Is This Really Delaware’s Response to Auriga Capital Corp. v. Gatz Properties, LLC?

Is This Really Delaware’s Response to Auriga Capital Corp. v. Gatz Properties, LLC?

      The Delaware LLC, like the Delaware General Business Corporation Law, is silent as to both what are the applicable fiduciary duties and who is bound thereby.  Under Delaware’s common law, there has never been a question that directors are bound by fiduciary’s duties, although there have been ebbs and flows with respect to exactly what are those duties.  A variety of decisions have been rendered by the Chancery Court, they generally finding that those in control of an LLC owe fiduciary duties roughly equivalent to those owed by corporate directors.  The question had not, before Auriga Capital, been addressed by the Delaware Supreme Court.

      Chancellor Leo Strine in Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 389 (Del. Ch. 2012), held that there exists default fiduciary duties in LLCs.  That proposition was in opposition to the view previously published by Chief Justice Steele in Freedom of Contract in Default Contractual Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L. J. 221 (Summer 2009).  When Auriga Capital was appealed to the Delaware Supreme Court, its per curiam decision found that the subject operating agreement contained an applicable fiduciary standard and, on the basis thereof, upheld the result of Chancellor Strine’s decision.  The Court went on to chastise Chancellor Steele for reviewing what it felt to be the hypothetical question of what would be the standards absent a contractual agreement.

      Draft legislation to amend the Delaware LLC Act has recently been circulated.  Anticipated with bated breath has been a statutory response to the dispute between the Chancery and the Supreme Court regarding the existence (or not) of default fiduciary duties in an LLC absent a provision in the operating agreement. 

      Now, under amendments proposed to the Delaware LLC Act, § 18-1104 would be amended (new text underlined) to provide as follows:

In any case not provided for in this chapter, the rules of law and equity, including the rules and laws of equity relating to fiduciary duties and the law merchant, shall govern.

      And that’s all we get.  We are not told: 

·                    who is it that will owe fiduciary duties;

·                    who will not owe fiduciary duties;

·                    why is it that fiduciary duties will arise;

·                    when those fiduciary duties will arise;

·                    what will be the standard of culpability for breach of the duty of care;

·                    is a “fair to the venture” defense available with respect to self-interested transactions;

·                    are the fiduciary duties owed to the LLC, to all of the members, or both; and

·                    any number of other points that are going to have to be resolved by litigation.

      With this amendment, Delaware provides a resounding “yes” to the question of whether, absent a contractual provision, there exist fiduciary duties in LLCs.  Ergo, Strine wins and Steele loses.  That outcome, however, has never really been in doubt under the existing decisions of the Delaware Chancery Court; we have numerous decisions holding that the “traditional fiduciary duties” exist in LLCs.  See, e.g., Phillips v. Hove, 2011 WL 4404034, at *24 (Del. Ch. Sept. 22, 2011) (“Unless limited or eliminated in the entity’s operating agreement, the member-managers of a Delaware limited liability companies owe traditional fiduciary duties to the LLC and its member”); Kelly v. Blum, No. 5616-VCP, 2010 WL 629850, at *10 (Del. Ch. Feb. 24, 2010) (“[U]nless the LLC agreement in a manager-managed LLC explicitly expands, restricts, or eliminates traditional fiduciary duties, managers owe those duties to the LLC and its members and controlling members owe those duties to minority members.”); Bay Ctr. v. Emery Bay PKI, No. 3658-VCS, 2009 WL 1124451, at *8 (Del. Ch. Apr. 20, 2009) (holding that “in the absence of a contrary provision in the LLC agreement, the manager of an LLC owes the traditional fiduciary duties of loyalty and care to the members of the LLC”); In re Atlas Energy Res. LLC, No. 4589-VCN, 2010 WL 4273122, at *6 (Del. Ch. Oct. 28, 2010) (“[I]n the absence of explicit provision in a limited liability company agreement to the contrary, the traditional fiduciary duties owed by corporate directors and controlling shareholders apply in the limited liability company context.”).  {This string cite has been adopted from Mohsen Manesh, Damning Dictum: The Default Duty Debate in Delaware, available on SSRN}. 

      Having done nothing more than confirm the current accepted view, the Delaware legislature proposes to give those utilizing Delaware LLCs no further guidance.  In consequence, the burden upon drafters of operating agreements remains to fully explicate the fiduciary duties and all issues related thereto.  Failing to do so, recourse to the courts for interpretation will remain necessary.