Cygnus Opportunity Fund, LLC v. Washington Prime Group, LLC

Majority - Laster, V.C.

1. No, the LLC Agreement's fiduciary duty waiver does not eliminate fiduciary duties for officers, and officers do owe a duty of disclosure in connection with both a tender offer and a unilateral squeeze-out merger. 2. Yes, the implied covenant of good faith and fair dealing can apply to constrain a controlling member's and the board's exercise of discretion and mandate adequate disclosure, even when the LLC agreement waives fiduciary duties and no member vote is required for a squeeze-out merger. 3. Yes, officers of an LLC can be held liable for breach of the LLC Agreement even if they are not signatories to the agreement. The court first addressed the breach of fiduciary duty claims against the Board members and SVP (Counts II and III), finding that the LLC Agreement's "Fiduciary Duty Waiver" (Section 6.8(a)) was "plain and unambiguous" in eliminating fiduciary duties for these "Covered Persons." Consequently, these counts were dismissed. However, the court held that the Fiduciary Duty Waiver expressly excluded officers from its protection. Relying on Gantler v. Stephens, the court affirmed that officers owe fiduciary duties identical to those of directors. For the Tender Offer, the court found it "reasonably conceivable" that the Officer Defendants (CEO Conlon, CFO Yale, and VP of Finance Indest) could have owed a duty of disclosure, despite the Board's lack of duties. For the Squeeze-Out Merger, the court ruled that a fiduciary cannot take a beneficiary's property without some level of disclosure, even absent a request for action, drawing an analogy to a trustee's duty to inform. Moreover, once fiduciaries choose to speak, they must do so "candidly and completely." The court found the Disclosure Documents for the Squeeze-Out Merger were "paltry and inadequate," failing to provide material information about negotiations, the Company's prospects, or the rationale for the price. Claims against individual officers (Conlon, Yale, Indest) for these disclosure breaches survived dismissal due to their roles. A specific claim that financial statements should have disclosed SVP's proposal for the merger was dismissed as plaintiffs failed to identify a GAAP requirement for such disclosure. The court then turned to the contract claims (Counts IV and V). Regarding express breaches (Count IV), the court found it "reasonably conceivable" that the Tender Offer constituted a "Squeeze-Out" requiring "Specified Approval," which SVP did not obtain, thus breaching the No Acquisition Provision. The court also found breaches of Section 11.1(b) for late delivery of 2021 annual financial statements and for significantly less information in Q1 2022 quarterly statements. Additionally, the Squeeze-Out Merger arguably breached the No Acquisition Provision because it only received approval from one of two Independent Managers (Reid), failing to meet the "majority of Independent Managers" requirement for Manager Approval. For the implied covenant of good faith and fair dealing (Count V), the court emphasized its application as a "cautious enterprise" but noted that the plaintiffs were involuntarily placed in the LLC structure, diminishing the typical caveat emptor rationale. Citing Dieckman v. Regency GP LP, the court held that the implied covenant could obligate defendants to provide "truthful and accurate disclosure of material information" regarding the Tender Offer and Squeeze-Out Merger, which the inadequate disclosures arguably violated. The implied covenant also constrained the Board's discretion in seeking Manager Approval. The court found it "reasonably conceivable" that the parties would not have agreed to allow Manager Approval from an Independent Manager (Reid) who refused to communicate with Minority Unitholders and whose livelihood depended on maintaining good relations with firms like SVP, thereby potentially "subvert[ing] the Special Approval process." Lastly, the court stated it was "reasonably conceivable" that the Squeeze-Out Merger price, alleged to be grossly inadequate (2-4x below fair value), could violate the implied covenant under a standard equivalent to waste. Regarding the Officer Defendants' liability for contract claims, the court was "not prepared to rule peremptorily that an officer of an LLC is not bound by its LLC agreement, even if the officer is not a signatory to the document," citing the LLC Act and corporate law analogies. Finally, the LLC Agreement's Exculpation Provision, protecting "Covered Persons" unless loss resulted from "Malfeasance" (knowing fraud or willful malfeasance), was not applied at the pleading stage. The plaintiffs' allegations that the defendants "intentionally pursued a scheme to eliminate the Minority Unitholders at a grossly unfair price," coupled with the significant valuation disparities, were sufficient to support a "reasonably conceivable" inference of Malfeasance, thus precluding dismissal based on exculpation. The court deferred ruling on the aiding and abetting claims (Counts VI and VII) because claims against all defendants survived dismissal on other grounds, meaning no defendant would be dismissed from the case at this stage, and discovery would proceed on a common set of facts.