Reed Smith Client Alerts

A recent decision from the Delaware Superior Court, Estate of Mark Buller v. Montague, recognizes that, under Delaware law, contract provisions deeming oral modifications unenforceable can be waived by a course of conduct.  Although the Court held that the party seeking to avoid enforcement of the no-oral-modification provision failed to satisfy the heighted evidentiary burden, the Court’s decision serves as an important reminder that commercial parties cannot, necessarily, depend on contractual no-oral-modification clauses and must be cognizant of the course of performance relating to the contractual relationship to ensure the “four corners” of the contract are enforced.  Companies should also ensure that decision-making relating to governance decisions is well-documented and accurately reflects the intention of the parties.

Authors: Brian M. Rostocki Benjamin P. Chapple Alexandria P. Murphy

Background of the case

Two sophisticated parties, Patrick Montague (Montague) and Mark Buller (Buller), entered into a joint venture for the purpose of pursuing real estate investments.  The parties formed a Delaware LLC as their joint venture vehicle.  Montague had a 52 percent interest in the joint venture LLC, and the remaining 48 percent was owned by Buller and affiliates of Buller.  Buller provided financing for the joint venture LLC and Montague contributed his subject-matter expertise.

The joint venture was governed by an LLC operating agreement (the Operating Agreement).  Under the Operating Agreement, each of the members of the joint venture would be personally liable for repayment due on a line of credit that Buller, as financier, extended to the joint venture based on each member’s respective percentage of interest in the joint venture LLC.  The Operating Agreement also required Buller and Montague to purchase “key man” life insurance in the amount of $250,000, naming the joint venture LLC as the beneficiary of the insurance.  Neither Buller nor Montague ever purchased the required key man life insurance. 

Because Buller was the financing source for the joint venture LLC, concerns were raised regarding what would happen to advances on the line of credit that Buller extended to the joint venture LLC in the event Buller became deceased or otherwise incapacitated.  Separate from the key man insurance Buller agreed to (but did not) purchase under the Operating Agreement, Buller had a life insurance policy through his employer.  Buller and his wife executed an authorization that would allow the transfer of funds from the employer-based life insurance policy to the joint venture LLC to cover the balance on the line of credit.

Buller died unexpectedly, less than two months after the Operating Agreement was executed.  Four additional advances were made on the line of credit following Buller’s death, bringing the total amount advanced to approximately $120,000.  The joint venture LLC never received the death benefit from Buller’s employer-based life insurance.  The joint venture LLC ultimately dissolved without repaying the money Buller advanced.  

Buller’s estate filed suit in the Delaware Superior Court against Montague, seeking 52 percent of the total amount Buller advanced, plus accrued interest, because Montague owned 52 percent of the joint venture LLC interest and had agreed, in the Operating Agreement, to be personally liable for any balance due on the line of credit Buller advanced based on Montague’s percentage of ownership interest.

Montague moved for summary judgment arguing, among other things, that Buller’s failure to purchase the key man life insurance, as required under the Operating Agreement, excused Montague’s performance under the Operating Agreement, including Montague’s obligation to be personally liable for a portion of the line of credit balance.  Buller’s estate argued that all parties agreed to orally modify the Operating Agreement to eliminate the obligation to purchase key man life insurance.  Montague, in response, argued that the Operating Agreement expressly precluded any oral modification because the Operating Agreement states “no Member, without the prior written consent of all other Members, shall amend … the Operating Agreement.”