In a recent opinion, Delaware Court of Chancery Vice Chancellor J. Travis Laster, siding with Chancellor Leo E. Strine Jr., said Delaware’s LLC Act does impose default fiduciary duties upon an LLC’s managers and controllers. Laster’s opinion is the latest on a hotly debated issue between the Chancery Court and the Delaware Supreme Court. Although one Delaware legal analyst said Laster used the opinion to defend Strine’s position on the matter, others said the vice chancellor was in the unenviable position of having to decide an unsettled issue placed before him.
In Feeley v. NHAOCG, a November 28 decision, Laster ruled that the defendants, an LLC composed of three real estate investors, violated Oculus Capital Group LLC’s operating agreement when it attempted to remove plaintiff Christopher Feeley as its sole management member.
The vice chancellor also spent roughly seven of the opinion’s 47 pages defending Strine’s view that the LLC Act does impose default fiduciary duties upon an entity’s managers and controllers.
Laster supported his argument by citing Section 18-110(c) of the LLC Act, which states, “To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company … the duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement.”
“The introductory phrase ‘to the extent that’ in Section 18-110(c) does not imply that the General Assembly was agnostic about the ontological question of whether fiduciary duties exist in limited liability companies,” Laster wrote in the opinion. “The same phrase appears in the parallel provision in the Delaware Limited Partnership Act and there has never been any serious doubt that the general partner of a Delaware limited partnership owes fiduciary duties.”
Laster’s opinion is the latest in a series of recent volleys between the Delaware Supreme Court and the Chancery Court over the LLC Act.
In January, Strine ruled in Auriga Capital v. Gatz Properties that defendant William A. Gatz breached his fiduciary and contract duties to an LLC, but Strine also spent a portion of the 75-page opinion ruminating on whether the LLC Act does impose default fiduciary duties. Strine concluded that such duties are imposed by default unless both parties specifically write in the LLC agreement that the duties do not apply.
Gatz appealed Strine’s decision to the Delaware Supreme Court, which upheld the chancellor’s decision but scorched him for opining on the LLC Act, calling it “one issue that the trial court should have not reached or decided” and declaring Strine’s opinion on the matter “as dictum without any precedential value.”
“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 said in a per curiam opinion, which was captioned Gatz v. Auriga Capital.
At the time of the Supreme Court’s opinion, many Delaware legal analysts said the court’s rhetoric may have been motivated by Chief Justice Myron T. Steele’s view that the LLC Act does not impose default fiduciary duties because they are creatures of contract. Steele has expressed this opinion in legal articles and at public speaking engagements.
Several sources in the Delaware legal community have speculated that Laster seized an opportunity in Feeley to defend the Chancery Court’s view on the LLC Act. In fact, the first footnote of Laster’s opinion cited multiple Chancery Court decisions that hold that LLC managers owe fiduciary duties, including Phillips v. Howe, a 2011 case, In re Atlas Energy, a 2010 ruling, and Bay Center Apartments v. Emery Bay PKI LLC, a 2009 case. However, those cases are only referenced in the footnote and the majority of the seven pages is focused on Strine’s decision in Auriga Capital.
“Although default fiduciary duties in Delaware LLCs was an issue properly before him in Feeley, I don’t think there was any reason to write seven pages other than to come to Strine’s defense,” said one Delaware attorney, who asked to remain anonymous. “He wanted to show what a great decision Strine made in Auriga Capital.”
McCarter & English Chairman Michael P. Kelly, who represented Feeley, disagreed, noting that the defendants had filed a breach of fiduciary duties counterclaim against his client, who was the LLC’s managing member. He said his firm had referenced Auriga Capital in one of the briefs and credited Laster for not avoiding the issue.
“The issue was squarely before the vice chancellor,” Kelly said. “He did the courageous thing and wrote what was in his mind and his heart. The LLC Act is not a model of clarity and I can see both points of view on the matter. I commend him for having the courage to address the LLC statute head-on, because a lesser man could have bucked the issue.”
Lawrence A. Hamermesh, the Ruby R. Vale Professor of Corporate and Business Law at Widener University School of Law, agreed with Kelly. He said Laster may have been sticking up for the court, but added that the vice chancellor did not decide the fiduciary duty issue in order to resolve Feeley.
“I think the vice chancellor may have been a little defensive, but he still needs to decide this case,” he said. “Realistically, what is the point of reinventing the wheel? Clearly, the work on the issue was done in Auriga Capital and the vice chancellor thought it was done persuasively.”
However, the Delaware attorney still questioned applying Auriga Capital in a case that centered on an LLC’s management and whether the defendants had the authority to remove a controlling partner.
“I think the reason he made such a lengthy analysis of Auriga Capital was to bolster Chancellor Strine,” the attorney who spoke on condition of anonymity said. “He was trying to adopt Strine’s reasoning and demonstrate that Auriga Capital was good law. This case was the vehicle in which he chose to do it.”
Laster acknowledged that the Supreme Court declared Strine’s views on the LLC Act “as dictum,” and noted that he cited the chancellor’s views in a fashion similar to a judge referencing a law review article.
“Although the Delaware Supreme Court determined that the chancellor should not have reached the question of default fiduciary duties, his explanation of the rationale for imposing default fiduciary duties remains persuasive, at least to me,” Laster said. “In citing the chancellor’s discussion, I do not treat it as precedential, but rather afford his views the same weight as a law review article, a form of authority the Delaware Supreme Court often cites.”
Hamermesh said Laster’s reference to a law review article was the best option for the vice chancellor to acknowledge Strine’s thoughts on the issue while recognizing that they do not carry any precedential weight.
“He has to acknowledge that Strine’s comments do not have the same force as a prior court opinion that was not dictum,” Hamermesh said. “He would have looked bad if he cited Strine’s work but didn’t say anything at all.”
“The vice chancellor was protecting himself because he was following something that was not precedential, but still a persuasive authority similar to a law review article,” he said.
This article first appeared in Delaware Business Court Insider, a Legal sibling publication.