Analysis

The Delaware Supreme Court’s public rebuke of Delaware Court of Chancery Chancellor Leo E. Strine Jr. in a recent opinion may have been sparked by differing opinion between Chief Justice Myron T. Steele and Strine on the state’s Limited Liability Company Act, according to legal sources within the state.

In a per curiam opinion issued Wednesday in Gatz Properties v. Auriga Capital, the Supreme Court sharply criticized Strine for using 11 pages of his 75-page post-trial opinion in the case to espouse his view that Delaware’s Limited Liability Company Act does impose default fiduciary duties upon an LLC’s managers and controllers when the LLC agreement is silent on such matters. Strine had concluded that under the statute, LLC managers have the same fiduciary duties as heads of traditional equity groups unless both parties specifically write in the LLC agreement that such duties do not apply.

The high court affirmed Strine’s decision that defendant William A. Gatz breached his fiduciary and contract duties to an LLC, dubbed Peconic Bay LLC, which was formed to own a golf course on Long Island, N.Y., but blasted Strine for pontificating upon the LLC Act in the opinion. The Supreme Court called Strine’s interpretation of the LLC Act an “issue that the trial court should not have reached or decided” and declared his opinion on the matter “as dictum without any precedential value.”

“The court’s excursus on this issue strayed beyond the proper purview and function of a judicial opinion,” the justices said.

“We remind Delaware judges that the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual worldviews on issues not presented,” the court continued. “A judge’s duty is to resolve the issues that the parties present in a clear and concise manner. To the extent Delaware judges wish to stray beyond those issues and, without making any definitive pronouncements, ruminate on what the proper direction of Delaware law should be, there are appropriate platforms such as law review articles, the classroom, continuing legal education presentations and keynote speeches.”

As a final exclamation point on the Supreme Court’s criticism of Strine, the court included a footnote restating Section 3.1(a) of the Delaware Judges’ Code of Judicial Conduct, which says a judge may “speak, write, lecture, teach, and participate in other activities concerning the law and the legal system and the administration of justice.”

The court also deviated from its traditional practice of referring to the head of the Delaware Chancery Court as “chancellor” and referred to Strine as “a trial judge” in the opinion.

A call to Strine’s chambers seeking comment was returned by his secretary, who told The Legal that the chancellor could not comment because Gatz is still an open case. Under Delaware law, the defendants have 15 days to file a motion for reargument with the Supreme Court.

Many in the Delaware legal community say the Supreme Court may have taken such a harsh approach because Steele has been very vocal in papers and speeches that Delaware’s LLC statute does not impose default fiduciary duties upon an LLC manager. The sources said Steele may have been concerned that Strine’s view would be interpreted as Delaware law, which remains unsettled on the matter.

In a 2009 article written for the American Business Law Journal, Steele asserted his personal opinion that there should be no default fiduciary duties in Delaware LLCs. The chief justice wrote “the entity is contractual, the parties’ relationship is contractual, and any ‘bad acting’ will be ferreted out by the parties’ bargain and the implied covenant of good faith and fair dealing. This is a contractual construct anticipated by the Delaware Legislature when the statutory policy of freedom of contract was adopted in the LLC statute.”

“There is no bad blood between Strine and Steele,” said one Delaware attorney. “It is simply a philosophical difference between two strong-willed individuals and people should not read much more into it than that.”

A member of the Delaware Chancery bar agreed with that assessment.

“I know this particular issue is dear to Steele’s heart and he has a very different view than Strine,” the attorney said. “Strine came out pretty strong about the imposition of fiduciary duties when he did not have to. I think that’s why the Supreme Court used such rhetoric. They didn’t want the world to think Strine had decided this issue.”

However, both attorneys were still surprised by the court’s language, with one attorney calling it “unique.”

There is some evidence in the Supreme Court’s language that it was concerned that Strine’s philosophy would be interpreted as Delaware law. The high court noted in the opinion its concern that members of Delaware’s Chancery bar, including Auriga Capital’s counsel, interpreted Strine’s comments on the LLC Act as Delaware law.

“Counsel understood the trial court opinion to mean that because the Court of Chancery has repeatedly decided an issue one way … and practitioners have accepted it, that this court … somehow ought to be constrained because people have been conforming their conduct to comply with the Court of Chancery’s decisions,” the Supreme Court said.

“It is axiomatic, and we recognize, that once a trial judge decides an issue, other trial judges on that court are entitled to rely on that decision as stare decisis,” the court said. “Needless to say, as an appellate tribunal and the court of last resort in this state, we are not so constrained.”

Lawrence A. Hamermesh, the Ruby R. Vale Professor of Corporate and Business Law at Widener University School of Law, agreed that the Supreme Court could have been motivated by its desire to inform the bar that Strine’s thoughts are not prevailing law in Delaware, but noted such views are merely speculation. However, he did call the high court’s language “blunt” and “a rebuke.”

“There is no question that the chief justice has been interested a great deal in the LLC Act,” he said. “That might well account for the some of the content in the court’s opinion.”

Hamermesh also expressed concern that the Supreme Court’s tone may force other Delaware trial judge’s to censure their views when writing opinions.

“To me, the important question is what should be expected from trial judges going forward,” he continued. “This obviously promotes a certain circumspection which may not be useful. Suppose the chancellor didn’t analyze the issue of default fiduciary duties and the court remands it back to him upon appeal for that reason. Now you’ve wasted a lot of time and judicial resources.”

Jeff Mordock can be contacted at 215-557-2485 or jmordock@alm.com. Follow him on Twitter @JeffMordockTLI. •