## Facts

- Del Bay Associates, LLC owned the Beacon Motel as its sole asset and was governed by a 1994 operating agreement requiring approval by two-thirds of member interests for member decisions.
- Ownership of Del Bay consisted of a 50% interest held by William Penn Partnership and three minority one-sixth interests held by trusts for Saliba, Ksebe, and Hoyt.
- T. William Lingo and Bryce Lingo were managing partners of William Penn and managers of Del Bay; fiduciary duties of loyalty and care were not eliminated by the operating agreement.
- In 2003, the Lingos pursued a sale of the Beacon Motel to J.G. Townsend Jr. & Co. (JGT), a company in which the Lingo family had significant ownership and board control, placing the Lingos on both sides of the transaction.
- The Lingos did not inform Saliba and Ksebe of prior third-party offers for the property and did not disclose key information during negotiations when Saliba and Ksebe attempted to buy out the other members to prevent a sale.
- The Lingos pressed an asserted June 30 closing deadline later found to be artificial and did not disclose that the buyer’s tax-driven timetable did not require that deadline.
- On June 10, 2003, the Lingos obtained Hoyt’s assent, giving them the two-thirds voting block to approve the sale over Saliba’s and Ksebe’s objections.
- At closing, the Lingos represented that all members had authorized the sale despite the dissent of Saliba and Ksebe.

## Issues

1. Whether managers and controlling members who stand on both sides of an LLC asset sale bear the burden to prove the transaction’s entire fairness.
2. Whether the Court of Chancery clearly erred in finding the defendants failed to prove entire fairness (fair dealing and fair price).
3. Whether fee shifting was permissible based on the fiduciaries’ prelitigation misconduct and, if so, whether the fee award was an abuse of discretion.

## Decision

- The Delaware Supreme Court affirmed the Court of Chancery’s judgment.
- The Court held the Lingos, acting for William Penn, breached fiduciary duties in connection with the sale of Del Bay’s sole asset through a deceptive and manipulative process.
- The Court upheld application of the entire fairness standard and placement of the burden of proof on the conflicted fiduciaries.
- The Court agreed that the defendants failed to carry the entire fairness burden, based on nondisclosure and manipulation in the sale process.
- The Court affirmed the award of attorneys’ fees and costs, concluding the Chancellor did not abuse his discretion in fee shifting due to egregious prelitigation conduct by faithless fiduciaries.

## Legal Principles

- Where LLC fiduciary duties are not contractually eliminated, managers and controlling members owe duties of loyalty and care to the LLC and its members.
- A controller who stands on both sides of a transaction is subject to the entire fairness standard, requiring proof of both fair dealing and fair price.
- In an interested controller transaction, the conflicted fiduciaries bear the burden to prove entire fairness unless the burden is shifted by effective procedural protections.
- Material nondisclosure, misrepresentation, and coercive process defects support a finding of unfair dealing and can defeat an entire fairness showing.
- Delaware courts may shift attorneys’ fees for bad-faith or faithless conduct; egregious prelitigation misconduct by fiduciaries can justify fee shifting, reviewed for abuse of discretion.

## Conclusion

The court held that conflicted LLC managers who caused the sale of the LLC’s sole asset to an affiliated buyer had to prove entire fairness and failed due to a misleading, coercive process, and it sustained fee shifting because their prelitigation conduct was sufficiently egregious to warrant sanctions.


William Penn P'ship v. Saliba, 13 A.3d 749 (Del. 2011)