PT China LLC v. PT Korea LLC, No. 4456-VCN (Del. Ch., Feb. 26, 2010), read letter decision here. Many thanks to Peter Ladig, one of the Delaware counsel of record in this case, for forwarding this decision to me the same day it was issued. (The photo below is of the Kent County Courthouse, where the Court of Chancery hears cases in Dover, although a new Courthouse is under construction.) This 29-page decision should be included in the tool box of every Delaware litigator who needs to know about obtaining jurisdiction over a “manager” of a Delaware LLC who may not have any other contacts with Delaware.
Threshold Issue: Whether personal jurisdiction can be imposed on a Singapore resident based on Section 18-109 of the Delaware LLC Act, and if so, if the exercise of such jurisdiction comports with due process prerequisites?
Consent Statute for LLC Managers
Analogous to the consent statute for directors of corporations at 10 Del. C. Section 3114, managers of Delaware LLCs are deemed to consent to the personal jurisdiction of Delaware courts pursuant to Section 18-109 when they agree to serve as a manager of an LLC, and when the suit is “involving or related to the business of the limited liability company or a violation by the manager…of a duty to the limited liability company, or any member….” Even so, due process must still be satisfied.
“Manager” is defined broadly in Section 18-101(10) to include a person who “participates materially in the management of the limited liability company.” Obviously this covers a rather broad class of people, including one who may not be formally bestowed with the appellation of manager as that term is often used in a colloquial sense.
Is Due Process Satisfied if Section 18-109 Imposes Jurisdiction for Claims “Relating to Business and Affairs of the LLC” as compared to Fiduciary Duty Claims Against a Manager?
Delaware Courts have previously determined that if claims against a manager of an LLC relate to his or her fiduciary duty obligations, then due process considerations are satisfied when Section 18-109 is used to imposed jurisdiction. See footnote 22 and cases cited. The more nuanced issue in this case is whether the same conclusion can be reached when the claims are not necessarily based on fiduciary duty violations. Prior cases suggest a consideration of three factors to address this issue: (i) do the allegations focus on the rights, duties and obligations of the manager; (ii) is the matter “inextricably bound up in Delaware law”; and (iii) Delaware has a strong interest in providing a forum for disputes relations to actions of managers of a limited liability company formed under its law in discharging their managerial functions.
Sub-Issue: Do Contractual Claims Bar Fiduciary Duty Claims Based on the Same Conduct due to the “Primacy of Contract Law in Delaware” over Fiduciary Claims Involving Matters Based in Contract Rights and Duties.
Prior decisions of this Court have recognized that “a contractual claim will preclude a fiduciary duty claim, so long as ‘the duty sought to be enforced arises from the parties’ contractual relationship'”, due to the primacy of contract law. See fns. 32 to 34 for cases cited. The appropriate question to ask in order to analyze this issue is “whether there exists an independent basis for the fiduciary duty claims apart from the contractual claims, even if both are related to the same or similar conduct.” See fn. 34.
The Court explained that it was not necessary to find that the claims against the manager were based on fiduciary duties in order to apply Section 18-109 to impose jurisdiction. Rather, so long as the action “involves the manager’s rights, duties, and obligations to the company”, due process will be satisfied under the consent statute. See fn. 35. There was no issue in this case about whether the operative agreement limited fiduciary obligations and related liability. Compare generally, Kelly v. Blum decision by Chancery highlighted earlier this week here.
The Court reasoned that the instant dispute is “intertwined with the defendant’s [manager’s] managerial position”, and coupled with “… the potential usefulness of his involvement in this suit, and Delaware’s interest in adjudicating disputes involving the management of its limited liability companies…”, the Court found justification for exercising jurisdiction in this matter consistent with “constitutional standards of fairness and substantial justice.” See fns. 43-44. See generally, In Re USACafes, L.P. Litigation, 600 A.2d 43, 52-53 (Del. Ch. 1991). The Court noted parenthetically, however, that it was not passing judgment on whether the contract-based claims would prevail at a later stage of the proceedings in terms of being plead sufficiently.