Failure to Make Capital Contribution Does Not Necessarily Result in Reduction of Interest in LLC or LP

In Brief

• The policy of both the Delaware LLC Act and the Delaware LP Act is to give maximum effect to the freedom of contract, and they provide the right, but not the obligation, to contract for penalties.
• Recent Delaware case law explains that a member’s failure to make the full amount of his initial capital contribution did not cause any reduction in his membership interest.
• If parties to an operating agreement want membership interest or partnership interest reduced for a deficiency of a capital contribution, those parties must contract for it in the operating agreement.