This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Friday, August 1, 2014
Delaware Court of Chancery Applies Kentucky LLC Act, Finds No Breach of Fiduciary Duty
Delaware Court of Chancery Applies Kentucky LLC Act,
Finds No Breach of Fiduciary Duty
In a recent decision, the Delaware Chancery Court considered
allegations that, in the operation of the Kentucky LLC, various fiduciary
obligations had been violated. These claims were entirely dismissed on the
basis that there existed no fiduciary duty which could be violated. Consequent
to the absence of breach of fiduciary duty, the court likewise dismissed aiding
and abetting claims and a claim for waste. Xcell
Energy and Coal Company, LLC v. Energy Investment Group, LLC, C.A. No.
8652-VCN, 2014 WL 2964076 (Del. Ch. June 30, 2014).
Xcell Energy brought suit against its former member EIG alleging breach of fiduciary
duty and related claims such as aiding and abetting and waste.The Delaware Chancery Court would dismiss
each of these claims for the reason that there was no fiduciary obligation that
could have been violated.
Xcell Energy was a manager-managed
LLC.Because EIG was only a member, and
not a manager, of Xcell Energy, the Court found that there existed no fiduciary
duty that could be violated.
A Kentucky LLC can be managed by its members or by its
managers.….Unless provided otherwise in the LLC’s
operating agreement, if a Kentucky LLC is managed by its managers, then, by
Kentucky statute, its members do not manage the LLC and thus do not owe
fiduciary duties to the LLC.Here,
Xcell’s Operating Agreement does not expressly provide that its members owe
fiduciary duties.EIG, as a member of
Xcell, a manager-managed LLC, thus did not owe fiduciary duties to Xcell under
Kentucky law.Slip op. at 18 (citations
The decision gives effect to the
election in the articles of organization for the LLC to be either
member-managed or manager-managed (KRS §275.025(1)(d)) and the “switch”
provision that appears at KRS § 275.170(4), it providing:
A member of a limited liability
company in which management is vested in managers under KRS 275.165(2) and who
is not a manager shall have no duties to the limited liability company or the
other members solely by reason of acting in his or her capacity as a member.
If there is no fiduciary duty then there can be no claim for the
breach thereof.See, e.g., Fastenal Company v. Crawford, 609 F. Supp. 2d 650, 665 (E.D. Ky.
2009) (“In order to prevail on a claim for breach of fiduciary duty, the
plaintiff must prove: (1) the defendant owes a fiduciary duty to the plaintiff….”)
(citing Sparke v. Re/Max Allstar Realty,
Inc., 55 S.W.3d 343, 348 n.15 (Ky. Ct. App. 2000) and Biggs v. Eaton Sales, Inc., 2011 Ky. App. LEXIS 91, 2011 WL
1901793, *10 (Ky. Ct. App. 2011) (“As our court has noted, ‘[i]f no duty is
owed by the defendant to the plaintiff, there can be no breach thereof, and
therefore no actionable negligence.’” (quoting Ashcraft v. Peoples Liberty Bank & Trust Co., Inc., 724 S.W.2d
228, 229 (Ky. Ct. App. 1986)).KRS §
275.170(4) says that in a manager-managed LLC the members are not, as members,
in a fiduciary relationship with the LLC or the other members – if duties are
desired then they must be created in the operating agreement.
Consequent to the
absence of the basis for alleging a breach of fiduciary duty, the Court
dismissed claims for aiding and abetting a breach of fiduciary duty and for
It should be noted that KRS §
275.170(4) is drawn from the Prototype LLC Act, and that other states have
similar statutes.The decisions of the
other states interpreting those equivalent provisions are consistent with Xcell
Energy as to its application. See, e.g., Mitchell
v. Smith, 2009
WL 891908 (D. Utah March 31, 2009) (“Because Defendant's Counterclaim relies
solely upon Plaintiffs status as members [of the LLC] for the existence of
fiduciary duties, and because Utah law prohibits such a finding based solely
upon membership, the Court finds that Defendant has failed to state a cause of
action upon which relief may be granted.”); Katris
v. Carroll, 842 N.E.2d 221 (Ill. App. 2005); ULQ, LLC v. Meder, 666 S.E.2d 713 (Ga. App. 2008); Ledford v. Smith, 618 S.E.2d 627 (Ga.
App. 2005); Dragt v. Dragt/DeTray, LLC, 161
P.3d 473 (Wash. App. 2007).