In this case, the Court of Chancery dealt with various counterclaims by the non-managing member of Oculus Capital Group, LLC, a Delaware limited liability company (the “Company”). The case began as a dispute over control between the two members of the Company. The counterclaims generally related to alleged damages resulting from purported actions taken by the managing member and the individual that controlled the managing member of the Company.
NHAOCG, LLC, a New York limited liability company (“NHA”) acted as the non-managing member of the Company, and AK-Feel, LLC, a Delaware limited liability company, acted as the managing member (the “Managing Member”). In a prior opinion related to this litigation, the Court of Chancery granted to the Managing Member partial judgment on the pleadings, holding that NHA wrongfully tried to remove the Managing Member and fire the Company’s president and CEO, Christopher J. Feeley (“Feeley”). Feeley was also the manager, and fifty-five percent owner, of the Company’s Managing Member.
The specific counterclaims included, that (1) NHA had the right under the Company’s LLC Agreement (the “LLC Agreement”) to cause the Company to “cease business operations,” (2) the Managing Member breached the LLC Agreement by engaging in grossly negligent conduct or in willful misconduct, diverting investment opportunities, and failing to perform contractual obligations, and that Feely aided and abetted such breach, and (3) the Managing Member and Feeley breached fiduciary duties to NHA.
The Court of Chancery dismissed the declaratory judgment request that asked the Court to cause the Company to “cease business operations” because the Court found no basis on which to make such a holding pursuant to the plain language of the LLC Agreement. The Court also dismissed most aspects of the breach of contract claims against the Managing Member. However, the Court permitted to proceed aiding and abetting breach of contract claims against Feeley. The Court reasoned that even though Delaware law does not recognize the concept of aiding and abetting breaches of commercial contracts, Delaware law does under the Gotham Partners (817 A.2d 160 (Del. 2002)) line of cases, recognize that a controller of an entity may be liable to the persons or entities to whom contractually imposed fiduciary duties are owed by the controlled entity. The Court stated that the Managing Member and Feeley failed to challenge the allegation that the LLC Agreement contractually imposed such duties. As such, the Court assumed that the LLC Agreement contractually mandated the duties alleged to have been breached and refused to dismiss the aiding and abetting claim against Feeley. Claims against Feely that the Court determined may implicate his Employment Agreement, which contained a provision requiring arbitration of disputes, were stayed by the Court pending the outcome of arbitration.
The Court of Chancery applied some of its most notable analysis in this case to the claim against the Managing Member for alleged breaches of default fiduciary duties. In that analysis, Vice Chancellor Laster of the Court of Chancery discusses the Delaware Supreme Court’s recent decision in Auriga Capital Corporation v. Gatz Properties, LLC. The Supreme Court stated in Gatz that “[w]here, as here, the dispute over whether fiduciary standards apply could be decided solely by reference to the LLC Agreement, it was improvident and unnecessary for the trial court to reach out and decide, sua sponte, the default fiduciary duty issue as a matter of statutory construction.” According to the Supreme Court, Delaware judges’ “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.” The Supreme Court made clear in Gatz that the issue of whether the Delaware Limited Liability Company Act (the “LLC Act”) does, or does not, impose default fiduciary duties is “one about which reasonable minds could differ.” However, in this case Vice Chancellor Laster noted that while Chancery Court precedents holding that default fiduciary duties apply to the managers of an LLC are not binding on the Supreme Court, they may be appropriately viewed as stare decisis by the Chancery Court. Vice Chancellor Laster also stated that Chancellor Strine’s analysis in the Chancery Court Gatz decision remained persuasive authority, similar to “a law review article, a form of authority the Delaware Supreme Court often cites.” In the Chancery Court Gatz decision, Chancellor Strine held that the traditional fiduciary duties of care and loyalty apply in an LLC context as long as the members do not contract them away.
Having concluded that default fiduciary duties apply to the Managing Member, the Court of Chancery in this case went on to analyze whether the Company’s LLC Agreement limited or eliminated such default duties, as permitted pursuant to Section 18-1101(c) of the LLC Act. The Court determined that the LLC Agreement did not modify the application of default fiduciary duties, but, rather it assumed they exist. The Court also determined that the LLC Agreement, consistent with the ability of parties to do so under Section 18-1101(e) of the LLC Act, limited possible monetary remedies, but not the potential for injunctive or other equitable relief, and permitted damages as a remedy for, among other things, gross negligence and willful misconduct. With that background, the Court declined to dismiss the claim against the Managing Member for alleged breach of default fiduciary duties.
The counterclaimants also alleged that Feeley, as the controller of the Managing Member, separately owed a fiduciary duty of care to NHA, and breached that duty. Feely countered that he could not be sued for breach of fiduciary duty, because that would equate to piercing the Managing Member’s corporate veil. In a lengthy discussion of veil piercing and corporate separateness principles, the Court of Chancery disposed of that counterargument by among other things, highlighting the USACafes (600 A.2d 43 (Del. Ch. 1991)) line of cases, in which the Court of Chancery has consistently looked to the actual controllers of an entity and imposed the risk of fiduciary liability on such controllers. Relying on principles of trust law, the Court of Chancery in USACafes held that directors of a corporate general partner may owe fiduciary duties to a limited partnership and its limited partners. The USACafes Court analogized directors of a corporate general partner to directors of corporate trustees and argued that, because of the managerial control that both such bodies possess over the underlying entity’s property, it is appropriate for both bodies to have similar duties. Notwithstanding Vice Chancellor Laster’s thorough discussion of corporate separateness and the holdings of USACafes and its progeny, he dismissed the duty of care claim against Feely because USACafes and cases following it have not been applied to duty of care claims, focusing only on the duty of loyalty.
The full opinion is available here.