Thursday, August 3, 2017

Delaware Chancery Court Rejects Naked Assertion That Minority Member Owes Fiduciary Duties

Delaware Chancery Court Rejects Naked Assertion That Minority Member
 Owes Fiduciary Duties
      In a decision rendered last month by the Delaware Court of Chancery (Glasscock, V.C.), there was rejected the naked assertion that the minority member of the Delaware LLC is bound by fiduciary obligations. Re: Beach To Bay Real Estate Center LLC v. Beach To Bay Realtors Inc., Civ. Act. No. 10007-VCG, 2017 WL 2928033 (Del. Ch. July 10, 2017).
      The facts of this case are rather involved, if only because it involves a number of related companies with nearly indistinguishable names. Still, ultimately, this came down to a dispute with respect to the winding up and termination, with related settling of accounts, a failed real estate venture to which only one of the parties had made significant capital contributions beyond the original. Also complicating the case was the fact that there was no integrated written operating agreement, but rather a series of alleged oral agreements and one writing, it conflicting, in part with the alleged oral contract.
      In this decision, the court ruled on motions to dismiss that were filed in 2014. At that time, the parties requested that the court hold off on consideration as they were pursuing settlement discussions. Finally, in 2017, at the courts own motion, consideration was given to those arguments. Vice Chancellor Glasscock’s description of this case’s history is worth reading, namely:
In Yoknapatawpha County, Faulkner tells us, the “past is never dead. It’s not even past.” It must be so in Sussex, if this case is any indication. This matter involves a Sussex-centered real estate sales venture, ultimately unsuccessful and, according to the Plaintiffs, giving rise to a dog’s breakfast of claims and accountings, mostly concerning acts taking place during the time of the administration of the second President Bush. The Defendants moved to dismiss three of the counts. Three years ago. The matter was fully briefed in 2014, and oral argument had been schedule. I continued the argument, at the parties’ request, because they were “exploring” settlement. Outside the litigation, the world continued to turn. Births and deaths occurred, heartaches were endured, aspirations were pursed, wars were fought. Inside the litigation, in the micro-world of Beach to Bay v. Beach to Bay, time stood still. Apart from rousing themselves to answer, in desultory fashion, occasional proddings from this Court (themselves, I admit, less than energetic), the parties were content in a world slowed to the pace of matter chilled to near-absolute zero. Eventually, following a mandatory appearance of counsel at a call of the calendar, sufficient thaw set in to revive consideration of this partial motion to dismiss. The parties consented – that is, impliedly consented by failing to respond to a letter from the Court – to consideration of the briefs without amendment or update, and sans oral argument. Therefore, I have addressed the issues as fixed in the briefs from 2014 like flies in amber.
      But back to the merits. The plaintiff, in its complaint, alleged that the defendant owed a fiduciary duty to the plaintiff and failed to appropriately discharge that obligation by means of certain self-dealing transactions. The defendant sought dismissal of this claim on the basis that the plaintiff had not demonstrated that a fiduciary duty existed to begin with. The parties were in agreement that a manager/managing member of a Delaware LLC does owe fiduciary duties, but that did not extend to minority members. Rather, the Chancery Court found:
On the face of the Complaint, minority membership is the sole allegation that purports to create a fiduciary duty. That is insufficient as a matter of law. Thus, the pleading that [the minority member] owed fiduciary duties to [the majority member] falls short.

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