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PT China LLC v. PT Korea LLC, et al., C.A. No. 4456-VCN (Del. Ch. February 26, 2010)

February 26, 2010

Defendants in this action asserted breach of fiduciary duty and breach of contract counterclaims against PT China LLC (“PT China”) and Harrison Wang (“Wang”), the sole member and manager of PT China, claiming he committed several wrongful acts in connection with his role in developing investment opportunities in distressed or underperforming Asian investments. Wang is a resident of, and works in, Singapore.

The opinion primarily addresses whether the claims against Wang allow the Delaware Court of Chancery to exercise personal jurisdiction over Wang as a non-resident third-party defendant. The Court analyzes whether it has personal jurisdiction over Wang using a two-pronged test. First, it determines whether service of process on Wang is authorized by Section 18-109 of the Delaware LLC Act. Second, it considers whether exercising its jurisdiction comports with due process and the constitutional standards of fairness and substantial justice. The Court also addresses an interesting secondary issue – whether the breach of contract claims against Wang preclude the breach of fiduciary duty claims.

On the issue of personal jurisdiction, the Court concluded that the first prong of the Court’s test was satisfied, because Wang conceded that he participates materially in the management of the Delaware limited liability companies at issue. Section 18-109(a) of the Delaware LLC Act provides that a manager of a limited liability company is amenable to jurisdiction in all civil actions brought in Delaware involving or relating to the business of the limited liability company or a violation by the manager of a duty to the limited liability company, or any member of the limited liability company. Importantly, Section 18-109(a) expands the definition of “manager” to include any person who, while not a “manager” as defined in Section 18-101(10), nevertheless, “participates materially in the management” of a Delaware limited liability company.

On the issue of due process, like directors of a Delaware corporation, even if the contacts of a limited liability company’s managers with Delaware are minimal, those “managers” impliedly consent to the jurisdiction of the Delaware courts by virtue of the notice of such consent given by the statute. When a manager agrees to accept certain managerial duties, he can reasonably expect to have to appear before a Delaware court when questions arise with respect to the execution, interpretation or scope of these duties. Further, Delaware has a considerable interest in supervising the conduct of persons who owe fiduciary duties and this interest outweighs the burden associated with submitting to the jurisdiction of the Delaware courts. The Court held that the allegations against Wang for breach of fiduciary duty were sufficiently pled, and, as such, the exercise by the Court of personal jurisdiction satisfied any due process considerations.

The tougher question for the Court was whether the breach of contract claims were, in the words of Section 18-109, “involving or relating to the business” of the Delaware limited liability companies at issue. The Court held that the three-prong test applied by prior courts to analyze whether personal jurisdiction comported with due process in that context was adequately met in this case. The three prongs of that test are whether: (1) the allegations focused on the manager’s rights, duties, and obligations as the manager of a Delaware limited liability company; (2) the matter was “inextricably bound up in Delaware law”; and (3) Delaware has a strong interest in providing a forum for disputes relating to the actions of managers of a limited liability company formed under its law in discharging their managerial functions. In applying this test, the Court found that the breach of contract claims were intertwined with Wang’s management of two of the Delaware limited liability companies at issue, Wang’s involvement in the action was potentially useful, and Delaware had an interest in adjudicating this type of dispute, which involves the management of Delaware limited liability companies.

In response to Wang’s claim that the defendants’ breach of fiduciary duty counterclaims should be dismissed, the Court restated the principle that contractual claims precluded fiduciary duty claims if the duty sought to be enforced arises from the parties’ contractual relationship. Contrary to Wang’s assertion, the Court stated that the question “is whether there exists an independent basis for the fiduciary duty claims apart from the contractual claims, even if both are related to the same or similar  conduct.” The Court determined that the fiduciary duty claims related either to inherent duties not overridden by the operating agreement of the Delaware limited liability company under which Wang served as manager or related to matters not addressed at all in said operating agreement. For that reason, among others, the Court held that those duties arose independently and were not precluded.

The full opinion is available here