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Delaware Supreme Court Rejects Chancery Court's Determination that Default Fiduciary Duties Apply to All LLC Members

The Delaware Supreme Court ultimately affirmed the ruling of the Delaware Chancery Court in finding the manager of an LLC in violation of his contractual fiduciary duties, but while doing so it took pains to reject as unnecessary the Chancery Court’s decision that default fiduciary duties apply to all LLC members under the Delaware Limited Liability Corporation Act (Delaware LLC Act).

Peconic Bay, LLC (Peconic Bay), a limited liability company formed to hold a long-term lease and to develop a golf course, appointed as its manager Gatz Properties, which is managed, controlled and partially owned by William Gatz (Gatz). As a sublease held by Peconic Bay was nearing its end, Gatz was approached by a third party interested in acquiring Peconic Bay’s long-term lease. Despite several attempts by the third party, Gatz refused to negotiate. Instead, Gatz arranged for Peconic Bay to be sold to himself at an unfair price in a flawed auction, violating his contractual fiduciary duties as a manager of the LLC.

The Delaware Supreme Court upheld the Chancery Court’s ultimate decision that Gatz violated his fiduciary duties, but only on contractual grounds. It wholly rejected the Chancery Court’s conclusion that the Delaware LLC Act imposes default fiduciary duties on LLC members. The Delaware Supreme Court held that “reasonable minds could differ” on whether such default fiduciary duties were imposed by the Delaware LLC Act, and thus the Court of Chancery should not have reached that question when a contractual duty clearly existed.

Gatz Properties, LLC v. Auriga Capital Corporation, No. 11-1937-cv (Del. Nov. 7, 2012).

©2014 Katten Muchin Rosenman LLP

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