SS M&A Litigation Outlook - Flipbook - Page 23
77 Charters, lnc. v. Gould, et al.,
C.A. No. 2019-0127-JRS (Del. Ch. May 18, 2020)
Why it is important
In 77 Charters, Inc. v. Gould, the Delaware Court
of Chancery held that an individual who exerted
control over the assets of an LLC through a corporate
entity owed limited fiduciary duties to the other LLC
members and could be sued personally for breach of
fiduciary duty. The court found that so-called “remote
controllers” could owe limited fiduciary duties even
if they were “second-tier controllers,” and could
accordingly be sued in their individual capacity for
self-dealing or other breaches, unless the relevant LLC
agreements clearly disclaimed fiduciary duties. The
court further found that an LLC agreement provision
limiting liability for damages for “Members” did
not clearly eliminate fiduciary duties or shield the
LLC’s managing member from liability. The ruling
is a reminder of the importance of carefully drafting
LLC operating agreements, and, in particular, that
fiduciary liability may be imposed absent an express
and unambiguous disclaimer of fiduciary duties.
Summary
77 Charters, Inc. (77 Charters) and two other
groups of investors acquired a Tennessee shopping
mall in 2007 for approximately US$29 million. 77
Charters contributed US$1.2 million in return for
a non-preferred ownership interest in an LLC that
indirectly owned the mall together with defendant
Jonathan D. Gould, entities he controlled, and a
non-party, Kimco Preferred Investor LXXIII, Inc.
(Kimco), which was a preferred investor. Through
entities under his control, Gould served as managing
member of the LLC 77 Charters invested in, and also
ran the mall’s day-to-day operations. In 2013, Gould
caused an entity under his control to buy Kimco’s
interest, giving him control of the operating entity
that owned the mall. According to 77 Charters, Gould
used this control to modify the operating entity’s
constitutive documents so as to benefit himself as a
preferred shareholder by increasing the distribution
preference preferred shareholders enjoyed from 9
percent to 12.5 percent. As a result of this change,
when the mall was sold in 2018, all proceeds went to
its creditors and preferred investors, leaving nothing
for 77 Charters.
77 Charters sued Gould, each of Gould’s entities,
and an investor that had purchased part of Gould’s
interest before the mall was sold, alleging breach of
fiduciary duty and other claims. The court dismissed
some of the claims, criticizing the complaint as
a “streaming narrative followed by a laundry list
of claims that generally incorporate the narrative
but do not state why or how the facts meet the
prima facie elements of the claim asserted.”
The court found that 77 Charters had, however,
properly alleged a breach of fiduciary duty claim
against Gould and the entities under his control for
amending the mall’s ownership structure to suit his
personal interests.
In so holding, the court found that both Gould and
the LLCs under his control owed a fiduciary duty
to 77 Charters. The court held that Gould was a
“second-tier controller” of the subsidiary LLCs and
accordingly owed 77 Charters some limited fiduciary
duties, even though 77 Charters was not itself a
member of the subsidiary LLCs, because Gould
effectively controlled the subsidiary LLCs.
The court also rejected the argument that the LLCs’
operating agreements clearly disavowed fiduciary
duties. The defendants relied on a provision
shielding any “[p]erson acting in its capacity as a
Member (including the Managing Member and its
Affiliates)” from personal liability. The court held
that the language was ambiguous, and could have
been intended to mean that individuals were only
shielded from liability when acting as LLC members,
not when acting as managing members. The ruling
stands as a reminder of the importance of clearly and
unambiguously addressing fiduciary duties in LLC
agreements and of the potential for liability under
a “remote controller” theory of fiduciary duty for
managing member acts that violate those duties.
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