## Facts

- Bay Center Apartments Owner, LLC and Emery Bay PKI, LLC formed a Delaware LLC to pursue a condominium conversion project in Emeryville, California, naming PKI as managing member with broad management authority.
- Bay Center contributed capital and sold the project property to a project subsidiary in exchange for an unsecured installment note (about $28 million) payable from defined project cash sources.
- The LLC agreement contemplated that PKI would cause a development manager (PKI or an affiliate) to perform development functions; PKI selected its affiliate Emery Bay ETI, LLC as development manager under a separate development management agreement signed by affiliate entities controlled by Alfred E. Nevis.
- The project entity obtained a large construction/development loan; Nevis personally guaranteed repayment.
- The project performed poorly and entered receivership; Bay Center alleged substantial overruns, operational failures, and poor sales attributable to mismanagement by PKI and its affiliates.
- Bay Center alleged defendants secretly renegotiated the construction loan to divert cash flow away from sources that would have funded payments on Bay Center’s note, while benefiting Nevis (by reducing guarantee exposure) and PKI (by avoiding capital calls).
- The LLC agreement contained provisions that both referenced statutory duties under the Delaware LLC Act and stated members owed no duties beyond the agreement, creating a dispute about whether fiduciary duties were eliminated.

## Issues

1. Whether Bay Center stated an implied covenant of good faith and fair dealing claim based on alleged opportunistic use of managerial discretion to frustrate Bay Center’s expected economic return.
2. Whether PKI, as managing member, and Nevis, as controller of PKI and related entities, owed fiduciary duties in light of the LLC agreement’s duty-limiting language.
3. Whether Bay Center adequately pleaded fraud and aiding-and-abetting liability against Nevis and affiliated entities based on alleged concealment and knowing participation in misconduct.

## Decision

- The Court of Chancery denied defendants’ motion to dismiss the challenged non-contract claims.
- The court held the implied covenant claim was adequately pleaded in the alternative to the contract claim.
- The court held the LLC agreement did not clearly and unambiguously eliminate fiduciary duties; PKI, as managing member, therefore owed default duties of loyalty and care, and the fiduciary duty claims against PKI and Nevis were sufficiently pleaded.
- The court held the fraud and aiding-and-abetting claims were sufficiently pleaded based on allegations of secret loan renegotiations, concealment of material facts, diversion of project funds, and knowing participation in any fiduciary breaches.

## Legal Principles

- In a manager-managed Delaware LLC, the manager/managing member owes default fiduciary duties of loyalty and care unless the LLC agreement clearly modifies or eliminates those duties.
- Contract language purporting to waive fiduciary duties must be plain and unambiguous; ambiguous provisions are not read to effect a complete waiver, especially where one party is granted extensive discretionary control.
- The implied covenant of good faith and fair dealing is a limited, gap-filling doctrine; it may support relief where a party uses contractual discretion in bad faith to defeat the counterparty’s reasonable contractual expectations, but it cannot rewrite the parties’ bargain.
- A controller who causes a managing member or affiliated entities to act for self-interested reasons may face liability for fiduciary breach or for knowing participation (aiding and abetting) in breaches.
- Fraud and aiding-and-abetting claims can survive dismissal when the complaint pleads deceptive concealment or misrepresentations and facts supporting knowing participation in the challenged conduct.

## Conclusion

The court allowed Bay Center to proceed past the pleading stage on implied-covenant, fiduciary-duty, fraud, and aiding-and-abetting theories, holding that default LLC fiduciary duties applied absent a clear waiver and that allegations of self-interested loan restructurings and concealed cash diversions plausibly stated non-contract claims.


Bay Ctr. Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451 (Del. Ch. Apr. 20, 2009)