A recent Chancery decision recounts the epic tale of a group of business partners who were longtime friends and who later accused each other, after forming a business together, of fraud and breach of fiduciary duty. In Stone & Paper Investors, LLC v. Blanch, C.A. No. 2018-0394-PAF (Del. Ch. July 30, 2021), the court describes in exhaustive detail the factual background involving detailed examples of funds invested in a company that were diverted for personal use instead of being applied for business purposes.
The opinion in this case should be read in its 108-pages of glory but for purposes of this short blog post, the most consequential aspects of the court’s legal reasoning that have the most widespread applicability include its discussion of the fiduciary duties of LLC Managers, where the LLC agreement does not waive those duties.
The court explains the well-known truism that under Delaware law, absent unambiguous waiver, fiduciary duties are imposed on LLC managers by default. See Slip op. at 73-75. The court observed that the LLC agreement in this case did limit personal liability–except that liability was not eliminated for “acts or omissions in bad faith or involving intentional misconduct or knowing violation of law or personal financial benefit to which the manager is not entitled.” After extensive reasoning, the court found that the breaches of fiduciary duty constituted intentional misconduct.
The court relied on the recent Chancery decision in Largo Legacy Group, LLC v. Charles, 2021 WL 2692426, at *13 (Del. Ch. June 30, 2021), which was highlighted on these pages, for the following block quote that elaborates on the fiduciary duties of a manager of a Delaware LLC:
“In the limited liability context, as in the corporate context, the duty of loyalty mandates that the best interests of the company and its stakeholders take precedence over any interest possessed by the manager and not shared by the stakeholders generally. A manager is not permitted to use their position of trust and confidence to further their private interest. Nor can fiduciaries intentionally act with a purpose other than that of advancing the best interests of the corporation. Specifically, and very pertinently for this case, such fiduciary duties include the duty not to cause the corporation to effect a transaction that would benefit the fiduciary at the expense of the minority stockholders.”
Slip op. at 74 (citing Largo Legacy Group LLC).
Also notable is footnote 315 for its explanation about why the breach of contract claims in this case did not overlap the fiduciary duty claims, and why both were permitted to be pursued through trial in this matter. See, e.g., Largo Legacy Group decision: In addition to the statement of fiduciary duty quoted above, the Largo Legacy case also clarified when tandem claims of both breach of contract an breach of fiduciary duty can proceed at the same time.
Although not covered in this brief blog post, the court also addressed several other important issues for corporate and commercial litigators in Delaware:
● The elements of a claim for fraud or fraud in the inducement.
● Breach of a contract regarding LLC agreement terms.
● Elements of an acquiescence defense.
● Elements of an unclean hands defense.
● Why damages need not be proven with mathematical certainty after a breach is established. Slip op. at 103-104.
● Fee shifting principles.