William Penn Partnerships v. Saliba, C.A. No. 111 (Del. Supr. Feb. 9, 2011).

Issue Presented:  Should Chancery’s award of attorneys fees be affirmed based on faithless prelitigation conduct in violation of fiduciary duties regarding the sale of the sole asset of an LLC. See summary here of the decision of the Court of Chancery that was upheld.

Holding:  The Delaware Supreme Court upheld the Chancellor’s finding that Defendants failed to satisfy their burden to establish the entire fairness of the contested transaction due to prelitigation conduct that rose to the level of egregiousness.

Background:  Defendants were managers of an LLC and the Operating Agreement did not eliminate any fiduciary duties.  The agreement provided a procedure to sell each member’s interest in the LLC.  Defendants used their majority control to sell the LLC’s sole asset in a manner that was unfair to the minority and contrary to the procedure in the agreement.  Defendants also sold the asset to another entity the defendants controlled.  Because the sales price was higher than the appraised value, however, the Court determined that the remedy for this violation of a fiduciary duty was award of attorneys’ fees and costs incurred by the plaintiff.

Overview of Legal Principles Involved:   The parties agreed that managers owed traditional fiduciary duties of loyalty and care to the LLC members, and those were not waived in the parties’ agreement.

The entire fairness standard involves price and process, and both parts must be satisfied.

Due to lack of disclosure of key details and misrepresentations of sale to LLC members, it was impossible to establish fair process–regardless of price.

Although the entire fairness analysis has 2 parts, the burden to establish them is not bifurcated, and establishing fair price alone, such as in this case, is not sufficient.

The exception to the American Rule applies in this case. Chancery has broad discretion to fashion an equitable remedy, especially where there is a breach of the duty of loyalty.  The Chancellor determined that it would not be fair to make the plaintiff shoulder costs of litigation arising out of prelitigation conduct, and absent award of fees, the plaintiff would have been penalized for successfully pursuing a breach of duty of loyalty claim.

Query:  Would this decision apply to other cases where there is a breach of fiduciary duty but where no monetary damages can be proven?