Delaware Court Of Chancery Allows Claims For Breach Of Both Fiduciary Duty And Contract Against LLC Manager
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Wilmington, Del. (August 3, 2021) – The
Delaware Court of Chancery recently explained under what
circumstances dual claims will be allowed to proceed for both
breach of fiduciary duty and breach of contract in the context of
the manager of an LLC allegedly using LLC assets for his personal
benefit in a manner not shared by all the other LLC members.
In Largo Legacy Group, LLC v. Charles, C.A. No.
2021-MTZ (Del. Ch., June 30, 2021), the court addressed many
noteworthy bedrock principles of Delaware commercial
Practitioners would be well-served to keep this decision handy
in their virtual toolbox because it includes many statements of
Delaware law that have widespread applicability to commonly
encountered business disputes, especially among LLC members.
Background of the Case
The detailed facts provided in the court’s opinion are
essential to fully understanding this case, but for the limited
purpose of highlighting the most consequential statements of law,
I’ll only provide a modest amount of color to give context to
the rulings. Although arguably involving usurpation of corporate
opportunity, the parties and the court referred to the claims as a
more generic and simple breach of fiduciary duty.
The LLC in this case owned a hotel as well as adjacent land that
was undeveloped. According to the complaint, which was viewed in
the context of a motion to dismiss under Rule 12(b)(6)
(see Slip op. at 18-19), the LLC manager transferred
the adjacent land to a separate entity that the manager personally
owned and controlled. He assigned zero value to the land of the LLC
that was transferred to his own entity. Among other things, the
manager allegedly also paid himself for redevelopment costs from
LLC funds, instead of retaining the value of the adjacent property
for the LLC and its members. Slip op. at 36-37.
- The most momentous part of this opinion is the explanation
about why the fiduciary duty claims were not preempted by the
breach of contract claims–notwithstanding the primacy of
contract under Delaware law. See Slip op. at
37-38; compare footnotes 124 and 125. In sum, the fiduciary duty
claims only survived to the extent that they did not duplicate the
breach of contract claims.
- Importantly, the court buttressed its reasoning with the
venerable Schnell v. Chris-Craft Indus., Inc., 285
A.2d 437, 439 (Del. 1971), which announced one of the most famous
equitable principles: “inequitable action does not
become permissible simply because it is legally
possible.” Slip op. at 39 and fn. 106. Another
variation on this bedrock principle of Delaware law is that
corporate actions must be twice-tested: once by the law and again
by equity. Fn. 106.
- As applied to this case, the court explained that simply
because the LLC agreement may have been technically complied with,
default fiduciary duties do not disappear as a check on managerial
conduct. Id. (The LLC agreement expressly allowed the
members to compete against the LLC, which might explain why the
malfeasance was not described as a usurpation of corporate
A few other well-settled principles that are well-known to
corporate and commercial litigators are still worth reiterating as
- Traditional common law fiduciary duties of loyalty and due care
apply to LLC managers, unless unambiguously limited. Slip op. at 30
and fn. 84.
- In order for traditional fiduciary duties to be eliminated or
limited in an LLC agreement, the language must plainly and
unambiguously disavow common law fiduciary duties. Slip op. at
30-31 and fn. 87-91.
- Primacy of contract only preempts fiduciary duty claims when
the LLC agreement expressly and unambiguously disavows fiduciary
- Any ambiguity in the language of the LLC agreement about
whether fiduciary duties were waived is resolved in favor of the
full panoply of duties. Fn. 117.
- The court relied on the well-worn USA Cafes case to
explain why the individual manager of the entity that served as the
manager of the LLC was exposed to personal liability for breach of
the fiduciary duty of loyalty. Fn. 96.
- A classic description of the elements of fiduciary duty and
what that obligation entails, is always
useful. See Slip op. at 32-33 and fn. 92-95.
E.g., a fiduciary “cannot play ‘hardball’ with those
to whom a fiduciary duty is owed.”
- Tolling of the statute of limitations is available in three
situations. Slip op. at 21-23. One of them is equitable tolling
during a plaintiff’s reasonable reliance upon the competence
and good faith of a fiduciary. No evidence of actual concealment is
necessary for tolling under this category. Slip op. at 26.
- Inquiry notice is explained in terms of when someone should
have been aware of activity that would trigger the beginning of the
statute of limitations period, which Chancery usually follows but
is not required to do so. Id.
- Chancery follows a three-part test to determine if a claim is
time-barred. Although the defense of laches is not well-suited for
a Rule 12(b)(6) motion (see fn. 66), Chancery often
follows the three-year statute of limitations for breach of
contract, fraud, and fiduciary duty claims. Slip op. at 21-23.
- A prior action for books and records based on the LLC agreement
was withdrawn after this plenary action was filed, but the court
allowed a claim to proceed for breach of the LLC agreement due to
failure to provide the requested books and records required under
the LLC agreement.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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