Professor Luke M. Scheuer
The Delaware Supreme Court’s November 7 opinion in Gatz Properties, LLC v. Auriga Capital Corp. has left open the question of whether the Delaware’s Limited Liability Company Act (the “LLC Act”) imposes default fiduciary obligations on a limited liability company’s (an “LLC”) managers. In Gatz, the Supreme Court affirmed the Court of Chancery’s opinion and held that a company’s manager had breached its contractual fiduciary duties to minority members under the company’s LLC agreement. However, in a blistering rebuke, the Supreme Court rejected as “dictum without any precedential value” the Court of Chancery’s conclusion that the manager had breached default fiduciary duties under the LLC Act. The Court further “decline[d] to express any view regarding whether default fiduciary duties apply as a matter of statutory construction.”
The decision is problematic for practitioners and investors who have assumed that in the LLC context, fiduciary obligations exist unless they are disclaimed in a company’s LLC agreement. Going forward, attorneys will undoubtedly inform their business clients (both managers and investors) that any fiduciary obligations should be addressed in an LLC agreement. However, unrepresented investors may be caught off-guard because fiduciary duties are a basic element of all other business forms. As the LLC becomes the default form for new businesses (including small businesses that are often formed without legal counsel), many less well advised investors may assume that managers have a minimum level of responsibility and not realize that they are required to include language in the LLC agreement to create such obligations.
The ruling is also part of a line of cases that contrasts the high standard historically required for those managing business entities with the low modern standard. The great Benjamin Cardozo articulated fiduciary duties in the following high minded terms: “[n]ot honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior . . . the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd.” In the intervening 80 years, fiduciary duties have been watered down to the point where they are bare minimal standards that can be waived (or might not even exist as a default) for LLCs. The Court may be correct that the Delaware legislature is the best group to decide the default fiduciary duty issue. Until they do, Delaware is placing LLC investors at risk for the benefit of managers, and is encouraging the degradation of business culture.
A blog entry on the oral argument before the Supreme Court was previously posted to this site by Ben Chapple (Widener Law ’13).