Two weeks ago the Delaware Supreme Court confounded the conventional wisdom and rebuked the Court of Chancery, by ruling that whether fiduciary duties apply to LLC managers is an open question in Delaware law. Gatz Properties, LLC v. Auriga Capital Corp., No. 148, 2012, 2012 WL 5425227 (Del. Nov. 7, 2012). Most Delaware corporate lawyers have assumed that LLC managers are subject to fiduciary duties unless limited by the LLC agreement, and the lower court in Gatz had interpreted Delaware’s LLC Act to impose fiduciary duties on LLC managers.

The Trial Court. The Court of Chancery ruled earlier this year on Gatz in Auriga Capital Corp. v. Gatz Props., LLC, No. C.A. 4390-CS, 2012 WL 294892 (Del. Ch. Jan. 27, 2012). The court found that an LLC’s manager and majority owner breached his fiduciary duties by taking steps to squeeze out the minority investors at an unfair price in order to obtain ownership of the LLC’s valuable golf course.

Chancellor Strine, the author of the trial court opinion, held that the terms of the parties’ LLC agreement, and the Delaware LLC Act, imposed fiduciary duties on the LLC’s manager. The court analyzed the Delaware LLC Act and its history, reviewed precedential cases, analogized the LLC Act to Delaware’s General Corporation Law in its treatment of fiduciary duties, and concluded that the LLC Act applies fiduciary duties to LLC managers and controllers unless the parties’ LLC agreement limits those duties. Commentators hailed the Chancellor’s opinion as a comprehensive and detailed explanation of how and why the Delaware Act applies fiduciary duties to LLC managers. I discussed that decision, here.

Supreme Court’s Ruling. The Supreme Court affirmed the judgment of the Court of Chancery and its award of damages and attorneys’ fees, but it did so by relying only on the LLC agreement’s contractual imposition of fiduciary duties. That was sufficient to decide the case, said the court, and therefore the Court of Chancery should not have expounded on whether the LLC Act imposed fiduciary duties on the manager.

Where, 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. The trial court did so despite expressly acknowledging that the existence of fiduciary duties under the LLC Agreement was “no longer contested by the parties.” For the reasons next discussed, that court’s statutory pronouncements must be regarded as dictum without any precedential value.

Gatz, 2012 WL 5425227, at *9 (footnote omitted). In its footnote the court said it felt compelled to “address this dictum” so in future cases it would not be misinterpreted as a correct rule of law when “in fact the question remains open.” Id., at *9 n.62.

The court elaborated on why the lower court’s discussion should be regarded as dictum. First, the LLC Agreement in Gatz addressed the issue that controlled the dispute. Second, the parties had not asked the court to decide whether the LLC Act imposed fiduciary duties. Third, it was wrong for the trial court to imply that once practitioners have relied on repeated decisions of the Court of Chancery on an issue, the Supreme Court should not change the rule relied on by those decisions. Fourth, reasonable minds can differ on whether DLLCA Section 18-1102’s provision that to the extent a manager has fiduciary duties, they can be limited by the LLC agreement, is “consciously ambiguous.” Fifth, “the court’s excursus on this issue strayed beyond the proper purview and function of a judicial opinion,” which is to “resolve the issues that the parties present in a clear and concise manner.” Id. at *10.

The court also discussed the proper role of the trial court: “We remind Delaware judges that the 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. A judge's duty is to resolve the issues that the parties present in a clear and concise manner.” Id.

After admonishing the trial court not to go beyond the issues presented, the Supreme Court then pontificated that the appropriate committee of the Delaware State Bar Association “may be well advised to consider urging the General Assembly to resolve any statutory ambiguity on this issue.” Id.

Comment. This case has generated a tremendous amount of commentary by bloggers and the press, including an article in The New York Times, here, and an alert from the American Bar Association’s Committee on LLCs and Partnerships, here. Besides undoing what many corporate lawyers thought was a settled legal principle, the opinion also admonished the highly respected chief judge of the Delaware Court of Chancery, Chancellor Leo Strine, that it was “improvident and unnecessary” to reach out and decide the fiduciary duty issue.

What can lawyers take away from this case? The moral for lawyers forming Delaware LLCs is clear: use language in the LLC agreement that clearly defines the fiduciary duties applicable to the managers and the limits of those duties.

But in other contexts the court’s ruling raises questions. For example, members of existing Delaware LLCs may be relying on LLC agreements that were written under the assumption that fiduciary duties implicitly apply to the managers. Such an agreement may yield unexpected results in the event of a dispute, if the Delaware Supreme Court ultimately holds that fiduciary duties do not apply to LLCs. Perhaps those members’ lawyers should be thinking about amendments to clarify explicitly what the parties intended.

In the case of existing disputes involving allegations of breach of fiduciary duties, Gatz has suddenly shifted the landscape. Now the parties don’t know what the Delaware law on LLC fiduciary duties is. Presumably the Court of Chancery will continue to rule as it has in the past, i.e., that LLC managers are subject to fiduciary duties unless those duties are explicitly limited in the LLC agreement. But we won’t know definitively what the law is until either a case comes up to the Supreme Court that squarely presents the issue, or the Delaware legislature clarifies the issue by amending the LLC Act.