Chancery Addresses Whether LLC Agreement Modified or Eliminated Fiduciary Duties

Morris James LLP

In Re Cadira Group Holdings, LLC Litigation, Consolidated C.A. No. 2018-0616-JRS (Del. Ch. July 12, 2021)

The Delaware Limited Liability Company Act provides that “the fiduciary duties of a member, manager, or other person that is a party to or bound by a limited liability company agreement may be expanded or restricted or eliminated by provisions in the limited liability company agreement.” Yet to eliminate fiduciary duties, Delaware law requires that the intent to do so must be “plain and unambiguous.”

In this matter, the relevant LLC agreement stated: “[i]t is the intent of this Section [13.02] to restrict the liability and fiduciary duties of the Members and the Managers to the maximum extent permitted by applicable law.” But that section then proceeded to allow claims against a Manager arising from the “Manager’s bad faith, gross negligence, willful misconduct or actual fraud.” The Court of Chancery noted that a contractual duty to refrain from “willful misconduct” or “bad faith” is essentially identical to the common law duty of loyalty, and a contractual duty to refrain from “gross negligence” is essentially identical to the common law duty of care. The Court concluded that this language “essentially ‘replaces’ traditional fiduciary duties with identical contractual duties.” Accordingly, the drafters failed to restrict or displace traditional fiduciary duties in “plain and unambiguous” language. 

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