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Fisk Ventures, LLC v. Segal, C.A. No. 3017-CC (Del. Ch. May 7, 2008)

May 7, 2008

The Court of Chancery granted motions to dismiss for failure to state a claim, and lack of personal
jurisdiction in connection with a petition by Fisk Ventures, LLC (“Fisk”) to dissolve Genitrix, LLC
(“Genitrix”), a Delaware limited liability company. Fisk and Dr. Andrew Segal (“Segal”), are two of the members of Genitrix. In answering Fisk’s petition, Segal made counterclaims against Fisk and several third-party defendants, claiming, among other things, that Fisk and such third-party defendants (i) breached the limited liability company agreement of Genitrix (the “LLC Agreement”), (ii) breached the implied covenant of good faith and fair dealing implicit in the LLC Agreement, and (iii) breached fiduciary duties to Genitrix.

The Court found that Section 18-109 of the Delaware Limited Liability Company Act (the “LLC Act”)
did not provide for personal jurisdiction over one of the third party defendants because such third
party defendant, was not a manager, and did not “materially participate in management,” which is an alternate test for jurisdiction under Section 18-109. In particular, the Court noted that such third party defendant’s appointing of individuals to the Genitrix board of managers and his conferring with such individuals prior to board decisions, did not result in his materially participating in the management of Genitrix.

The Court also held that personal jurisdiction under Delaware’s long-arm statute (10 Del. C. § 3104(c)) did not exist, as the Court found that although business was transacted within the State, the claims asserted did not arise out of such transactions.

The Court also held that sufficient facts were not pled to infer that the LLC Agreement was breached. According to the Court, the claims pled did not allege breaches of specific duties that could reasonably be read into the LLC Agreement. Chancellor Chandler declined “to turn an expressly exculpatory provision into an all encompassing and seemingly boundless standard of conduct” and did not agree that a provision exculpating one unless, for example, he is grossly negligent, creates a duty.

The implied covenant of good faith and fair dealing, which, as the Court noted, is rarely invoked
successfully, was not breached here. The claimant alleged that the covenant was violated by
preventing the consummation of certain financing transactions. However, the LLC Agreement expressly provided for supermajority approval of such transactions. The Court noted that a forceful negotiation in accordance with a party’s contractual rights, does not necessarily constitute a breach of the implied covenant. Every contract contains an implied covenant of good faith and fair dealing, however, “it cannot be invoked where the contract itself expressly covers the subject at issue” as the LLC Agreement did in this case. Curiously and possibly inadvertently, in dispensing with the claim for breach of fiduciary duty, the Court seems to suggest that there may be times when one need not act in good faith, which, as discussed above, is an implied part of every contract.

The Court swiftly dispensed with the breach of fiduciary duty claims. It reasoned that, in accordance with Section 18-1101 of the LLC Act, the “LLC Agreement eliminates fiduciary duties to the maximum extent permitted by law by flatly stating that members have no duties other than those expressly articulated in the [LLC] Agreement. Because the [LLC] Agreement does not expressly articulate fiduciary obligations, they are eliminated.”

UPDATE: In a letter opinion issued July 3, 2008, Chancellor Chandler denied a motion by Segal for
reargument of the claims for breach of fiduciary duty and tortious interference. The Chancellor denied Segal’s motion because Segal failed to meet the requirements of Court of Chancery Rule 59(f), which provides that to obtain reargument, the moving party must demonstrate that the Court’s decision was predicated upon a misunderstanding of a material fact or a misapplication of law.

The full opinion is available here