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CelestialRX Investments, LLC v. Krivulka, C.A. No. 11733-VCG (Del. Ch. Jan. 31, 2017) (Glasscock, V.C.)

January 31, 2017

In this memorandum opinion, the Court of Chancery addressed a motion for partial summary judgment concerning the construction of a limited liability company agreement to determine whether it eliminated common-law fiduciary duties and provided a contractual standard governing conflicted transactions.  For purposes of efficiency, the Court took “the unusual step of addressing this contractual standard before evidence of the behavior of the parties is fully in the record . . . .”

A member of Akrimax Pharmaceuticals, LLC, a three-member limited liability company, alleged that the two other members, who participated in the management of the company, engaged in improper self-dealing, including a conspiracy to divert pharmaceutical interests from the company.  The defendants sought a judicial determination that the company’s limited liability company agreement (the “LLC Agreement”) eliminated fiduciary duties and provided contractual standards governing the challenged transactions.

In interpreting the LLC Agreement, the Court observed that common-law fiduciary duties apply to a manager of a limited liability company under the Delaware Limited Liability Company Act (the “Act”).  The Court noted, however, that the Act is contractarian, and a limited liability company agreement may eliminate common-law fiduciary duties if done in clear and unambiguous terms.  The Court explained, “[i]n other words, the intention of the parties to the agreement that fiduciary duties apply to managers is implied where that agreement does not provide otherwise.” 

The Court found that, despite the parties’ linguistic, grammar, and punctuation arguments, the plain language of the LLC Agreement generally eliminated common-law fiduciary duties.  According to the Court, the LLC Agreement imposed liability for intentional or illegal misconduct, bad faith actions, and improper self-dealing, which the Court found to be contract-based liability standards under the LLC Agreement rather than standards premised on common-law fiduciary duties.  The Court noted, however, that common-law fiduciary duty concepts would be instructive in construing the meaning of undefined contractual terms such as “bad faith.” 

The Court additionally found that whether a conflicted transaction involves improper self-dealing must be assessed in light of other provisions of the LLC Agreement providing safe harbors for self-dealing transactions.  The Court discussed one of those safe harbors (as the parties did not argue the other applied), and determined that a defendant will be found not to have engaged in improper self-dealing if it entered into a conflicted transaction in good faith and determined that the transaction was fair and reasonable to the company and its members after a good-faith balancing of interests.  The Court noted that good faith is a subjective standard and that the Delaware Supreme Court has employed the following standard in considering an undefined good faith provision in the alternative entity context: “an action so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.”

The Court also denied certain defendants’ motion for partial summary judgment that sought a ruling that plaintiff had released certain claims under a Release Agreement, finding, based on the clear language of that agreement, that plaintiff did not release claims thereunder.  The Court instructed the parties to confer as to the most efficient way to resolve the remaining issues in the litigation, encouraging the parties to mediate in view of the court’s rulings.

The full opinion is available here