## Facts

- Minority members and the manager formed a Delaware LLC to hold a long-term lease on Long Island property and develop a golf course that was subleased to a third-party operator.
- The LLC agreement made the company manager-managed, designated an entity controlled by William Gatz as manager, and left Gatz and his family with control of the voting and economic interests.
- The golf course operation declined, and the operator was positioned to terminate the sublease under an early termination right, making the LLC’s leasehold and business prospects uncertain.
- A third-party bidder expressed interest in acquiring the LLC’s assets; the manager did not meaningfully engage and instead discouraged the bidder and limited access to information.
- The manager then initiated a sale process described as engineered to yield a low price, culminating in an affiliate-controlled acquisition at a price only slightly above the company’s debt.
- Minority members sued, alleging the manager and its controller breached (i) contractual restrictions on affiliate transactions in the LLC agreement and (ii) fiduciary duties of loyalty and care; defendants invoked contractual exculpation and indemnification provisions.

## Issues

1. Whether the LLC agreement contractually imposed an entire-fairness-type constraint on conflicted transactions between the LLC and the manager or its affiliates.
2. Whether Delaware law supplies default fiduciary duties for managers of a manager-managed LLC when the LLC agreement does not clearly eliminate them.
3. Whether the manager’s handling of third-party interest and the sale process breached contractual obligations and/or fiduciary duties.
4. Whether contractual exculpation and indemnification provisions barred monetary liability and fee shifting given findings of bad faith and misrepresentation.

## Decision

- The Court of Chancery held the manager and its controller liable for breaching the LLC agreement’s affiliate-transaction protections and for breaching fiduciary duties in connection with the conflicted sale.
- The court found the sale process was not designed to achieve the best available transaction for the LLC and functioned to facilitate an affiliate purchase at an unfair price.
- The court determined exculpation and indemnification did not apply because the defendants acted in bad faith and made willful misrepresentations.
- The court awarded damages to the minority members based on fair value and ordered fee shifting.
- On appeal, the Delaware Supreme Court affirmed the judgment and remedies on contractual grounds, agreed the LLC agreement imposed a contractual equivalent of entire fairness, and stated the trial court should not have opined broadly on default fiduciary duties because resolving that question was unnecessary.

## Legal Principles

- An LLC agreement is interpreted as a contract and may impose fiduciary-like standards of conduct without using specific fiduciary terminology.
- Contract language restricting affiliate transactions to terms no less favorable than arm’s-length alternatives can functionally impose a contractual entire-fairness standard, requiring fair dealing and fair price in a conflict transaction.
- A manager breaches such a contractual standard by obstructing credible third-party bidding and conducting a sale process engineered to favor the manager’s affiliate at a depressed price.
- Contractual exculpation and indemnification provisions do not protect a manager who acts in bad faith or engages in willful misrepresentations.
- Appellate review may affirm liability based on contracted-for duties while declining to resolve broader questions about default fiduciary duties under the LLC statute when the agreement supplies the governing standard.

## Conclusion

The court imposed liability and monetary relief for a manager-controlled, conflict sale that violated the LLC agreement’s affiliate-transaction constraint and was carried out in bad faith; the judgment was later affirmed on contract interpretation enforcing a contractual entire-fairness equivalent, while broader default-duty statements were treated as unnecessary to the result.


Auriga Cap. Corp. v. Gatz Props., LLC, 40 A.3d 839 (Del. Ch. 2012)