Richards Layton & Finger
 

MHS Capital LLC v. Goggin: Reviewing Fiduciary Duty and Exculpation Provisions in Limited Liability Company Agreements

June 15, 2018

In Goggin, a member of East Coast Miner LLC (ECM) brought suit against ECM’s manager and his associates challenging several allegedly self-dealing transactions. The plaintiff alleged, among other things, that ECM’s manager had caused ECM’s part ownership of specified assets to be diverted to different entities that the manager and his associates owned and controlled. The assets in question were subject to a lien that ECM held against a bankrupt entity. Pursuant to the lien, ECM had the right to credit bid on the secured assets in a bankruptcy auction. The plaintiff alleged that ECM’s manager had arranged for the bankruptcy court’s order to transfer the assets to a consortium of entities, all the members of which, other than ECM, were allegedly owned and controlled by ECM’s manager and his associates. The plaintiff brought series of claims against ECM’s manager, including claims for breach of ECM’s LLC agreement and breach of fiduciary duty.

ECM’s manager moved to dismiss, arguing that the provisions of ECM’s LLC agreement operated to preclude any recovery of monetary damages, and that any award of equitable relief was precluded by the bankruptcy court’s order with respect to the asset transfer. In analyzing the claims, the Delaware Chancery Court noted that two provisions of ECM’s LLC agreement were particularly relevant. First, it contained provisions specifying the standard of conduct applicable to the manager, dispensing with traditional fiduciary duties and replacing them with a provision obligating the manager to “discharge his duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Second, it contained a broad exculpatory clause providing that “[t]he Manager shall not be liable to [ECM] or any Member [of ECM] for monetary damages for breach of such person’s duty as a Manager, except as otherwise required under the [LLC] Act.”