When a business relationship falls apart, a former executive or founder frequently discovers that their ownership in a company has been wiped out, canceled, or reallocated without their permission.
For Delaware LLC’s (Limited Liability Company), this scenario often triggers a high-stakes legal battle. If you are trying to recover your ownership interest, one possible legal claim is called conversion.
For litigators representing an aggrieved individual in a civil arbitration under Delaware law, asserting a claim for the tort of conversion seems like a natural and powerful maneuver.
However, successfully pleading and sustaining a conversion claim involving intangible LLC membership units requires navigating a complex minefield where tort law, statutory definitions, and strict contractual principles collide.
| Tort Law: | A civil rule system that handles wrongs between people, focusing on negligence, intentional harm, and strict liability |
| Conversion Claim: | A civil lawsuit used when someone wrongfully takes, uses, or keeps your personal property as if it were their own, without your permission. |
The foundational definition of this tort remains firmly rooted in Delaware common law.
As codified in Chapter 12 of the Delaware Superior Court Civil Pattern Jury Instructions, conversion is defined as an act of dominion wrongfully exerted over the personal property of another, in denial of, or inconsistent with, his or her ownership rights.
While historically confined to tangible property, Delaware courts have long extended this protection to intangible corporate securities.
Under the landmark ruling Drug, Inc. v. Hunt, 168 A. 87, 93 (Del. 1933), the judiciary made it clear that an exercise of wrongful dominion over shares of stock, including a refusal to register a transfer or a wrongful cancellation, constitutes actionable conversion.
The critical threshold question is whether this protective corporate framework applies when the defendant entity is not a corporation, but an LLC.
The short answer is yes, but the statutory and strategic mechanics shift drastically. To establish the first element of conversion – proving a valid property right – practitioners must look to the Delaware Limited Liability Company Act.
Under 6 Del. C. § 18-701, the statute mandates that a limited liability company interest is personal property. Because the legislature has categorized these units as personal property, they are fully subject to conversion claims, even if they are completely intangible or exist merely as a line item on an uncertificated ledger.
| The Bootstrapping Rule prevents someone from turning a breach of contract into a separate tort claim—such as conversion—unless they can show the other party violated an independent legal duty beyond simply breaking the contract. |
Even if you have a valid claim, you’ll likely run into an important legal hurdle called the “Bootstrapping Rule,” also recognized under the economic loss or economic substance doctrine. In Delaware, most rights involving LLC ownership are governed by the company’s operating agreement.
Because Delaware LLC law prioritizes maximum flexibility of contract, virtually every right regarding your membership units – including how they vest, how they are valued, and how they can be forfeited – is dictated by the LLC’s operating agreement.
The company will likely argue that your dispute is only about the operating agreement. If that’s true, Delaware courts usually treat it as a breach of contract rather than a conversion claim Consequently, the defense counsel in an arbitration proceeding will aggressively argue that your right to your membership units is purely defined by that agreement, meaning the dispute is entirely a contract claim and the tort of conversion must be dismissed as an impermissible attempt to “bootstrap” a breach of contract.
As the Court of Chancery warned in Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872 at 889-890 (Del. Ch. 2009), a plaintiff may not append a claim for conversion to a breach of contract claim unless the conversion claim arises from a breach of an independent legal duty that exists separate and apart from the contractual obligations.
Defeating the bootstrapping defense in an arbitration environment requires a precise strategic pivot.
Counsel cannot just point to a contract breach, such as an unjust termination that improperly triggered a unit forfeiture clause. Instead, you must demonstrate that the LLC management went entirely beyond a technical contractual failure and committed an independent, overt common-law tort after the contractual relationship fractured.
For example, if the entity merely fails to issue units required by a contract, that is a standard breach of contract. However, if the management team actively falsifies corporate ledgers, alters company books, or fraudulently files a certificate of amendment with the state to completely erase your name from the entity’s records without a legitimate vote, they have committed an independent, tortious exercise of wrongful dominion.
The strategic goal in your arbitration brief is to frame the injury not as a failure to perform under the contract, but as an independent, post-termination destruction of contractually vested personal property rights.
This distinction becomes even more critical when dealing with major entity maneuvers like unauthorized mergers, recapitalizations, or forced cash-outs.
In traditional corporate litigation, a plaintiff seeking to establish that a wrongful corporate action constitutes a conversion of their stock must look past Arnold v. Society for Savings Bancorp, Inc., 678 A.2d 533, 536 (Del. 1996)—which actually rejected a conversion claim arising from a merger—and relied instead on the foundational rule from Drug, Inc. v. Hunt, 168 A. 87, 93 (Del. 1933). Drug, Inc. establishes that a conversion of stock occurs when an entity wrongfully exerts dominion over a holder’s shares in denial of, or inconsistent with, their ownership rights.
While this core common-law tort theory theoretically applies to alternative entity units, citing corporate merger cases like Arnold in an LLC dispute is a tactical misstep. Because Delaware courts fiercely protect the boundaries between rigid corporate statutes and contract-based alternative entities, the defense will use any corporate law citation to argue that corporate-centric doctrines do not apply to an LLC governed by an operating agreement.
To successfully argue that an unauthorized LLC merger or cash-out constitutes a conversion of your units, counsel must anchor the argument to the operating agreement’s voting and consent provisions.
When an LLC management team executes an invalid merger or cash-out in direct violation of the entity’s governing agreement, the transaction itself is legally void or voidable.
Therefore, treating the member’s contractually vested units as “canceled” or “wiped out” under an invalid transaction transforms the corporate action into a common-law tort.
By combining the statutory baseline of 6 Del. C. § 18-701 with the modern tort framework of Kuroda, you can powerfully demonstrate to the arbitrator that the unauthorized destruction of LLC membership units is an independent, actionable conversion demanding full compensatory relief.
That is where Sutter comes in. Avoid costly legal battles between founders and shareholders.
Our team of experienced Attorneys are here to cross your t’s and dot your i’s so that you do not face equity conversion claim lawsuits or become a victim of one.
Let us protect your company, so that you can focus on what you do best: growing your startup.
