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On-Line Symposium: Default Fiduciary Duties in LLCs and LPs

Welcome to Our On-Line Symposium

On Default Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies

INTRODUCTION

In a 2009 article in the American Business Law Journal [Freedom of Contract and Default Contractual Duties in the Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221, 223-224 (2009)], Chief Justice Myron Steele of the Delaware Supreme Court asserted (for himself and not the Court, which has not definitively ruled on the question) that there are (and should be) no default fiduciary duties in Delaware LLCs. As the Chief Justice explained in that article, “the entity is contractual, the parties’ relationship is contractual, and that any ‘bad acting’ will be ferreted out by the parties’ bargain and the implied covenant of good faith and fair dealing. This is the contractual construct anticipated by the Delaware legislature when the statutory policy of freedom of contract was adopted in the LLC statute.”

This assertion has generated a great deal of controversy, particularly since it appears to run counter to repeated recitations to the contrary in opinions of the Delaware Court of Chancery. See, e.g., Bay Center Apartments v. Emery Bay PKI, LLC, 2009 Del. Ch. LEXIS 54, *26 n.33 (Del. Ch. 2009) (“The LLC cases have generally, in the absence of provisions in the LLC agreement explicitly disclaiming the applicability of default principles of fiduciary duty, treated LLC members as owing each other the traditional fiduciary duties that directors owe a corporation.”), citing Douzinas v. Am. Bureau of Shipping, Inc., 888 A.2d 1146, 1149-50 (Del. Ch. 2006); Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 153 (Del. Ch. 2004); VGS, Inc. v. Castiel, 2000 Del. Ch. LEXIS 122, 2000 WL 1277372, at **4-5 (Del. Ch. Aug. 31, 2000), aff’d 781 A.2d 696 (Del. 2001)[;] … In re Seneca Invs. LLC, 970 A.2d 259, 2008 Del. Ch. LEXIS 141, 2008 WL 5704773, at *2 (Del. Ch. Sept. 23, 2008); In re Silver Leaf, L.L.C., 2005 Del. Ch. LEXIS 119, 2005 WL 2045641, at *10 (Del. Ch. Aug. 18, 2005). Likewise, according to the Court of Chancery at least, “[i]n the limited partnership context, it has been established that ‘[a]bsent a contrary provision in the partnership agreement, the general partner of a Delaware limited partnership owes the traditional fiduciary duties of loyalty and care to the Partnership and its partners.’” Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 2000 Del. Ch. LEXIS 146, 2000 WL 1476663, at *10 (Del. Ch. Sept. 27, 2000).

We have invited some well-known commentators on the law of non-corporate entities to weigh in on this controversy in this forum. We’ll add their comments as we receive them, and we’ll open this site to other commentary on December 7, 2012, and leave it open until mid-January (comments can be emailed to lahamermesh@widener.edu). Our hope is that this forum will generate debate – not for the sake of debate alone, of course, but to inform policymakers in Delaware and perhaps elsewhere on a subject of substantial interest and public importance.

You can read the submitted commentary by following the links below:

Ann E. Conaway, Challenging Traditional Thought: Chief Justice Steele’s Proposition on Default Contractual Duties for Delaware Limited Liability Companies Tests Delaware Jurists and Practitioners’ Presumptions That All Business Entities Must Necessarily Be Formed With Fiduciary Duties

J. William Callison & Allan W. Vestal, Triple Error: Chief Justice Steele and Default Contractual Duties in Delaware Limited Liability Companies and Limited Partnerships)

Carter G. Bishop, Are Delaware LLC Members Status Fiduciaries Imbued With Loyalty?

Daniel S. Kleinberger, Why Justice Cardozo Was Right, and Chief Justice Steele Is Wrong

Louis G. Hering, Commentary on Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies

There is also additional commentary submitted by:

John Cunningham (Dec. 9, 2011)

Lyman Johnson (Dec. 12, 2011)

Mohsen Manesh (Dec. 14, 2011)
See also:
Larry Ribstein’s Dec. 9, 2011 blog entry on this subject
Daniel Rubin, ed., Practical Law Company, “Q&A with Chief Justice Myron T. Steele”