In the recent decision of Oklahoma Firefighters Pension & Retirement System v. Corbett, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017), the Delaware Court of Chancery provided a scholarly review of Caremark claims.  In sum, the decision stands for the proposition that in order to survive a motion to dismiss, a plaintiff must plead sufficient facts demonstrating a deliberate violation of the law or a conscious indifference to wrongdoing.

It is worth noting that Caremark claims are notoriously difficult to prove.  The Court of Chancery has previously explained that a “Caremark claim is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment, and bad faith on the part of the corporation’s directors is a necessary condition to liability.”  Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs, C.A. No. 10872-VCMR, slip op. at 19, (Del. Ch. Aug. 1, 2016) (citing  In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996)).

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Clients can pick their own attorneys but they cannot pick their own facts. A recent case decided by Master Ayvazian highlights the difficulties that unfortunate facts can present.

Creditors have eight months to file a claim against an estate (see 12 Del.C. §2102(a)). After a claim is presented, the executor (or personal administrator) can pay the claim or can deny the claim. Other than failure to timely file the claim (see 12 Del.C. §2102(a)), there is no statutory justification for denial of claim. In fact, Delaware has historically held that fiduciaries owe a fiduciary duty to creditors. See In re Estate of Bennie P. Farren, Del. Ch., C.A. No. 9385-MA (June 18, 2015).

Last will and testament
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Delaware Acceptance Corporation, CACV of Colorado, LLC and 202 Investments, Inc. v. Estate of Frank C. Metzner, Sr., Lona C. Metzner, Executrix and Frank C. Metzner, Jr., the Metzner Family, LLC, C.A. No. 8861-MA involved an executor who denied a claim in the amount of $41,002.59 which had been filed against the estate by a credit card company. After four years of litigation, the Court of Chancery, Master Kim Ayvazian, found that the case hinged on the authenticity of a document, which in turn depended upon the credibility of several witnesses. The Court found that the backdating of documents and the offering of false testimony at trial rendered the Executrix unfit to serve as fiduciary and ordered her removal.

Frank C. Metzner, Sr. (“Frank , Sr.”) and his wife, Lona C. Metzner (“Lona”), deeded their house in Lewes into the Metzner Family Limited Liability Company (the “LLC”) in 2002. Frank, Sr. and Lona each held originally a fifty percent interest in the LLC but subsequently they gave two percent to their son, Frank, Jr.

In 2003, Frank, Sr. and Lona stopped paying their bills, including their credit cards, when the outstanding balance totaled approximately $55,000. Plaintiffs Delaware Acceptance Corporation CACV of Colorado, LLC and 202 Investments, Inc. (“Creditor”) sought a Charging Order based upon the Court of Common Pleas judgments that had been entered against Frank, Sr. and Lona. The Charging Order was signed on December 6, 2010 and served upon the LLC to attach to any distributions from the LLC to either Frank, Sr. or Lona. Frank, Sr. and Lona’s personal residence which was the asset of the LLC clearly did not have any income spitting out so the Charging Order laid dormant.

Subsequently Frank, Sr. died on October 26, 2012 and his Will, which was filed on December 5, 2012, named Nona as executor. The sole asset in the Estate was Frank, Sr.’s 49% interest in the LLC which was left to his son, Frank, Jr. Creditor filed its claim against the Estate on April 15, 2013. The Estate’s attorney denied the claim by letter dated June 3, 2013 on the basis that: (1) the Estate was devoid of assets other than the 49% LLC interest; (2) it was understood that the Charging Order was not dissolved by Frank, Sr.’s death; (3) Frank, Sr.’s 49% interest transferred under the Will to Frank, Jr. remained subject to the Charging Order. This was unacceptable to the Creditor.

Under the LLC Agreement (as was common in those days), the death of a member was considered a withdrawal, resulting in the dissolution of the LLC unless the surviving members elected to continue the LLC within 90 days of the death of the member. If the LLC were dissolved, 49% of the personal residence would have been distributed out to the Estate of Frank, Sr. thereby, the Executrix (faced with the Charging Order) as a fiduciary for the creditor, could have been directed to sell the house to satisfy the claim.

Within the required three month window (under 12 Del.C. 2102(b)) the Creditor filed a complaint alleging its belief that the LLC had dissolved after the death of Frank, Sr. due to the failure of the remaining members, Lona and Frank, Jr., to have consented in writing to continue the LLC within the 90 days after Frank, Sr.’s death.

In response, the Executor alleged that the remaining members (Lona and Frank, Jr.) had effectively elected to continue the LLC after Frank, Sr.’s death and proffered first a signed writing dated November 30, 2012 (the “Election”).

The Court found the Election suspect and in an effort to discern the actual date of the Election, directed the Creditor’s attorney to request the metadata relevant to the Election from the computer of the attorney who had drafted the document and/or such attorney’s former firm’s network server and to produce the data to the Court within 60 days. If the metadata was not produced, the Court would draw an adverse inference that the Election had been created after the 90-day period following Frank, Sr’s death. No metadata was ever delivered to the Court.

The attorney testified that he believed that the Election had been prepared in his office although the Election did not have certain identifiable marks (e.g. file number) that would evidence such preparation, nor was the Election-signing ceremony on the attorney’s calendar.

Undeterred, at trial Lona introduced a second document that had not previously been produced during the litigation (the “November 10th letter”). The November 10th letter (admittedly written by Lona) would have served as a sufficient writing to continue the LLC had the Court believed its provenance or if the metadata associated with the November 10th letter been provided. According to Lona’s testimony at trial, however, the computer that had generated the November 10th letter had “gone bad” a few years ago and had been disposed of.

Unfortunately for her, Lona was not a credible witness.

In concluding that Lona should be removed as Executor for cause, the Court held that a person who backdates documents and offers false testimony at trial should not be a fiduciary of an estate. The Court ordered the appointment of a new personal administrator with an order to: (1) dissolve the LLC; (2) liquidate the assets in the LLC; and (3) make disbursements to pay off the Creditor as required in the Changing Order.

Key takeaways:

First, review LLC Agreements to discern whether mandatory election is necessary and advisable and amend the LLC Agreement if appropriate. Second, only go into trial with a firm belief in the honesty of your client’s version of the facts. Otherwise, don’t let your client pick you as their attorney.


Beth B. Miller is counsel with the law firm of Fox Rothschild LLP, resident in its Wilmington office. She practices business, tax and trusts and estates law. You can reach Beth at (302) 622-4219 or at bbmiller@foxrothschild.com.

The Delaware Supreme Court has just handed down a decision that dramatically illustrates the need to take a holistic approach to an estate plan to ensure that what you want to happen to your assets when you die, can and actually will happen.

Courthouse
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Everett T. Conaway died on May 11, 2010, leaving to survive him his second wife, Janice, and his son from his first marriage, Jesse.  Everett named Janice and Jesse as co-fiduciaries of his Will and his Trust.  That was not successful and eventually the Court appointed a local attorney to independently handle the administration (who promptly thereafter sued both Janice and Jesse (see Conaway I, Conaway II and Conaway III).  Carefully consider your appointment of fiduciaries to ensure that the fiduciaries (whether as successor trustees or as executors) can and will work together to complete the administration.  If you have any concerns or hesitation, trust your gut and designate someone else.

Everett had utilized several estate planning tools: a pour-over Will; a Revocable Trust; and a limited partnership.  However, these separate tools were not viewed holistically and therefore Everett’s estate plan was unsuccessful.

For instance, Everett’s Trust held a 69% interest in a limited partnership that he had entered into with Jesse.  Everett attempted to leave that 69% limited partnership interest to Janice.  That was not successful (as discussed in a previous post by my colleague Carl Neff).  There possibly could have been a way to accomplish Everett’s goal to leave this asset to Janice but simply ignoring the limitations that Everett had placed on the limited partnership agreement did not work.

Everett owned in his own name, Conaway Development Industries, Inc., which Everett had sold prior to his death.  Under Everett’s Trust Agreement, Everett left that stock or the sales proceeds from the sale of the stock, to Janice.  Unfortunately, this was not successful either.  Because the stock was in Everett’s name alone (and not held in his Trust), the stock was available to Everett’s creditors (including an approximately $260,000 outstanding balance on an unsecured line of credit).  Everett’s attempt to leave the proceeds from the sale to Janice failed since creditors have the superior right to be paid before beneficiaries.  Had Everett retitled the Conaway Development Industries, Inc. stock (or the proceeds from the sale of the stock) into his Trust (with a simple assignment assuming it was permitted under the limited partnership agreement) Janice could have inherited the same.

Key Takeaway: Review your entire holdings (including how they are titled and whether there are any restrictions) and annually read your estate planning documents to ensure that what you want to happen to your assets, actually can and will happen.

Earlier this month, the Delaware Supreme Court reversed a decision of the Delaware Court of Chancery in the matter of In re Sanchez Energy Derivative Litig., No. 702, 2014 (Del. Oct. 2, 2015), finding that Vice Chancellor Glasscock’s dismissal of a pension fund’s breach-of-duty suit failed to consider the sufficient doubt that plaintiff had cast on the independence of a pivotal Sanchez Energy director who had a 50 year long friendship with the Chairman of the Board.  The Court of Chancery’s 51 page opinion can be found here: C.A. No. 9132, 2014 WL 6673895 (Del. Ch. Nov. 25, 2014).

Writing for the en banc court, Chief Justice Strine found that the swing-vote director’s friendship and business relationships was sufficient to plead that he lacked the independence to fairly decide whether the pension fund’s suit was in Sanchez Energy’s interests.  Of note, the Chief Justine wrote that the burden to prove a director lacks independence where there is no majority shareholder “can be difficult”, particularly where a plaintiff declines to first make a books and record demand on the company.

The reversal of the Court of Chancery’s dismissal of the case at the pleadings stage will allow the pension fund to move forward with discovery in this matter.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the case of The Ravenswood Investment Company, L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Del. Ch., Jan. 31, 2013), the Court of Chancery analyzed motions filed by both plaintiff and defendant in a Section 220 action that was filed simultaneously with a breach of fiduciary duty claim.

Background

Plaintiff Ravenswood Investment Co., L.P. (“Ravenswood”) filed a Section 220 action and a fiduciary duty claim against Defendant, Winmill & Co., Inc. (“Winmill”) for declining to provide books and records to Ravenswood.  Ravenswood’s litigation efforts are premised on the belief that Winmill’s board withholds information with the expectation that Winmill’s share price will fall because of investor reluctance to acquire shares in a company that refuses to disclose corporate documentation. 

Winmill filed a motion with the Court, objecting to the comingling of a Section 220 action with a fiduciary duty action.  Winmill also sought dismissal of the fiduciary duty claim, based on the fact that Delaware law does not impose reporting or disclosure requirements on a corporation’s board of directors except when seeking shareholder approval.  Additionally, Ravenswood filed a motion to compel, seeking to depose Winmill’s board members in support of its Section 220 action.  In addition to the corporate representative produced by Winmill, Ravenswood also seeks to depose two of its directors.

Analysis

The Court stated that the Section 220 and fiduciary duty claim should not have been brought together, and therefore could have dismissed the fiduciary duty claim.  However, the Court determined that the more pragmatic approach would be to separate the Section 220 claim from the fiduciary duty claim.   After adjudicating the Section 220 claim, it will then move onto the fiduciary duty claim, if it remains.  As a result, the Court deferred, for the time being, on the sufficiency, as a matter of pleading, of Ravenswood’s fiduciary duty claim.

In connection with Ravenswood’s motion to compel, the Court noted that the discovery obligation confronted by a corporate defendant is “relatively minimal,” which has been described as “narrow is purpose and scope.”  Accordingly, the deposition of the corporate representative of the corporation, and not its directors, should suffice.  If such representative is not in possession of the requisite knowledge, then deposition of the directors may become necessary.  If Winmill continues to deny Ravenswood the opportunity to depose its directors, however, then Court ruled that they will not be allowed to testify at trial on the Section 220 claims.

Conclusion

This case is significant because it shows the need to assert a Section 220 claim prior to bringing more substantive claims against a company or its directors, such as for breach of fiduciary duty.  See, e.g., our prior post summarizing Central Laborers Pension Fund v. News Corporation, C.A. No. 6287-VCN (Del. Ch. Nov. 30, 2011), which dismissed a Section 220 claim filed after a derivative action.   Not only is it improper to bring such claims simultaneously, but by bringing a books and records action simultaneously with a breach of fiduciary duty claim, a plaintiff will slow the pace of the books and records action, which is intended to be a summary proceeding.   For more information concerning summary proceedings, see our Directors’ and Shareholders’ Reference Guide to Summary Proceedings in the Delaware Court of Chancery.  

 

The issue of whether default fiduciary duties apply to Delaware LLCs when the LLC agreement is silent on the matter is an open issue in Delaware…  
In the recent case of Gatz Properties LLC v. Auriga Capital Corp., No. 148, 2012 (Del. Nov. 7, 2012), the Delaware Supreme Court affirmed the decision of the Court of Chancery, but declined to uphold the lower court’s ruling that default fiduciary duties are owed in the context of limited liability companies.
Background
The Delaware Supreme Court upheld the Court of Chancery’s finding that Gatz, the manager of Gatz Properties LLC (the “LLC”), violated his fiduciary duties by failing to negotiate with a third party bidder and subsequently selling the LLC to himself at an unfair price.  The Supreme Court also upheld the Court of Chancery’s adjudication that Gatz acted in bad faith in connection with the sale of the LLC, and that the LLC Agreement did not provide him with exculpation or indemnification under these circumstances.  
Analysis
Of relevance to this blog post, however, is the fact that the Delaware Supreme Court declined to uphold the Court of Chancery’s finding that default fiduciary duties are owed in the context of Delaware limited liability companies.    The Court of Chancery found that in addition to violating contractual duties owed under the LLC Agreement, Gatz also violated default fiduciary duties owed by managers of an LLC.  The Supreme Court rejected the Chancery Court’s finding as “mere dictum”, specifically stating that the trial court “should not have reached or decided” the issue of whether default fiduciary duties are imposed on LLC managers and controllers unless the parties to the LLC agreement waive such duties.   
Thus, the Supreme Court solely upheld the Court of Chancery’s finding that Gatz violated contractual duties owed under the LLC Agreement, and “decline[d] to express any view regarding whether default fiduciary duties apply as a matter of statutory construction.” 
ConclusionThe Delaware Supreme Court has made it clear that the issue of whether default fiduciary duties are owed by managers or an LLC is an unsettled point of law in Delaware.  Whether the LLC statute does, or does not, impose default fiduciary duties is:  “[o]ne about which reasonable minds could differ.”  Therefore, drafters of LLC Agreements should specifically provide in the agreement whether fiduciary duties are owed by the managers or members of the entity, and should not proceed under the assumption that default duties are owed absent express language in the agreement.

The issue of whether default fiduciary duties apply to Delaware LLCs when the LLC agreement is silent on the matter is an open issue in Delaware…  

In the recent case of Gatz Properties LLC v. Auriga Capital Corp., No. 148, 2012 (Del. Nov. 7, 2012), the Delaware Supreme Court affirmed the decision of the Court of Chancery, but declined to uphold the lower court’s ruling that default fiduciary duties are owed in the context of limited liability companies.

Background

The Delaware Supreme Court upheld the Court of Chancery’s finding that Gatz, the manager of Gatz Properties LLC (the “LLC”), violated his fiduciary duties by failing to negotiate with a third party bidder and subsequently selling the LLC to himself at an unfair price.  The Supreme Court also upheld the Court of Chancery’s adjudication that Gatz acted in bad faith in connection with the sale of the LLC, and that the LLC Agreement did not provide him with exculpation or indemnification under these circumstances.  

Analysis

Of relevance to this blog post, however, is the fact that the Delaware Supreme Court declined to uphold the Court of Chancery’s finding that default fiduciary duties are owed in the context of Delaware limited liability companies.  The Court of Chancery found that in addition to violating contractual duties owed under the LLC Agreement, Gatz also violated default fiduciary duties owed by managers of an LLC.  The Supreme Court rejected the Chancery Court’s finding as “mere dictum”, specifically stating that the trial court “should not have reached or decided” the issue of whether default fiduciary duties are imposed on LLC managers and controllers unless the parties to the LLC agreement waive such duties.   

Thus, the Supreme Court solely upheld the Court of Chancery’s finding that Gatz violated contractual duties owed under the LLC Agreement, and “decline[d] to express any view regarding whether default fiduciary duties apply as a matter of statutory construction.” 

Conclusion

The Delaware Supreme Court has made it clear that the issue of whether default fiduciary duties are owed by managers or an LLC is an unsettled point of law in Delaware.  Whether the LLC statute does, or does not, impose default fiduciary duties is:  “[o]ne about which reasonable minds could differ.”  Therefore, drafters of LLC Agreements should specifically provide in the agreement whether fiduciary duties are owed by the managers or members of the entity, and should not proceed under the assumption that default duties are owed absent express language in the agreement.

It is doubtless troubling to New Media that Delaware law provides no statutory basis for exercising jurisdiction over the manager of a Delaware limited liability partnership for breaches of fiduciary duty in the course of his work for the partnership, absent acts taken in Delaware itself in furtherance of the  alleged wrongdoing.  But this is the state of our law, and I must apply it as it is.

The Delaware Court of Chancery in New Media Holding Company, LLC  v. Brown, C.A. No. 7516-CS, addressed the issue of whether personal jurisdiction can be exercised over a manager of a limited liability partnership based solely upon an applicable consent statute and absent specific acts taken by the manager in Delaware to further the alleged wrongdoing.  
The case involved a dispute between two businessmen over the ownership of a television station.  One of the businessmen created a Delaware limited liability company, Iolta Ventures LLC, to hold the television network and thereafter, converted the company into a limited liability partnership.  The other businessman, through his company New Media Holding, purchased a 50% stake in the partnership.  The partnership was managed by a fiduciary services company,  Capita Fiduciary Group and its employee Grant Brown.  New Media brought a claim against Brown and Capita alleging that they abused of their management position which reduced New Media’s stake in the Partnership from 50% to 0.3%.  Brown and Capita moved to dismiss the complaint against them based upon a lack of personal jurisdiction.
The Court of Chancery granted the motion to dismiss, and held that New Media did not sustain its burden of demonstrating that the court had specific jurisdiction over Brown and Capita under Delaware’s long arm statute, 10 Del. C. sec. 3104(c )(1).  The Court reasoned that New Media did not demonstrate that its claims of dilution were related to acts that Brown and Capita carried out in Delaware, and no act in Delaware was necessary to, or done in connection with the alleged dilutive scheme. 
The Court further held that New Media could not assert jurisdiction over the defendants under 6 Del. C. sec. 18-109(a), which provides for service of process on the managers of limited liability companies.  The Court so held because the Iota Ventures LLC was converted into a limited liability partnership before the alleged wrongdoing by the defendant managers took place.  Notably, the Court held that there was no comparable provision to 6 Del. C. sec. 18-109(a) under which a manager of a limited liability partnership could be subject to personal jurisdiction where the alleged wrongful acts did not occur in Delaware in furtherance of the wrongdoing.   In so holding the Court stated, “It is doubtless troubling to New Media that Delaware law provides no statutory basis for exercising jurisdiction over the manager of a Delaware limited liability partnership for breaches of fiduciary duty in the course of his work for the partnership, absent acts taken in Delaware itself in furtherance of the alleged wrongdoing.  But this is the stat of our law, and I must apply it as it is.”
Application:
This case is important for practitioners who might be unaware of the lack of statutory authority to assert personal jurisdiction over a manager of a limited liability partnership absent specific acts of wrongdoing conducted in the state in furtherance of the wrongdoing.  It would make sense that such a provision be enacted to address this loophole, particularly since statutory authority exists in the limited liability context to assert personal jurisdiction over a manager even where acts in furtherance of alleged wrongdoing did not occur in Delaware.  See  6 Del. C. sec. 18-809(a) (“A manager’s . . . serving as such constitutes such person’s consent to the appointment of the registered agent of the limited liability company (or, if there is none, the Secretary of State) as such person’s agent upon whom service of process may be made as provided in this section.”)  See also, 6 Del. C. sec. 15-114(a) (providing for service of process on the partners and liquidating trustees of a partnership, but not on managers). 

The Delaware Court of Chancery in New Media Holding Company, LLC  v. Brown, C.A. No. 7516-CS, addressed the issue of whether personal jurisdiction can be exercised over a manager of a limited liability partnership based solely upon an applicable consent statute and absent specific acts taken by the manager in Delaware to further the alleged wrongdoing.  

The case involved a dispute between two businessmen over the ownership of a television station.  One of the businessmen created a Delaware limited liability company, Iolta Ventures LLC, to hold the television network and thereafter, converted the company into a limited liability partnership.  The other businessman, through his company New Media Holding, purchased a 50% stake in the partnership.  The partnership was managed by a fiduciary services company,  Capita Fiduciary Group and its employee Grant Brown.  New Media brought a claim against Brown and Capita alleging that they abused of their management position which reduced New Media’s stake in the Partnership from 50% to 0.3%.  Brown and Capita moved to dismiss the complaint against them based upon a lack of personal jurisdiction.

The Court of Chancery granted the motion to dismiss, and held that New Media did not sustain its burden of demonstrating that the court had specific jurisdiction over Brown and Capita under Delaware’s long arm statute, 10 Del. C. Sec. 3104(c)(1).  The Court reasoned that New Media did not demonstrate that its claims of dilution were related to acts that Brown and Capita carried out in Delaware, and no act in Delaware was necessary to, or done in connection with, the alleged dilutive scheme. 

The Court further held that New Media could not assert jurisdiction over the defendants under 6 Del. C. Sec. 18-109(a), which provides for service of process on the managers of limited liability companies.  The Court so held because the Iota Ventures LLC was converted into a limited liability partnership before the alleged wrongdoing by the defendant managers took place.  Notably, the Court held that there was no comparable provision to 6 Del. C. Sec. 18-109(a) under which a manager of a limited liability partnership could be subject to personal jurisdiction where the alleged wrongful acts did not occur in Delaware in furtherance of the wrongdoing.   In so holding the Court stated, “[i]t is doubtless troubling to New Media that Delaware law provides no statutory basis for exercising jurisdiction over the manager of a Delaware limited liability partnership for breaches of fiduciary duty in the course of his work for the partnership, absent acts taken in Delaware itself in furtherance of the alleged wrongdoing.  But this is the stat of our law, and I must apply it as it is.”

Application:

This case is important for practitioners who might be unaware of the lack of statutory authority to assert personal jurisdiction over a manager of a limited liability partnership absent specific acts of wrongdoing conducted in the state in furtherance of the wrongdoing.  It would make sense that such a provision be enacted to address this loophole, particularly since statutory authority exists in the limited liability context to assert personal jurisdiction over a manager even where acts in furtherance of alleged wrongdoing did not occur in Delaware.  See  6 Del. C. Sec. 18-109(a) (“A manager’s . . . serving as such constitutes such person’s consent to the appointment of the registered agent of the limited liability company (or, if there is none, the Secretary of State) as such person’s agent upon whom service of process may be made as provided in this section.”)  See also, 6 Del. C. Sec. 15-114(a) (providing for service of process on the partners and liquidating trustees of a partnership, but not on managers). 

On August 27, 2012, the Delaware Supreme Court, in a lengthy, 110 page opinion, affirmed the Court of Chancery’s judgment of over $2 billion in damages in connection with a breach of fiduciary duty claim relating to the sale of a company.  The Supreme Court also affirmed the award of attorneys’ fees totaling $300 million.  For a link to the case, Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012), click here.

In the case of Auriga Capital Corporation v. Gatz Properties, LLC, C.A. No. 4390-CS (Del. Ch. Jan. 27, 2012), the Court of Chancery reinforced the notion that a majority and managing member of a limited liability company can be held liable for breach of fiduciary duty in connection with the member’s management and eventual purchase of the company.

 

This opinion demonstrates that that the Court interprets the Delaware Limited Liability Company Act, 6 Del. C. § 18-101, et seq. (the “DLLC Act”) to impose default fiduciary obligations similar to those in the corporate context, in the absence of a clear expression otherwise in the LLC agreement.

 

Specifically in this case, Chancellor Strine rejected the assertion that traditional fiduciary duties of loyalty and care do not apply in the context of alternative entities, holding that the DLLC Act specifically states that the rules of equity shall govern unless displaced by statute or contract, and “[i]t seems obvious that . . . a manager of an LLC would qualify as a fiduciary of that LLC and its members.” Moreover, though an LLC can contractually eliminate certain fiduciary duties through its operating agreement pursuant to § 18-1101(c) of the DLLC Act (except the implied contractual covenant of good faith and fair dealing), the elimination of those duties must be clear.  Without explicit and unequivocal language, Delaware courts will apply default fiduciary duties.


Auriga makes clear that the Court of Chancery will consider LLC managers as fiduciaries in the same vein as corporate directors absent clear contractual language to the contrary. Additionally, it serves as a reminder that controlling shareholders must proceed cautiously when considering a buyout of their minority investors, because the Court will analyze the course of conduct leading to the sale in order to determine whether the price paid was entirely fair.

It is not uncommon for shareholders who seek appraisal of their shares, pursuant to Section 262 of the Delaware General Code (“DGCL”) in objection to a merger, to also pursue claims of wrongdoing against the directors or officers of the merging corporation (i.e. claims for breach of fiduciary duty, fraud, etc.).  This post will address relevant case law on whether such actions can be pursued in one complaint, or if claims for wrongdoing and appraisal must be instituted in separate actions, and then subsequently consolidated.

Relevant Cases and Analysis

In Cede v. Technicolor, Inc., 542 A.2d 1182 (Del. 1988), the Delaware Supreme Court held that claims for appraisal and corporate wrongdoing must be brought separately, and then subsequently consolidated.  In that case, the Court affirmed the Court of Chancery’s denial of Plaintiff’s motion to amend its appraisal action to include claims for wrongdoing, on the grounds that “statutory appraisal is limited to ‘the payment of fair value of the shares . . . by the surviving or resulting corporation'” . . .  and that a “determination of fair value does not involve an inquiry into claims of wrongdoing in the merger.”  Cede, 542 A.2d at 1189.  The Delaware Supreme Court further stated that allowing the plaintiff to amend its complaint to allege fraud claims would “impermissibly broaden the legislative remedy” of an appraisal action.

The Delaware Supreme Court’s holding was based upon the fact that only a small portion of shareholders usually seek appraisal.  Thus, if such shareholders are allowed to litigate claims of wrongdoing in their appraisal proceedings, those shareholders not seeking appraisal remedies would be required to litigate their claims independently.  This would create the risk of inconsistent judgments and raise issues of collateral estoppel.   Accordingly, Cede makes clear that claims for appraisal and corporate wrongdoing against directors and officers must be asserted independently in separate actions, and then subsequently consolidated.

However, the Delaware Court of Chancery in Nagy v. Bistricer, 770 A.2d 43 (Del. Ch. 2000), distinguished Cede and held that appraisal and fiduciary duty claims can be brought in the same action where there is no distinction of identity between those plaintiffs seeking appraisal and those seeking equitable claims.  In Nagy, the plaintiff who sought appraisal and asserted claims for wrongdoing was the only minority shareholder of the company.  The remaining shareholders were the directors who authorized the merger.  Therefore, the Court held that there was no risk of inconsistent judgments by trying these claims in the same action.

[In a related prior post we discussed the decision of In Re Appraisal of the Aristotle Corporation, which held that a stockholder who asserts an appraisal action cannot subsequently bring an action for failure to disclose adequate information to determine whether the stockholder should seek appraisal in the first instance].

Conclusion

Generally, claims against directors and officers for corporate wrongdoing, and appraisal actions brought pursuant to Section 262 of the DGCL should be asserted in separate complaints and thereafter consolidated.  The lone exception to this rule is where the shareholders who assert claims for corporate wrongdoing and appraisal constitute the entirety of the shareholders who could bring such claims.