Corporate Governance

Related Westpac LLC v. JER Snowmass LLC: Implicit Waiver of Fiduciary Duties

By Misty Dalke

In Related Westpac LLC v. JER Snowmass LLC, C.A. No. 5001-VCS (Del. Ch. July 23, 2010), Westpac sought damages from JER Snowmass' ('JER'), claiming that JER breached the operating agreement and its fiduciary duties by refusing to fund capital calls.  The court dismissed the action finding that under the operating agreement JER had no fiduciary duty to Westpac.     

In 2006, Westpac and JER formed two LLCs, Base Village Snowmass Center Associates LLC and Snowmass Mountain Village Associations LLC, to develop Snowmass Village in Colorado.  The LLCs intended to build hotels, condos, recreational areas, and commercial facilities to attract tourism.  In 2007, Westpac, JER, and the newly formed LLCs entered into an operating agreement which stipulated Westpac would run the day-to-day operations and JER would act as the funding member providing capital for the project. 

Under the operating agreement, Westpac, as the operating manager, would prepare and submit a business plan and budget to JER for approval.  JER, as the funding member of the LLC, would then approve or disapprove the proposed business plan and budget.  After JER provided consent for the proposals, JER would provide capital to fund the projects.  The operating agreement stipulated that JER's consent was required for any major decision affecting a material action.  The operating agreement defined 'major decisions' as approving, disapproving, or amending the business plan or budget, making expenditures, and borrowing funds; additionally, the operating agreement defined 'material actions' as anything that required additional capital or involved a material change in the budget.  As the court concluded, the language of the operating agreement gave JER the right to refuse to consent to a major decision without having to show its decision met a reasonableness standard.   

Westpac asserts JER refused to fund capital calls on three separate occasions:  1) exercising an option to purchase land for employee housing; 2) refinancing a $110 million loan; and 3) selling property that was a part of the project.  On each occasion, JER offered consent on the condition that JER would benefit commercially from the transaction.  Since JER did not offer unconditional consent, Westpac asserted that it and the newly formed LLCs suffered harm; specifically, Westpac claims it and the LLCs took a loss on the sale of a property, lost seven other properties because they were unable to refinance the $110 million loan, and experienced delays in the development plans.  As a result, Westpac injected its own capital into the venture. 

In its complaint, Westpac claimed that JER's failure to fund capital calls breached terms of the operating agreement, breached the implied covenant of good faith, breached its fiduciary duty, and unjustly enriched JER since Westpac funded the capital calls.   Westpac sought monetary damages from JER as remedy.  JER asserts Westpac's claims failed because, under the language of the operating agreement, it could rightly withhold consent without a duty to act reasonably. 

The court dismissed Westpac's complaint in its entirety, concluding the contractual language in the operating agreement had been freely entered into by both parties.  With respect to the claim for unjust enrichment, the remedy could not be allowed since the operating agreement specified the "sole remedy" related to unfunded capital contributions, ousting other remedies including unjust enrichment.

With respect to the fiduciary duty claims, the court did not rely on an express waiver.  Instead, the court concluded that fiduciary duties could not be allowed to interfere with express provisions of an operating agreement.  See Id. ("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.").   As the court reasoned:

• 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]." 

In short, the court permitted an implicit waiver of fiduciary duties, relying on the detailed provisions of the agreement rather than any explicit effort by the parties. 

The primary materials for this post can be found on the DU Corporate Governance website.     

Full post as published by The Race to the Bottom on September 29, 2010 (boomark / email).