I have criticized many Delaware opinions for dicta saying that there are no fiduciary duties in Delaware LLCs unless they are expressly contracted for (what I have called the "mere contractual entity" approach). The recent opinion in Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC,C.A. No. 3658-VCS (Del. Ch. Ct. April 20, 2009) (Mem. Op.) ("Bay Center"), gives me reason to hope that Delaware has not lost its way. In Bay Center,Vice Chancellor Strine denied a motion to dismiss, among other things, claims of breach of fiduciary duty. In discussing the fiduciary duty claim, Strine began by emphasizing the inherently fiduciary character of the relationship between an LLC's manager and the LLC and its members. Slip Op. at 17-18.
Another important aspect of the opinion is VC Strine's treatment of a purported waiver of fiduciary duties in section 6.2 of the LLC Agreement:
Section 6.2 Liability of Members. . . . Except for any duties imposed by this Agreement . . . each Member shall owe no duty of any kind towards the Company or the other Members in performing its duties and exercising its rights hereunder or otherwise.
Slip Op.at 19 (emphasis in original). Strine found that Section 6.2 conflicted with Section 6.1(b), which provided
Section 6.1 Relationship of Members. Each Member agrees that, to the fullest extent permitted by the Delaware Act and except as otherwise expressly provided in this Agreement or any other agreement to which the Member is a party: . . . (b) The Members shall have the same duties and obligations to each other that members of a limited liability company formed under the Delaware Act have to each other.
Slip Op. at 18-19 (emphasis in original). As a result, the LLC Agreement was ambiguous. Even though, to survive on a motion to dismiss, plaintiffs must offer only areasonable interpretation that supports their claim, VC Strine indicated that a reading of the LLC Agreement as allowing fiduciary duties under Section 6.1(b) was more reasonable than a reading that Section 6.2 controlled. Accord to VC Strine, the latter reading would make Section 6.1(b) meaningless. Slip Op.at 19-20. Last, VC Strine invoked traditional principles of interpretation of fiduciary waivers:
And, the interpretive scales also tip in favor of preserving fiduciary duties under the rule that the drafters of chartering documents must make their intent to eliminate fiduciary duties plain and unambiguous. As a result, the defendants’ interpretation of the fiduciary duty provisions of the LLC Agreement is not the most reasonable interpretation, let alone the only reasonable interpretation.
Slip Op. at 20 (footnote omitted) (emphasis added).
For additional discussion of various aspects of Bay Center, see analysis by Prof. Larry Ribstein, and by Francis G.X. Pileggi.
posted by Gary Rosin