Failure to Fund: Default Rules and Contractual Remedies When a Joint Venture Member Does Not Make Its Capital Contribution

Two couples agreed to form an LLC as equal members to develop and operate an upscale restaurant. One couple made its full capital contribution. The other contributed a portion and refused to fund the balance. The operating agreement was silent on the consequences of a member’s failure to fund. Construction stopped, the venture failed, the members sued each other, and the landlord pursued personal guaranty claims. The couple that had funded, the members who had performed their obligations, ultimately lost control of both the entity and the business.

The operating agreement provided no mechanism to protect their position, and the governing statute did not supply any default provision to change ownership or control.

When a member of a joint venture LLC signs an operating agreement but fails to make its promised capital contribution, three questions arise immediately: Does that member retain its membership interest? Is it entitled to distributions? Can the managers or the other members dilute, remove, or terminate the interest? Under both Delaware and Massachusetts law, the statutory answers favor the non-contributing member to a degree that most owners do not anticipate.

What the statutes provide

Both the Delaware Limited Liability Company Act and the Massachusetts Limited Liability Company Act impose a binding obligation on members to perform their capital commitments. Both statutes authorize operating agreements to prescribe consequences for a member’s failure to fund. Neither statute, however, supplies those consequences as a default rule.

Under Delaware law, Section 18-502 provides that a member is obligated to perform any promise to contribute cash, property, or services, even if the member is unable to perform by reason of death, disability, or any other cause. If the member fails to make the required contribution, the LLC may demand cash equal to the agreed value of the unfulfilled obligation and may pursue specific performance or other available remedies. The statute further provides that the operating agreement may subject the defaulting member’s interest to specified penalties or consequences, including reduction, subordination, forced sale, or forfeiture. But unless the operating agreement contains such provisions, the statute does not impose them.

The Massachusetts LLC Act tracks this framework closely. Section 28 of Chapter 156C provides that a member who has promised to contribute remains obligated to do so. If the member fails to deliver property or services, the LLC may require a cash payment equal to the agreed value of the contribution. The statute likewise authorizes the operating agreement to prescribe penalties for a funding default, including reduction or forfeiture of the defaulting member’s interest, but only where the agreement actually contains such terms.

One additional Delaware default rule warrants attention. Under Section 18-504, if the operating agreement does not specify how profits, losses, and distributions are allocated, they follow the agreed value of contributions actually made and received by the LLC. A member who contributes nothing may therefore receive a diminished allocation under this statutory default. That member nonetheless retains its status as a member and its stated percentage interest unless the operating agreement provides otherwise. Massachusetts does not contain an identical statutory provision, and a Massachusetts court confronting an unclear agreement would more likely look to actual contributions and the parties’ agreement rather than to any comparable statutory formula.

The result in both jurisdictions is the same.  The statutes confirm the obligation to fund and authorize the operating agreement to impose consequences for breach, but they do not automatically dilute, subordinate, or extinguish the interest of a member who fails to contribute.

Grove v. Brown

The Delaware Court of Chancery addressed this issue directly in Grove v. Brown, C.A. No. 6793-VCG (Del. Ch. Aug. 8, 2013). In that case, a member of a Delaware LLC failed to make the full amount of an initial capital contribution required by the operating agreement. The court held that the shortfall did not result in any reduction of that member’s membership interest, because the operating agreement did not provide for a reduction tied to the deficiency.

The court held that if the members of an LLC wish to have a membership interest reduced upon a failure to make a capital contribution, they must contract for that result in the operating agreement. The court declined to infer such a consequence from the statute or from equitable principles.

That reasoning extends to subsequent capital calls. If the operating agreement is silent on the consequences of a missed call, the non-contributing member retains its full percentage interest, and the contributing member who advances additional capital receives no automatic adjustment to its ownership share. The allocation of interests changes only if the agreement prescribes the mechanism by which it changes.

Where operating agreements do contain dilution or forfeiture provisions, Delaware courts enforce them. Courts have upheld provisions permitting the non-defaulting member to adjust capital accounts and reduce the defaulting member’s percentage interest following a missed capital call, citing Section 18-502 as express statutory authorization for such contractual remedies. In a separate line of cases, members have forfeited specified portions of their interests after failing to fund within a defined cure period because the operating agreement clearly provided for that consequence. The distinction is that the remedy must originate in the contract, not in the statute.

A recent Chancery decision, Hassanein v. NTO Fund I, LLC (Del. Ch. 2026), reinforces the point. There, the operating agreement provided only limited recourse for a co-member’s failure to fund. The court declined to supply additional remedies, concluding that the parties had to live with the result of their agreement. That outcome is consistent with Delaware’s contract-based approach to LLC governance, under which the operating agreement serves as the primary source of rules governing the affairs of the company and the conduct of its business.

Massachusetts law

Massachusetts courts have not yet squarely decided a case analogous to Grove on the question of interest reduction for failure to fund. The statutory language of Section 28 of Chapter 156C, however, closely mirrors Delaware’s Section 18-502 in both structure and substance. Massachusetts courts also routinely look to Delaware LLC jurisprudence for guidance on matters of first impression, particularly where the Massachusetts provisions were modeled on Delaware’s Act.

It is therefore reasonable to anticipate that a Massachusetts court would reach the same result on similar facts where silence in the operating agreement would not authorize reduction of a defaulting member’s interest, and any such remedy would need to be expressly set forth in the agreement. Massachusetts practitioners frequently borrow Delaware forms and rely on Delaware precedent, further aligning the likely outcomes.

One distinction should be emphasized. Section 28(b) of Chapter 156C provides that the obligation to make a contribution may be compromised only by consent of all members, unless the operating agreement provides otherwise. Forgiving or reducing a funding obligation thus requires unanimity absent a contrary contractual provision – a default rule that protects the non-defaulting member against informal compromise but does not itself create a dilution or forfeiture remedy.

Drafting the funding remedies

Because neither statute supplies automatic changes to ownership or control when a member fails to fund, the operating agreement must do that work entirely. An agreement that states only that “each member shall contribute its share of capital” and nothing more leaves the non-defaulting member with a breach-of-contract action for damages or specific performance, remedies that are slow, costly, and inadequate when the venture requires immediate capital.

In joint venture agreements, the standard contractual mechanisms typically include some combination of the following:

• Default loans. The non-defaulting member advances the shortfall as a loan to the defaulting member or to the LLC at a penalty interest rate. The loan is typically senior to equity distributions and repaid before any return of capital or profit share to the defaulting member.
• Equity dilution. The non-defaulting member’s additional capital is credited at a punitive multiple of the defaulted amount, reducing the defaulting member’s percentage interest according to a defined formula.
• Forfeiture or forced disposition. If a member repeatedly fails to fund or does not cure a default within a specified period, the agreement may provide for forfeiture of a portion or all of the defaulting member’s interest, or for a forced sale to the non-defaulting member or the company at a discounted valuation.

Several drafting principles follow from the statutes, the case law, and established joint venture practice.

• Specify remedies with precision. Courts enforce the terms that are written. Where an agreement addresses capital calls and defaults but omits certain remedies, courts are unlikely to imply additional relief. A provision that merely recites a member’s obligation to fund, without detailing the consequences of non-performance, may leave the non-defaulting member with only traditional contract remedies. The formula for any ownership adjustment should be stated with sufficient specificity that a third party could apply it without further negotiation.
• State whether remedies are exclusive or cumulative. Capital call provisions frequently list specific consequences — default loans, dilution, forfeiture — without specifying whether that list is exclusive. At least one recent decision has treated a capital call remedy clause as the exclusive remedy, even where a separate general preservation-of-remedies clause appeared elsewhere in the agreement. If the parties intend to preserve damages, specific performance, or other remedies in addition to the enumerated capital call mechanisms, that intention should be stated expressly and reconciled with any other remedies provisions in the agreement.
• Ensure symmetry of consequences. If an investor may dilute the sponsor for failing to meet a capital call, the sponsor should possess comparable rights if the investor defaults. Asymmetrical remedies create negotiating friction and litigation risk, particularly in ventures where the parties’ economic exposure is interdependent.
• Establish workable triggers and cure periods. Capital call provisions should specify who may issue a call, under what circumstances, how much advance notice is required, and how long the member has to cure a default before consequences attach. If the mechanics are ambiguous or the timelines impractical, a defaulting member may contend that no valid default occurred, or that the non-defaulting member failed to comply with conditions precedent to invoking the remedy.
• Exercise caution with cross-defaults to affiliate agreements. In multi-contract joint ventures, the sponsor or its affiliates frequently hold separate development, management, or leasing agreements alongside the operating agreement. Cross-defaulting the capital contribution obligation to those contracts, automatically terminating the sponsor’s development or management agreement upon a missed capital call, conflates distinct obligations and can produce consequences disproportionate to the underlying default. The better practice is to treat the funding obligation and the affiliate agreements as independent undertakings, each with its own tailored remedies.

The lesson

The restaurant venture described at the outset did not fail because of market conditions or misfortune. It failed because the operating agreement was not constructed to address the most foreseeable risk in any joint venture – a member who will not fund. The contributing members had no contractual mechanism to dilute, remove, or replace the defaulting members. They had no basis to reallocate personal guaranty exposure. They had no agreed path to assume control of the entity they were financing. The law gave them a breach-of-contract claim, and, at best, the remedies available to any unsecured creditor, but nothing that altered the ownership structure or governance of the venture in their favor.

Every meaningful consequence of a funding default, including, dilution of percentage interests, forfeiture or forced disposition of the defaulting member’s interest, reallocation of voting and management rights, removal of the defaulting member, and reallocation of personal guaranty obligations, must be negotiated and reduced to writing in the operating agreement. In an LLC joint venture, the operating agreement is, for all practical purposes, the governing law of the enterprise. Practitioners who assume the statute will supply the missing terms will discover, often at considerable expense, that it will not.

David J. Murphy is the managing attorney at Murphy PC in Boston, Massachusetts.  He regularly represents real estate developers and investors in real estate development projects.