Gatz Properties, LLC v. Auriga Capital Corp.
59 A.3d 1206
| Del. | 2012Background
- Peconic Bay, a Delaware LLC, is governed by the LLC Agreement which adopts an entire fairness standard for conflicted transactions with the manager’s affiliates.
- Gatz Properties, as manager, controlled a controlling stake and had veto power over major decisions, including sales of Peconic Bay.
- From 2007–2009,Gatz engaged in efforts to sell Peconic Bay’s long-term lease; RDC/Galvin expressed interest but faced limited due diligence and selective information from Gatz.
- Gatz proceeded to auction Peconic Bay in 2009 under terms favoring him, culminating in his own bid and purchase for $50,000 cash plus debt assumption, despite evidence of higher value and investor bid interests.
- The Court of Chancery awarded damages of $776,515 and attorney’s fees; on appeal, the Delaware Supreme Court affirmed liability under Section 15, rejected exculpation under Section 16, and upheld damages and fees.
- The court found Gatz acted in bad faith with willful misrepresentations, refused to engage in meaningful negotiations, and orchestrated a distress sale that did not meet the contract’s fair-price obligation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did Gatz owe fiduciary duties under Section 15? | Auriga argues Section 15 imposes fiduciary duties to obtain a fair price in affiliate transactions. | Gatz contends no fiduciary duty beyond contract language; argues compliance with LLC Agreement. | Yes; Section 15 contracts for entire fairness/ fair-price review. |
| Does Section 16 exculpate Gatz? | Auriga argues Section 16 could immunize but only for acts within its scope. | Gatz argues protection applies when conditions are met. | No; bad faith and willful misrepresentations defeat exculpation. |
| Should the Delaware LLC default fiduciary duties apply? | Auriga contends default fiduciary duties apply absent contract modification. | Gatz disputes reliance on default fiduciary duties when contract specifies entire fairness. | Statutory default duties discussed but held dictum; contract controls here. |
| Were damages properly awarded for breach of the fiduciary duty? | Auriga supported a damages award reflecting fair value above what Gatz paid. | Gatz challenged the calculation and scope of damages. | Yes; damages of $776,515 affirmed as reasonable under the circumstances. |
| Was the attorneys’ fees award proper? | Auriga argues fees appropriate given bad-faith conduct. | Gatz opposes broader fee shifting beyond trial. | Yes; Court properly awarded the minority one-half of fees and costs given bad-faith conduct. |
Key Cases Cited
- Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160 (Del.2002) (contractual fiduciary duties of entire fairness; analogized to LLC context)
- Americas Mining Corp. v. Theriault, 51 A.3d 1213 (Del.2012) (discussion of fair process and fair price; dissenting/concurrence context)
- William Penn Partnership v. Saliba, 13 A.3d 749 (Del.2011) (interpretation of fiduciary duties within operating agreements)
- Hudak v. Procek, 806 A.2d 140 (Del.2002) (appellate deference to trial credibility and fact-finding in damages)
- Crescent/Mach 1 Partners L.P. v. Dr Pepper Bottling Co. of Texas, 962 A.2d 205 (Del.2008) (fiduciary duties and contractual limitations in partnership-like contexts)