Wednesday, March 20, 2013

The Uncertain Status of Default Fiduciary Duties in Delaware LLCs

The Uncertain Status of Default Fiduciary Duties in Delaware LLCs

While Delaware is often lauded as the font of knowledge in all matters involving the law of business organizations, this attitude is often unjustified.  As addressed in Going to Delaware(?), forthcoming in the  Journal of Passthrough Entities, the laws of Delaware are not necessarily better, even as they are often different. 

One point of particular note is that the Delaware LLC Act is silent as to what are the fiduciary duties that exist in an LLC and is as well silent as to who owes those duties and to whom.  There is brewing a dispute in Delaware, not always polite, as to whether there are default fiduciary duties and what they are.

Chief Justice Myron T. Steele, in Freedom of Contract and Default Contractual Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221 (Summer 2009), posited that there are no default fiduciary duties in limited partnership or LLCs organized under Delaware law.  Chancellor Leo Strine, in Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 389, 2012 WL 361677 (Del. Ch. 2012), held that there exist default fiduciary duties in Delaware LLCs.  When that decision was appealed to the Delaware Supreme Court, Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 839 (Del. 2012), it held (per curium) that the LLC manager had violated a contractually defined standard and went on to chastise Chancellor Steele for reviewing hypothetical of what are the standards absent a contractually agreed standard and declaring those portions of his opinion dicta.  Then, in Feeley v. NHAOCG, LLC, 2012 WL 5949209, *8-10 (Del. Ch. Nov. 28, 2012), Vice Chancellor Laster adopted the reasoning and path of analysis employed by Chancellor Strine in Auriga Capital, writing “Until the Delaware Supreme Court speaks, the long line of Court of Chancery precedents and the Chancellor’s dictum provide persuasive reasons to apply fiduciary duties by default to the manager of a Delaware LLC.” 

The word on the street is that the normally quite secretive official drafting committee is crafting a statutory patch to address the issue.

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