XRI Investment Holdings v. Holifield: Precedent based on “magic words” leads to inequitable result

Corporate / M&A Decisions update series

In XRI Investment Holdings LLC v. Holifield, C.A. No. 2021-0619-JTL, the Court of Chancery found that defendant Holifield violated a No Transfer Provision in the limited liability company agreement of XRI Investment Holdings LLC when he transferred shares to a special purpose vehicle. Although “the law require[d] this result,” the court found it an “inequitable result” and that the outcome was “disquieting to a court of equity.” The court found that Holifield proved XRI’s acquiescence, but that the LLC agreement’s mandate that unpermitted transfers were “void,” rather than “voidable,” meant that all equitable defenses were inapplicable, according to binding Delaware Supreme Court precedent. As a result, the court indicated that it was bound by pre-existing law and granted judgment in XRI’s favor. In doing so, the court urged the Delaware Supreme Court to reconsider its precedent in connection with any appeal to avoid such inequitable outcomes in the future.

Defendant Holifield and non-party Gabriel co-founded XRI Investment Holdings LLC to explore uses for non-potable water sources in the oil and gas industry. In August 2016, Holifield and Gabriel sold a controlling interest in XRI to certain funds affiliated with an investment bank. As a result of the sale, the funds held Class A units while Holifield and Gabriel held Class B units.

In 2018, Holifield attempted to use his Class B units to secure a loan to XRI. Such a pledge of units required board approval, per XRI’s limited liability company agreement (the LLC Agreement), and Holifield learned that the five-member board of XRI was unlikely to approve the pledge. As a result, Holifield explored alternative structures with the aid of employees of XRI, eventually deciding to proceed by using a special purpose vehicle (SPV). Holifield created an SPV, called GH Blue Holdings, LLC (Blue), effected a “Permitted Transfer” of his Class B units, and, in turn, used those units to facilitate a loan to XRI (the XRI Loan). Under the LLC Agreement, a “Permitted Transfer” was designed to allow unitholders to transfer units for estate planning purposes.

In August 2020, however, Holifield defaulted on the XRI Loan. Various litigation ensued, including the case that led to this decision from the Delaware Court of Chancery. In this litigation, XRI asserted a claim for breach of contract against Blue and Holifield for breaching the LLC Agreement. The trial took place in June 2022. Following the trial, the court found that XRI proved that Holifield violated the No Transfer Provision in the LLC Agreement, even though it considered the outcome inequitable based on the defense of acquiescence.

XRI based its breach of contract claim on two theories: first, that Holifield’s transfer of his Class B united violated the provisions of the LLC Agreement prohibiting the transfer of units (the No Transfer Provision); and second, that XRI also argued that Holifield’s transfer to Blue violated the LLC Agreement’s prohibition on encumbering units (No Encumbrance Provision). The court focused on the No Transfer Provision theory and declined to reach the issue of the No Encumbrance Provision because it found that XRI did not prove that such a violation would affect the outcome of the case.

Regarding the No Transfer Provision theory, the court found that Holifield could not prove that the transfer of his Class B units to Blue was “made without consideration,” one of the elements required for the transfer to be a Permitted Transfer. Because Holifield could not do so, XRI stated a claim for breach of contract.

Holifield asserted several defenses, including that the doctrine of acquiescence barred XRI’s request for relief. The court found that Holifield proved acquiescence, but that acquiescence was nevertheless unavailable to Holifield based on the language of the LLC Agreement. Specifically, the court found acquiescence based on the actions of XRI and its employees, who knew that Holifield was seeking to use his units to raise capital, helped Holifield develop structures that would permit him to do so, and failed to say anything about the transfer to Blue for years after it occurred. After a lengthy academic discussion, the court also concluded that acquiescence, an equitable defense, was available to Holifield in an action at law.

Unfortunately for Holifield, the LLC Agreement provided that if a transfer violated the No Transfer Provision, it was “void,” and Delaware Supreme Court precedent prohibited the court from applying equitable defenses because “void” means void ab initio. As a result, the court entered judgment in XRI’s favor, but found that the result was inequitable based on the evidence demonstrating XRI’s acquiescence. The court found that the outcome was “disquieting to a court of equity,” and proceeded to lay out reasoning to allow for the application of equitable defenses in cases where a contract is void ab initio. The court was clear: “No one should be misled. The approach suggested by this decision does not currently reflect Delaware law.” The court proceeded to set out an alternative framework for the Delaware Supreme Court to consider. That rationale would “restrict determinations that acts were void ab initio to those acts that contravene limitations imposed by the state, not agreements by private parties” and would “apply regardless of the language used in the parties’ contract.” In the view of the court, the regime would avoid outcomes that are “contrary to the equities of the case,” such as the outcome in XRI.


Authored by Ryan Philp, Michael Hefter, and Allison Wuertz.

David Michaeli
New York
Allison Wuertz
New York
Jon Talotta
Global Co-Lead
Northern Virginia
William Regan
New York


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