Auriga Capital Corp. v. Gatz Properties, LLC
2012 Del. Ch. LEXIS 19
| Del. Ch. | 2012Background
- Peconic Bay, LLC (the Company) was formed to hold a long-term leasehold on a property owned by the Gatz family, with a golf course and clubhouse; the Ground Lease ran 40 years with two 10-year renewals.
- Gatz Properties, controlled by William Gatz, acted as Manager with majority voting power; Class A and Class B interests gave Gatz veto rights over major decisions including sale, sublease, or operation of the Course.
- The LLC initially intended passive operation via a third-party operator (American Golf), with Peconic Bay receiving rent and distributing cash under a waterfall favoring Class B investors until their capital was returned.
- American Golf never operated the Course profitably, and by 2004–2005 Gatz knew its exit in 2010 was likely, yet took no steps to pursue alternative value-creating strategies or markets for Peconic Bay.
- A proposed sale or strategic alternative was discouraged by the Manager; a credible buyer openly interested (RDC/Galvin) was rebuffed and subjected to misleading disclosures and an inequitable bidding process.
- In 2009, an auction was held whose terms, marketing, and execution were found by the Chancellor to be a sham, resulting in Gatz purchasing Peconic Bay for a nominal amount and returning the property to his family.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Do default fiduciary duties apply to LLC managers absent full contract elimination? | Minority asserts default loyalty and care duties apply; LLC Agreement cannot wholly eliminate implied duties. | Gatz contends duties are displaced by the LLC Agreement and § 15 (arms-length) suffices to govern. | Default fiduciary duties apply; the Agreement does not wholly eliminate them. |
| Does § 15 of the LLC Agreement require a fair price and arms-length process for affiliate self-dealing? | Gatz failed to show a fair price and conducted an improper affiliate transaction via the Auction. | § 15 provides a safe harbor if a fair-price showing is made after customary market checks. | Gatz failed to demonstrate a fair price and violated the § 15 duty; the process was not arms-length. |
| Is the § 16 exculpation provision effective to shield Gatz from liability when § 15 was violated? | Exculpation does not cover bad-faith self-dealing under § 15; breaches remain actionable. | If actions were within authority and not in bad faith, exculpation could apply. | Exculpation does not immunize bad-faith/self-dealing conduct; § 16 does not cure the § 15 breach. |
| What damages remedy is appropriate for breaches of loyalty/care and the fair-price standard? | Award full return of capital plus a premium reflecting lost value due to distress sale; fees may be shifted due to bad faith. | Damages should reflect insolvency and limited recovery; higher damages are unwarranted. | Remedy of $776,515 plus pre-judgment interest; half of fees awarded due to bad-faith conduct. |
| Should the court shift attorneys’ fees under the bad-faith exception to the American Rule? | Bad-faith litigation conduct by Gatz warrants fee-shifting to deter loyalty breaches. | Fees should be limited; conduct did not warrant full-shift. | Award of one-half of minority's reasonable attorneys’ fees and costs; not full fee-shifting. |
Key Cases Cited
- William Penn P’ship v. Saliba, 13 A.3d 749 (Del. 2011) (default fiduciary duties in LLCs; implied covenant considerations)
- Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160 (Del. 2002) (default fiduciary duties; elimination amendments; equity overlay)
- Sealy Mattress Co. of N.J., Inc. v. Sealy, Inc., 532 A.2d 1324 (Del.Ch. 1987) (fiduciary duty of loyalty; fairness in transactions)
- In re USACafes, L.P. Litig., 600 A.2d 43 (Del.Ch. 1991) (fiduciary duties in alternative entities; client control matters)
- Boxer v. Husky Oil Co., 429 A.2d 995 (Del.Ch. 1980) (early fiduciary duties framework; business fairness)