The issue of whether default fiduciary duties apply to Delaware LLCs when the LLC agreement is silent on the matter is an open issue in Delaware...

In the recent case of Gatz Properties LLC v. Auriga Capital Corp., No. 148, 2012 (Del. Nov. 7, 2012), the Delaware Supreme Court affirmed the decision of the Court of Chancery, but declined to uphold the lower court's ruling that default fiduciary duties are owed in the context of limited liability companies.

Background

The Delaware Supreme Court upheld the Court of Chancery's finding that Gatz, the manager of Gatz Properties LLC (the "LLC"), violated his fiduciary duties by failing to negotiate with a third party bidder and subsequently selling the LLC to himself at an unfair price.  The Supreme Court also upheld the Court of Chancery's adjudication that Gatz acted in bad faith in connection with the sale of the LLC, and that the LLC Agreement did not provide him with exculpation or indemnification under these circumstances.  

Analysis

Of relevance to this blog post, however, is the fact that the Delaware Supreme Court declined to uphold the Court of Chancery's finding that default fiduciary duties are owed in the context of Delaware limited liability companies.    The Court of Chancery found that in addition to violating contractual duties owed under the LLC Agreement, Gatz also violated default fiduciary duties owed by managers of an LLC.  The Supreme Court rejected the Chancery Court's finding as "mere dictum", specifically stating that the trial court “should not have reached or decided” the issue of whether default fiduciary duties are imposed on LLC managers and controllers unless the parties to the LLC agreement waive such duties.   

Thus, the Supreme Court solely upheld the Court of Chancery's finding that Gatz violated contractual duties owed under the LLC Agreement, and "decline[d] to express any view regarding whether default fiduciary duties apply as a matter of statutory construction." 

Conclusion

The Delaware Supreme Court has made it clear that the issue of whether default fiduciary duties are owed by managers or an LLC is an unsettled point of law in Delaware.  Whether the LLC statute does, or does not, impose default fiduciary duties is:  “[o]ne about which reasonable minds could differ.”  Therefore, drafters of LLC Agreements should specifically provide in the agreement whether fiduciary duties are owed by the managers or members of the entity, and should not proceed under the assumption that default duties are owed absent express language in the agreement.