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 omitted).
            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 waste.
            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).

No comments:

Post a Comment