Gatz Properties, LLC v. Auriga Capital Corp., C.A. No. 4390 (Del. Nov. 7, 2012)

more+
less-
more+
less-
Explore:  Fiduciary Duty LLC

In this en banc opinion, the Delaware Supreme Court affirmed the Court of Chancery’s decision in Auriga Capital Corporation v. Gatz Properties, LLC, 40 A.3d 839 (Del. Ch. 2012), awarding minority members of a limited liability company damages and attorneys’ fees.  In doing so, however, the Supreme Court stated that the Court of Chancery should have refrained from its discussion of whether default fiduciary duties apply in a limited liability company context and that the answer to that issue remains unclear.

The appeal arose out of an action brought by the minority members (the “Minority Members”) of Peconic Bay, LLC, a Delaware limited liability company (the “Company”), against the Company’s manager, Gatz Properties, LLC (“Gatz Properties”), and Gatz Properties’s manager, William Gatz (“Gatz”), for breach of contractual duties and default fiduciary duties.  Under Section 15 (“Section 15”) of the Company’s limited liability company agreement (the “LLC Agreement”), no manager or member was permitted to cause the Company to “enter into any additional agreements with affiliates on terms and conditions which [were] less favorable to the Company than the terms and conditions of similar agreements which could then be entered into with arms-length third parties . . . .”  The Minority Members alleged that Gatz breached his duty under Section 15 as well as his default fiduciary duties of care and loyalty by refusing to negotiate with a third-party bidder and then, by causing the Company to be sold to himself at an unfair price in a flawed auction that he himself engineered.  In response, Gatz argued that the LLC Agreement provided for his exculpation and indemnification.  The Court of Chancery found that Gatz breached his contractual duty under Section 15 and the default fiduciary duties of care and loyalty and that the LLC Agreement did not provide for Gatz’s exculpation or indemnification because Gatz acted in bad faith and made willful misrepresentations. 

The Supreme Court agreed with the Court of Chancery that Section 15 imposed fiduciary duties on transactions between the Company and affiliated persons.  According to the Supreme Court, magic words, such as “entire fairness” or “fiduciary duties,” are not required to impose fiduciary standards of conduct as a contractual matter.  The Supreme Court noted that, functionally, Section 15 imposed a contractual equivalent of the entire fairness equitable standard of conduct and judicial review.  According to the Supreme Court, although the Court of Chancery formally only applied the fair price prong of the entire fairness test, as required under the LLC Agreement, it properly considered the “fairness” of how Gatz dealt with the Minority Members.  The extent of Gatz’s fair dealing, or lack thereof, affected the fair price determination.  The Supreme Court then affirmed the Court of Chancery’s ultimate finding that Gatz did not obtain a fair price for the Company due, at least in part, to the sham auction and bad faith efforts of Gatz.  Because of Gatz’s bad faith and willful misrepresentations, the Supreme Court also affirmed the Court of Chancery’s finding that the LLC Agreement did not exculpate or indemnify Gatz.

Although the Supreme Court affirmed the Court of Chancery’s decision on contractual grounds, it disapproved of its discussion of default fiduciary duties in the limited liability company context.  The Supreme Court stated 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 Court of Chancery’s discussion of the issue, and ultimate conclusion that default fiduciary duties apply in a limited liability company context, “must be regarded as dictum without any precedential value.” 

The Supreme Court made clear that the issue of whether the Delaware Limited Liability Company Act does, or does not, impose default fiduciary duties is “one about which reasonable minds could differ.”  As such, the question of whether default fiduciary duties apply in a limited liability company context remains open.

Lastly, the Supreme Court affirmed the Court of Chancery’s awards of damages and attorneys’ fees under an abuse of discretion standard.  The damages award consisted of a return of the Minority Members’ capital contributions to the Company plus a 10% aggregate return, less the amount the Minority Members received from the sham auction.  Because this award was based on conscience and reason, rather than capriciousness or arbitrariness, the Supreme Court upheld it.  The Supreme Court found that the Court of Chancery did not abuse its discretion in awarding one-half of the Minority Members’ attorneys’ fees because the record amply supported the finding that, among other things, Gatz acted in bad faith, and Gatz and his counsel splattered the record with a series of legally and factually implausible assertions.

The full opinion is available here.

 

Topics:  Fiduciary Duty, LLC

Published In: Business Organization Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Potter Anderson & Corroon LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »