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Gatz Props., Ltd. Liab. Co. v. Auriga Capital Corp. - 59 A.3d 1206 (Del. 2012)

Rule:

Under the American Rule, absent express statutory language to the contrary, each party is normally obliged to pay only his or her own attorneys' fees. The American Rule applies in Delaware. Delaware courts have, however, recognized bad faith litigation conduct as a valid exception to that rule. Although there is no single definition of bad faith conduct, courts have found bad faith where parties have unnecessarily prolonged or delayed litigation, falsified records or knowingly asserted frivolous claims.

Facts:

In 1997, Gatz Properties, LLC ("Gatz") and Auriga Capital Corp. ("Aruga"), together with other minority investors, formed Peconic Bay, LLC, a Delaware limited liability company ("Peconic Bay"). That entity was formed to hold a long-term lease and to develop a golf course on property located on Long Island that the Gatz family had owned since the 1950's. Gatz was the designated manager of Peconic Bay. A dispute arose over the proposed sale Peconic Bay, and Aruga filed a lawsuit against Gatz, alleging breach of fiduciary duty. The Court of Chancery of the State of Delaware determined that Gatz had breached both his contractual and fiduciary duties to Aruga, Peconic Bay's minority investors, with respect to the sale of Peconic Bay and awarded the investors damages of $ 776,515, plus one-half of their requested attorneys' fees. Gatz appealed.

Issue:

Did Gatz owe contractually-agreed-to fiduciary duties to Aruga and the minority investors?

Answer:

Yes

Conclusion:

The court interpreted the LLC Agreement as a contract that adopted the fiduciary duty standard of entire fairness, and the "fair price" obligation that inhered in that standard. Section 15 of the LLC Agreement imposed that standard in cases where an LLC manager caused the LLC to engage in a conflicted transaction with an affiliate without the approval of a majority of the minority members. The manager bought the property at auction for $ 50,000 and had rebuffed a potential buyer's interest in discussing a deal "well north of $ 6 million." The manager violated the contracted-for fiduciary duty by refusing to negotiate with a third-party bidder and then, by causing the company to be sold to himself at an unfair price in a flawed auction that the manager himself engineered. There was no majority-of-the-minority approving vote. For that breach of duty the manager was liable. Because the manager acted in bad faith and made willful misrepresentations, § 16 of the LLC Agreement did not afford him exculpation.

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