Delaware Supreme Court Disclaims Court of Chancery’s Conclusions on Fiduciary Duties of Managers of Delaware LLCs

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In an opinion issued on November 7, 2012, the Delaware Supreme Court left open the long-standing question of whether the Delaware Limited Liability Company Act imposes default fiduciary duties on managers of Delaware LLCs in the absence of an express contractual elimination of such duties. Earlier this year, in Auriga Capital Corp. et al. v. Gatz Properties, LLC, Chancellor Strine of the Delaware Court of Chancery answered this question in the affirmative and held that the manager in question, Gatz Properties, LLC, owed traditional implied fiduciary duties to the members of the LLC it managed, Peconic Bay, LLC, in addition to the duties imposed under the underlying LLC agreement. On appeal, the Delaware Supreme Court upheld the Court of Chancery’s interpretation of the LLC agreement but not its reading of the Delaware LLC Act. Instead, the Delaware Supreme Court instructed courts and practitioners that the Court of Chancery’s opinion that “the LLC Act starts with the default that managers of LLCs owe enforceable fiduciary duties” was mere dictum without any precedential value.

Gatz Properties, LLC was a family-owned entity that held title to property on Long Island in New York. The Gatz family set up Peconic Bay, LLC, which was managed by Gatz Properties and owned in part by third-party investors, and Peconic Bay entered into a long-term ground lease for the property with Gatz Properties. Peconic Bay subleased the property to an independent golf-course management company, but the golf course struggled. According to the Court of Chancery and the Supreme Court, Gatz Properties then sought to unlock the value in the underlying property, which by that time was worth more as vacant land for development than as an operating golf course, but it acted at the expense of the third-party investors in Peconic Bay. In particular, Gatz Properties stonewalled an unaffiliated investor interested in purchasing Peconic Bay and instead conducted what the Court of Chancery described as a “sham” auction to allow Gatz Properties to purchase Peconic Bay for itself at a “fire sale price.”

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