Auriga Capital Corp. v. Gatz Properties, LLC

Delaware Court of Chancery · 2012 · Corporations

CorporationsLLCsFiduciary dutiesOperating agreementsSelf-dealingDelaware LLC Actdefault fiduciary dutiesduty of loyalty

Facts

Peconic Bay held a long-term lease on golf course property owned by the Gatz family, and Gatz Properties served as manager while the Gatz family controlled the votes needed to block major strategic actions. By 2004 or 2005, William Gatz knew the subtenant, American Golf, was likely to terminate its sublease in 2010, but he did not pursue replacement operators, a sale, or self-operation for the LLC. When RDC later expressed serious interest in buying or leasing the business, Gatz withheld basic diligence, discouraged negotiations, and then used RDC's incomplete bids to pressure the minority into selling on misleading information. He ultimately ran a poorly marketed auction on terms favoring himself, was the only bidder, and bought the LLC for $50,000 over debt, leaving only a small distribution to the minority.

Issue

Whether the manager of a Delaware LLC owed default fiduciary duties of loyalty and care where the LLC agreement did not clearly eliminate them, and whether the manager breached those duties and the LLC agreement by steering the LLC to himself through self-interested inaction, misleading conduct, and a sham sale process. The court also had to decide whether the exculpation clause shielded the manager and what damages were appropriate.

Rule

Under the Delaware LLC Act, equitable fiduciary principles apply by default, so an LLC manager owes traditional fiduciary duties of loyalty and care unless the LLC agreement clearly modifies or eliminates them. Where an LLC agreement permits affiliate transactions only on terms no less favorable than those obtainable in an arm's-length deal, the conflicted manager bears the burden to show a fair price supported by a good-faith, responsible effort to determine what a third party would pay. An exculpatory clause does not protect conduct taken in bad faith, with gross negligence, willful misconduct, willful misrepresentation, or outside the authority granted by the agreement.

🔒

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Trails, LLC owns recreational lease rights in Colorado and is managed by Nora Leland. The operating agreement gives Nora broad authority over day-to-day operations and contains no clause stating that managers owe only contractual duties, though it does include detailed voting provisions for major decisions.

If minority members sue Nora for disloyal self-interested conduct, which is the strongest argument about the source of her duties?

Explanation. The majority opinion held that Delaware LLC managers are fiduciaries by default because the LLC Act incorporates equity, and a manager exercises discretionary control over the company. Absent a clear contractual modification or elimination, traditional duties of loyalty and care apply. Mere silence or detailed governance provisions do not displace those default duties.