With Great Flexibility Comes Great Responsibility (to Draft LLC Agreements Carefully)
“The limited liability company affords great flexibility to those who adopt it to organize their enterprise. Many take advantage of that flexibility by drafting a bespoke limited liability company agreement. But if that agreement is contradictory or confusing, flexibility begets friction.” – Vice Chancellor Zurn, Holzbaur v. Trolley Square Hospitality, LLC (Del. Ch. June 4, 2025)
Vice Chancellor Zurn’s recent post-trial opinion in Holzbaur v. Trolley Square Hospitality, LLC offers a cautionary tale for anyone who drafts – or relies on – a Delaware limited liability company agreement. The flexibility that makes the LLC form so attractive can become a trap when bespoke language is imprecise or internally inconsistent. In Holzbaur, that trap snapped shut on a plaintiff-member who thought he had bargained for the enduring economic protections afforded to “cash contributing members,” only to learn that the agreement also (and, in the court’s view, more persuasively) characterized him as a “sweat equity” participant subject to removal at will.
Background
Erik Holzbaur, who served as general manager of Trolley Square Oyster House in downtown Wilmington, Delaware, became a member of Trolley Square Hospitality, LLC based on an agreement with Eric Sugrue, the company’s managing member. Sugrue and another member contributed cash to the business, while Holzbaur and Holly Monaco, who acted as co-director of operations, contributed their labor — commonly referred to as “sweat equity.” After several years, Holzbaur resigned as general manager. Following his resignation, Sugrue exercised his authority under the LLC agreement to remove Holzbaur as a member, which resulted in Holzbaur no longer receiving distributions. Holzbaur then sued, claiming he was wrongfully removed and was entitled to approximately $98,000 in unpaid distributions, arguing that the agreement provided that he was a cash-contributing member who could not be removed. The central legal issue was whether Holzbaur was a cash-contributing member (and thus irremovable) or a noncash-contributing member (and thus subject to removal). The court found the LLC agreement ambiguous, as some provisions suggested he had made cash contributions while others referenced sweat equity. Turning to extrinsic evidence, the court found that pre-formation discussions and the parties’ conduct made clear that only Sugrue and another member had contributed cash, while Holzbaur and Monaco contributed only labor. Monaco confirmed at trial that she had always understood her interest to be based on sweat equity, and Sugrue’s drafting history showed that certain cash amounts listed in an Exhibit A to the LLC agreement were intended to reflect equity ownership shares, not any actual cash contributions by Holzbaur or Monaco. The trial ultimately demonstrated that Holzbaur had never contributed any cash, even when given the opportunity. Based on this record, the court concluded that Holzbaur was a noncash contributing member, and that Sugrue validly exercised his removal power. As a result, Holzbaur was not entitled to further distributions.
Takeaways
Delaware’s LLC Act gives drafters wide latitude, but that freedom carries the risk of internal contradiction. This case shows that courts will harmonize provisions where possible, but when reconciliation fails, ambiguities open the door to costly litigation and invasive discovery into subjective intent. When the document falters, extrinsic evidence — in this case, such as email threads, coffee-shop conversations, drafting history, and course-of-performance — can be decisive, often eclipsing facially contrary language. Although Sugrue drafted the agreement, the court declined to construe the ambiguity against him, finding that Holzbaur had participated meaningfully in the pre-formation discussions.
Vice Chancellor Zurn’s opinion underscores that bespoke LLC agreements achieve their intended flexibility only when they say exactly what the parties mean – and mean the same thing on every page. In Holzbaur, the drafters’ slip led to a year of litigation. For practitioners, the lesson is simple: adopt the LLC form for its agility, but draft with rigid precision, lest flexibility give way to friction.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
