal only if the General Assembly clearly intended LLC agreements to be insulated from the operation of the statute of frauds. Olson claims that the stated policy of giving maximum effect to enforceability of LLC agreements clearly indicates the General Assembly's intent to remove LLC agreements from the scope of the statute of frauds. We disagree; neither the LLC Act's text, nor its legislative history supports that intent. The legislative history of the LLC Act does not demonstrate the General Assembly's intent to place LLC agreements outside of the statute of frauds. When the General Assembly originally enacted the LLC Act in 1992, it only permitted written LLC agreements. [32] In 1995, the General Assembly amended the LLC Act to permit any agreement, written or oral. [33] In 2007, the General Assembly further expanded the LLC Act to allow implied LLC agreements. [34] In its current form, Section 18-101(7) of the LLC Act provides that LLC agreements may be written, oral or implied. [35] Admittedly, these amendments to Section 18-101(7) clearly increase the contracting parties' flexibility to enter into LLC operating agreements. But, the amendments do not evidence any intent by General Assembly to remove LLC agreements from the reach of the statute of frauds. If anything, these amendments indicate the exact opposite. The General Assembly would have added an explicit provision during the course of any of their serial amendments, had it intended to place LLC agreements outside the statute of frauds. The General Assembly has the authority, of which it is well aware, to exclude LLC agreements from the operation of the statute of frauds if it so chooses. [36] Rather than specifically doing so, however, the General Assembly decided to permit more types of contracts under the LLC Act. We will not presume the General Assembly's intent to create a legal result that it omitted to specifyparticularly where, as here, it repeatedly amended a statute and had multiple opportunities to clarify its intent as with the LLC Act. By providing that LLC agreements can be written, oral or implied, we can infer only that the General Assembly intended to give maximum effect to LLC agreements by treating them similarly to most other contracts. We infer from the policy stated in Section 18-1101(b) that the General Assembly intended the LLC Act to give maximum effect to the enforceability of LLC agreements. The General Assembly offered the limited liability company as an alternative to the corporate form for entrepreneurs and investors. In keeping with this legislative intent, we construe the maximum effect of LLC agreements as allowing governance terms not permitted under the more restrictive corporate paradigm. It is in that sense that the General Assembly intended to give maximum effect to the LLC, business entity formation and agreement. Because we can construe the statute of frauds and the LLC Act together and the General Assembly did not clearly intend the LLC Act to render the statute of frauds inapplicable, there is no implied repeal of the statute of frauds. As the Vice Chancellor stated, the statute of frauds should protect defendants against unfounded or fraudulent claims that would require performance over an extended period of time. [37] The legislature enacted the statute of frauds over a century ago, and its purpose remains valid. If the General Assembly intends to limit the application of the statute of frauds by removing LLC agreements from its scope, the General Assembly must say so explicitly. [We] will not do by judicial implication what the General Assembly itself has declined to do by express legislation. [38] Accordingly, we hold that the Delaware LLC Act does not preclude application of the statute of frauds to LLC agreements. Therefore, the statute of frauds applies to LLC agreements, and the Vice Chancellor correctly so held.