Related Westpac LLC v. JER Snowmass LLC,
C.A. No. 5001-VCS (Del. Ch. July 23, 2010), read opinion here.
This case involves a suit between members of two LLCs
formed to pursue a land development project in Snowmass, Colorado. When the
funding needs of the project exceeded the agreed upon budget, and one member
refused to meet a capital call, the argument was made that the refusal was
unreasonable. The Court dismissed the complaint because the operating
agreements allowed the defendant member to withhold its consent for any reason,
including a self serving reason. Thus the Court refused to imply or impose a
reasonableness requirement, especially when such requirements were present
elsewhere in the agreement but not in the provision at issue. The Court also
refused to impose fiduciary duties that were at odds with express provisions of
the LLC agreement.
The Court cited to many Delaware cases that emphasize the
freedom of contract, especially in the context of LLCs which are creatures of
contract. See footnote 30. In addition the Court observed that the
contracts involved were plainly written with no lack of clarity.
In rejecting an argument to imply a reasonableness
condition, the Court cited to several recent decisions in which such claims
were rejected. See footnote 34. This is true especially in this case
where express provisions were provided that did not impose a reasonableness
requirement. See footnote 35.
The Court also rejected claims for fiduciary duty and
unjust enrichment, explaining based on cited authorities the reason why those
claims fail when the factual basis of the claim is one for breach of contract.
See cases cited in footnotes 39, 41, 43, 45 and 46.
Default Fiduciary Duties Rejected
The Court addressed an area of Delaware LLC
law that is--uncharacteristically for Delaware, not well-settled. Namely,
whether fiduciary duties can be used as "default gap fillers" in LLC agreements
when the agreement does not expressly disclaim them is an issue not fully
matured yet although it has certainly been addressed . See, e.g., an
article by Delaware Supreme Court Chief Justice Myron Steele here (note that this article is not ex
cathedra as an opinion of the Court would be). See also recent
Chancery opinion in Kelly v. Blum addressing the issue here and imposing fiduciary duties in LLC context
as default gap fillers. Cf. Fisk Ventures, here, where the Chancellor reached a different
result on different facts. See generally commentary here at a recent seminar (Noting two schools of
thought on this topic. One would use as a default principle only the implied
duty of good faith and fair dealing. The other school of thought would rely of
a default default fiduciary duty if the agreement was silent on the topic.)
The Court in this opinion addresses a nuanced
but important distinction between an LLC agreement that does not expressly
disclaim fiduciary duties (which the LLC statute allows), and the facts of this
case in which certain express provisions that permit the exercise of certain
rights would be at odds with "default fiduciary duties".
The relatively pithy treatment by the Court of the
interplay between the contractual provisions and the argument that "default
fiduciary duties should fill in any gaps" focused on the reasoning that
fiduciary duty principles should not contradict specific bargained-for terms
expressing the parties' intent by means of a contractual provision. See
footnotes 45 through 49 and accompanying text. Due to both its importance and
its brevity, the discussion by the Court on this important topic deserves to be
When, as the parties here did, they cover a particular
subject in an express manner, their contractual choice governs and cannot be
supplanted by the application of inconsistent fiduciary duty principles that might otherwise apply as a default.
Here, JER Snowmass clearly bargained for the freedom to decide whether to give
its consent to Major Decisions involving Material Actions without being
restricted by any reasonableness requirement. Related seeks to deprive JER
Snowmass of the freedom it preserved by contending that JER Snowmass, as a
member of the LLCs, was a fiduciary of the LLCs and was required to act in the
reasonable best interests of the LLCs at all times. Related then seeks to have
a trial about whether JER Snowmass complied with this supposed fiduciary duty
and to hold JER Snowmass liable if its refusal to give consent was adverse to
the best interests of the LLCs.
The problem with this theory is as follows. Under the
Operating Agreements, JER Snowmass was left free to give consents to Major
Decisions involving Major Actions as it chose, in its own commercial interest.
That freedom was not qualified by any fiduciary duty of so-called
"reasonableness" and to imply such a duty in these circumstances would nullify
the parties' express bargain. Under our law dealing with alternative entities
such as the LLCs here, this court may not do that. When a fiduciary duty claim
is plainly inconsistent with the contractual bargain struck by parties to an
LLC or other alternative entity agreement, the fiduciary duty claim must fall,
otherwise "the primacy of contract law over fiduciary law in matters involving
. . . contractual rights and obligations [would be undermined]." Thus, Related
has failed to state a claim for breach of fiduciary duty. (footnotes omitted).
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