Archive for the ‘Delaware’ Category

Delaware, Charging Orders and SMLLCs

Friday, May 10th, 2013

House Bill No. 126, introduced in the Delaware legislature on May 9, 2013, would make two amendments to the Delaware LLC Act that would affect the rights of creditors. First, Section 6 of the Bill would Section 18-703(d) of the Delaware LLC Act to read as follows:

(d) The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or a member’s assignee may satisfy a judgment out of the judgment debtor’s limited liability company interest and attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor, whether the limited liability company has 1 member or more than 1 member.

House Bill No. 126, 147th Leg., § 6 (Del. May 9, 2012)(underlining in original, italics added). Second, Section 7 of the Bill would amend § 18-1101 of the Delaware LLC Act by inserting a new sub-paragraph (j), to read :

(j) The provisions of this chapter shall apply whether a limited liability company has 1 member or more than 1 member.

Id. at § 7 (underlining in original).

The first part of the amendment to § 18-703(d) elaborates on what “exclusive remedy” means. Among other things, it seems intened to avoid the result in cases such as would avoid the result, in cases such as Hotel 71 Mezz. Lender LLC v. Falor, 2010 NY Slip Op 01348, 14 NY3d at 307, 926 N.E.2d 1202 (2010) (slip Op.) and Olmstead v. Federal Trade Commission, 44 So. 3d 76 (Fla. 2010)(slip Op.), in which courts held that general creditors remedies, such as attachment (Falor) and levy and execution (Olmstead), can be used to reach interests in LLCs.

The second part of the amendment to §18-703(d), and new 18-1101(j) is aimed at the result, in cases such as Olmstead, and In re Albright, 291 B.R. 538 (Bankr. D. Colo. 2003), that allow a transferee of the interest of the sole member in a single-member LLC (SMLLC) to succeed to both the economic and the management rights of the member. With the SMLLC amendments, Delaware joins the race-to-the-bottom for the state most-friendly to the use of SMLLCs for asset p;rotection.

Gary Rosin

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Delaware Default Fiduciary Fix

Friday, May 10th, 2013

In its per curiam opinion in Gatz Properties, LLC v. Auriga Capital Corporation, 59 A.3d 1223 (Del. 2012)(en banc) (slip opinion), the Delaware Supreme Court called on the Delaware legislature to settle the questions of whether, when the LLC agreement is silent, those involved with LLCs owe fiduciary duties. See Gary Rosin, Gatz Properties, LLC. v. Auriga Capital Corp. (Del. 2012): Strine Affirmed on other Grounds and Chastised (Nov. 8, 2012).

Proposed legislation has been working its way through the Delaware State Bar Association. On May 9, 2012, the result, House Bill No. 126, was introduced in current Delaware legislative session. Section 8 of the bill provides:

Section 8. Amend § 18-1104, Title 6 of the Delaware Code by making insertions as shown by underlining as follows:

In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.

As noted by Doug Batey, Uncertainty Over Delaware LLC Fiduciary Duties To Be Clarified (April 16, 2013), the bill implicitly endorses the reasoning of Chancellor Stine in Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 839 (Del. Ch. 2012) (slip op.) that fiduciary duties are rooted in equity.

As a side note, in his opinion in Feeley v. NHAOCG, LLC, C.A. No. 7304-VCL (Nov. 28, 2012)(slip op.), Vice Chancellor Laster noted that , in Gatz Properties, LLC, the Delaware Supreme Court had left open the question of default fiduciary duties, and had Chancellor for even discussing the question. Laster then treated Strine’s opinion as if it were a law review article, slip op, at 16-17, and adopted Strine’s reasoning. Feeley , slip op. at 14-22. Laster’s opinion also has a nice discussion of the introductory phrase to Del. Sec. 18-1101(c), which allows contracting out of fiduciary duties:

To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties),

As explained by the Vice Chancellor, whether a member, or some other person, owes fiduciary duties is context specific. For example, in a manager-managed LLC, a non-controlling member does not owe fiduciary duties. Likewise, a person who is not a manager or a member might assume fiduciary duties by becoming and office or agent of the LLC. Feeley, slip op. at 18-21.

Gary Rosin

 

 

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Manesh on Dictum & Default Duties

Tuesday, March 12th, 2013

 

Mohsen Manesh (Oreg.) has a working paper with the alliterative title Damning Dictum: The Default Duty Debate in Delaware” (February 21, 2013)(SSRN). The paper reacts to the Delaware Supreme Court’s opinion in Gatz Properties, LLC. v. Auriga Capital Corp., C.A. 4390 (Del. Nov. 7, 2012)(per curiam), aff’g on other grounds, Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 839 (Del. Ch. 2012) (slip opinion). As discussed in Gatz Properties, LLC. v. Auriga Capital Corp. (Del. 2012): Strine Affirmed on other Grounds and Chastised, in his opinion below, Chancellor Strine had outlined the basis for applying default fiduciary duties to persons managing Delaware LLCs, and the Delaware Supreme Court rebuked him for doing so.

Prof. Manesh criticizes the Delaware Supreme Court’s opinion in Gatz Properties, LLC on several grounds. Two of the most important are:

  • The Court needlessly unsettled expectations that default fiduciary duties apply, except where modified or eliminated by agreement.
  • Not only have both the Delaware Chancery and Supreme courts long used dicta to guide the development of the law, that practice is central to the pre-eminence of those courts, and of Delaware generally, in the law of business organizations.

Gary Rosin

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Gatz Properties, LLC. v. Auriga Capital Corp. (Del. 2012): Strine Affirmed on other Grounds and Chastised

Thursday, November 8th, 2012

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

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