Delaware LLC Statute Amendment Regarding Default Fiduciary Duty

On August 1, 2013, Delaware amended Section 1104 of its Limited Liability Company Act (the “DLLCA”) to provide for default fiduciary duty for the managing member of an LLC.

Surprising practitioners, the issue of whether the DLLCA imposed a default fiduciary duty upon managers was raised by battling Delaware court decisions. Before the amendment, Section 1101(c), beginning with “[t]o the extent that, at law or equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company…” had been described as “consciously ambiguous.” Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206, 1219 (Del. 2012).

The default fiduciary duty question became front page legal news in 2012 throughout the litigation of a dispute between LLC members that began with Auriga Capital Corp. v. Gatz Props., LLC. 40 A.3d 839 (Del. Ch. 2012).  In Auriga, the manager of an LLC which owned a Long Island golf course was accused of breaching his contractual fiduciary duties in a series of events that eventually led to the manager purchasing the LLC as sole bidder in a distress auction for $50,000 above the LLC’s debt, for which he was already a guarantor.  Chancellor Strine of the Court of Chancery ruled against the manager, holding not only that he had violated contractual duties of loyalty and care per the governing LLC agreement, but that the Delaware LLC Act “explicitly applies equity as a default and our Supreme Court, and this court, have consistently held that default fiduciary duties apply to those managers of alternative entities who would qualify as fiduciaries under traditional equitable principles, including managers of LLCs.”  On appeal, the Delaware Supreme Court, while affirming judgment, chastised Chancellor Strine for his “improvident and unnecessary” assertion as to the existence of default fiduciary duty.  The Court held that the Auriga decision should have been made solely from a contractual analysis of the LLC agreement.  

Following the Supreme Court’s decision, the Delaware legislature set out to resolve the issue.  The result is a revised DLLCA Section 18-1104 which states that “In any case not provided for in this chapter…the rules of law and equity relating to fiduciary duties…shall govern.”  In the absence of contractual language governing the issue in question or specifically disclaiming the default fiduciary duty, a manager will now be held by default to a standard of fiduciary care and loyalty to the other members. 

Eric McMahon, a law student intern with Olshan, assisted in the research and writing of this post.

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