November 10, 2012
Delaware Infighting
Posted by Gordon Smith

This past February, I blogged about Chancellor Leo Strine's opinion in Auriga Capital Corp. v. Gatz Properties, LLC. The case was particularly interesting because Chancellor Strine expressed his view that a manager in a manager-managed LLC owes fiduciary duties, even if the participants in the LLC are silent about fiduciary duties. In other words, the manager has fiduciary duties by default.

I agree.

But Chief Justice Myron Steele has expressed a different view in his article, Freedom of Contract and Default Contractual Duties in the Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221, 223-224 (2009).

So when the Delaware Supreme Court issued an en banc opinion in Auriga earlier this week, we were all curious what Chief Justice Steele would say. The result was a per curium  decision and it was surprising. The Court affirmed Chancellor Strine's decision, then added:

[W]e pause to comment on one issue that the trial court should not have reached or decided. We refer to the court’s pronouncement that the Delaware Limited Liability Company Act imposes “default” fiduciary duties upon LLC managers and controllers unless the parties to the LLC Agreement contract that such duties shall not apply. Where, as here, the dispute over whether fiduciary standards apply could be decided solely by reference to the LLC Agreement, it was improvident and unnecessary for the trial court to reach out and decide, sua sponte, the default fiduciary duty issue as a matter of statutory construction. The trial court did so despite expressly acknowledging that the existence of fiduciary duties under the LLC Agreement was “no longer contested by the parties.” For the reasons next discussed, that court’s statutory pronouncements must be regarded as dictum without any precedential value.

First, the Peconic Bay LLC Agreement explicitly and specifically addressed the “fiduciary duty issue” in Section 15, which controls this dispute. Second, no litigant asked the Court of Chancery or this Court to decide the default fiduciary duty issue as a matter of statutory law. In these circumstances we decline to express any view regarding whether default fiduciary duties apply as a matter of statutory construction. The Court of Chancery likewise should have so refrained.

Third, the trial court’s stated reason for venturing into statutory territory creates additional cause for concern. The trial court opinion identifies “two issues that would arise if the equitable background explicitly contained in the statute were to be judicially excised now.” The opinion suggests that “a judicial eradication of the explicit equity overlay in the LLC Act could tend to erode our state’s credibility with investors in Delaware entities.” Such statements might be interpreted to suggest (hubristically) that once the Court of Chancery has decided an issue, and because practitioners rely on that court’s decisions, this Court should not judicially “excise” the Court of Chancery’s statutory interpretation, even if incorrect. That was the interpretation gleaned by Auriga’s counsel. During oral argument before this Court, counsel understood the trial court opinion to mean that “because the Court of Chancery has repeatedly decided an issue one way, . . . and practitioners have accepted it, that this Court, when it finally gets its hands on the issue, somehow ought to be constrained because people have been conforming their conduct to” comply with the Court of Chancery’s decisions. It is axiomatic, and we recognize, that once a trial judge decides an issue, other trial judges on that court are entitled to rely on that decision as stare decisis. Needless to say, as an appellate tribunal and the court of last resort in this State, we are not so constrained.

Fourth, the merits of the issue whether the LLC statute does—or does not— impose default fiduciary duties is one about which reasonable minds could differ. Indeed, reasonable minds arguably could conclude that the statute—which begins with the phrase, “[t]o the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties)”—is consciously ambiguous. That possibility suggests that the “organs of the Bar” (to use the trial court’s phrase) may be well advised to consider urging the General Assembly to resolve any statutory ambiguity on this issue.

Fifth, and finally, the court’s excursus on this issue strayed beyond the proper purview and function of a judicial opinion. “Delaware law requires that a justiciable controversy exist before a court can adjudicate properly a dispute brought before it.” We remind Delaware judges that the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual world views on issues not presented. A judge’s duty is to resolve the issues that the parties present in a clear and concise manner. To the extent Delaware judges wish to stray beyond those issues and, without making any definitive pronouncements, ruminate on what the proper direction of Delaware law should be, there are appropriate platforms, such as law review articles, the classroom, continuing legal education presentations, and keynote speeches.

Parts of this passage surfaced on Above the Law and generated a story today in the NYT, but neither story mentioned the underlying dispute between Chief Justice Steele and Chancellor Strine on default fiduciary duties.

Those stories also didn't note that this was not the first time the Delaware Supreme Court had warned Chancellor Strine about dicta. Ironically, the issue in Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 167 (Del. 2002) was then-Vice Chancellor Strine's assertion that fiduciary duties could be eliminated in a limited partnership. On that occasion, the Court observed, "we are constrained to draw attention to ... the underlying general principle in our jurisprudence that scrupulous adherence to fiduciary duties is normally expected."

Finally, inspired by the reaction of Brett McDonnell when we discussed this story yesterday, I wonder what Ed Rock thinks of this opinion. See Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L. Rev. 1009 (1997).

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