Yesterday, the Delaware Supreme Court handed down its opinion in Gatz Properties, LLC v. Auriga Capital Corp., C.A. No. 4390 (Del. Nov. 7, 2012). As expected form oral argument, the Court affirmed Chancelllor Strine’s holding of earlier this year, but on other grounds.
In Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 839 (Del. Ch. Ct. 2012) (slip opinion), Chancellor Strine held that a controlling owner of the manager of an LLC violated its duty of loyalty in connection with a self-interested merger of the LLC. Chancellor Strine reasoned that, unless clearly eliminated by agreement, the managing and controlling persons of a Delaware LLC owe traditional “default fiduciary duties.”
The Delaware Supreme Court affirmed on the grounds that the LLC Agreement directly imposed a contractual duty of loyalty, and thus, entire fairness review. Slip Op, at 12-20. The Court reserved the question of default fiduciary duties, but noted that
whether the LLC statute does—or does not— impose default fiduciary duties is one about which reasonable minds could differ. Indeed, reasonable minds arguably could conclude that the statute—which begins with the phrase, “[t]o the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties)”—is consciously ambiguous. That possibility suggests that the “organs of the Bar” (to use the trial court’s phrase) may be well advised to consider urging the General Assembly to resolve any statutory ambiguity on this issue.
Slip. Op., at 626-27. The Court then criticized Chancellor Strine for addressing an issue that, in the view of the Court, was not properly before him:
We remind Delaware judges that the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual world views on issues not presented. A judge’s duty is to resolve the issues that the parties present in a clear and concise manner. To the extent Delaware judges wish to stray beyond those issues and, without making any definitive pronouncements, ruminate on what the proper direction of Delaware law should be, there are appropriate platforms, such as law review articles, the classroom, continuing legal education presentations, and keynote speeches.
Slip. Op., at 27 (emphasis added).
Gary Rosin
Discretion and Fiduciary Duties. Bernards v. Summit Real Estate Management, Inc. (OR 2009)
Friday, August 28th, 2009Bernards v. Summit Real Estate Management, Inc., 229 Or. App. 357, 213 P.3d 1 ( Ct. App. 2009) involves a demand-refusal derivative suit by a member of two member-managed Oregon LLCs. Each LLC owns an apartment complex that is managed by Summit Real Estate Management, Inc. (apparently unrelated to any of the members). After Summit and one of its officers embezzled substantial sums from each LLC, Bernards demanded that each LLC sue them. When other members refused “without explanation,” Bernards filed a derivative suit against Summit and its officer. Later, Bernards joining the other members, alleging that breach of both contract and fiduciary duties. 213 P.2d at 360-362.
Section 63.801(b) of the Oregon LLC Act allows derivative suits on a showing of demand futility, but allows the operating agreement to change that rule. Section 5.4(d) of the operating agreement of each LLC required unanimous member consent for a derivative suit. 213 P.2d at 360-61 & 366. The Court rejected the argument that Section 5.4:
Id. at 366-67 (emphasis added)(citations omitted).
As indicated by the court, Section 5.10 of the operating agreement provided that members were not liable
Id.at 364 ( emphasis added) (internal quotations omitted). The Court clearly saw good faith as that required of a fiduciary, rather than the contractual obligation of good faith and fair dealing.
Although the Court did not discuss this, Section 63.160 of the Oregon LLC Act limits the use of operating agreements to eliminate member (and manager) liability of damages, and uses language similar to that of Section 102(b)(7) of the Delaware General Corporation Law to do so:
Section 63.160. Section 63.160(2) differs from DGCL Section 102(b)(7)(ii)
(emphasis added). Arguably, the omission in the Oregon statute of the word “or” limits the scope of “good faith.” That said, the Oregon statute also prohibits elimination of liability for breaches of the duty of loyalty. If it was not already clear that acts not in good faith breach the duty of loyalty, the Delaware Supreme Court has now settled that question as a matter of Delaware law (In re Walt Disney Litigation and Stone v. Ritter).
In any event, Section 5.10 of the operating agreement in Bernards arguably conditions the waiver of liability to acts taken in “good faith.” Thus, the exclusion of “gross negligence, fraud, or willful or wanton misconduct” applies only to acts taken in good faith.
The problem with complaint was that it did not plead any specific facts indicating misconduct by the members in rejecting the demand. The court rejected that argument that the misconduct by Summit and its officer was clear that a failure to sue them could only be explained by misconduct. 213 P.3d at 267-70.
Gary Rosin
Tags:derivative suits, fiduciary duties, LLC, waivers of liability
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