Implied Covenant of Good Faith and Fair Dealing Saves Employee’s Claim for Improper Termination Under Company’s LLC Agreement

Morris James LLP

Smith v. Scott, C.A. No. 2020-0263-JRS (Del. Ch. Apr. 23, 2021)

The Delaware LLC Act provides that fiduciary duties may be expanded or limited by the provisions of an LLC agreement. If the agreement is silent, then traditional corporate fiduciary duties apply. However, if the agreement unambiguously disclaims fiduciary duties, then the only duties that exist are those specified contractually in the LLC agreement and the implied covenant of good faith and fair dealing. 

The parties to the LLC agreement in this case opted out of the traditional corporate fiduciary duties, and instead indicated that the managing member must act in accordance with the LLC agreement and the implied covenant of good faith and fair dealing, and also “in a manner that does not constitute gross negligence or fraud.” Plaintiff alleged a scheme by which the defendants wrongfully terminated plaintiff to deprive him of certain Vested Interests under the LLC agreement. The Court concluded such an intentional scheme could not be “gross negligence,” and the elements of fraud were not pled. However, the Court held that the implied covenant could be used to fill a gap in the various agreements at issue, explaining that “none of the operative contracts explain what is to happen if a party fabricates a basis to fire for cause in order to trigger a forfeiture of Vested Interests.” The Court granted defendants’ motion to dismiss plaintiff’s claims of fraud and gross negligence but upheld the claim for breach of the implied covenant. 

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.

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