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Chancery Interprets LLC Agreement that Modifes Fiduciary Duties

By Francis G. X. Pileggi, Esq.

Kahn v. Portnoy, (Del. Ch., Dec. 11, 2008), read opinion here. 

This Chancery Court opinion deals with the important concept of the ability to modify fiduciary duties in an LLC agreement. In this derivative case involving an LLC, the LLC agreement's modification of  fiduciary duties was not clear enough to choose one reasonable interpretation over another at the summary judgment stage.

When one modifies fiduciary duties, the risk is that one will not be able to avail oneself of the mulitude of cases in the common law on the topic.

The court did, however, find that there was a lack of independence that satisfied the first-prong of the Aronson test, in part due to interlocking relationships.

The nominal defendant in this case was TravelCenters of America, which has been a party in several Chancery Court cases within the past year, as summarized on this blog here.

The court's own succinct introductory summary of the case in the opinion itself follows:

Limited liability companies are primarily creatures of contact, and the parties have broad discretion to design the company as they see fit in an LLC agreement. With this discretion, however, comes the risk—for both the parties and this Court—that the resulting LLC agreement will be incomplete, unclear, or even incoherent.
In this case, plaintiff alleges that the director defendants breached their fiduciary duties to the company by approving a transaction that was allegedly designed to benefit a director at the expense of the company. As the company in this case is an LLC, the fiduciary duties of the directors are defined in the LLC agreement. This agreement, however, explicitly imports and modifies the familiar and well defined fiduciary duties from Delaware corporate law. The result is a company whose directors are governed by a modified version of the fiduciary duties of directors of Delaware corporations. Unfortunately, the agreement in this case fails to clearly articulate the contours of these contractual fiduciary duties. The result is an LLC agreement that provides an ambiguous definition of fiduciary duties and is open to more than one reasonable interpretation.
Since I am faced with a motion to dismiss for failure to state a claim, I am not allowed to choose between reasonable interpretations of ambiguous provisions of a contract. Accordingly, and for the reasons stated below, I must deny the motion to dismiss.
 

Full post as published by Delaware Corporate and Commercial Litigation Blog on December 19, 2008 (boomark / email).