Feeley v. Nhaocg, LLC
62 A.3d 649 (2012)
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Rule of Law:
Managers of a Delaware Limited Liability Company (LLC) owe default fiduciary duties of loyalty and care unless they are explicitly and unambiguously eliminated in the LLC's operating agreement. An individual or entity that controls a managing member can be held liable for breaches of the duty of loyalty, but not for breaches of the duty of care.
Facts:
- Christopher Feeley and Andrea Akel sought financing for a new real estate venture from Andrea's father, George Akel, and his associates, David Newman and David Hughes.
- In January 2010, the parties formed Oculus Capital Group, LLC, a Delaware limited liability company.
- Oculus had two members: AK-Feel, LLC (owned by Feeley and Andrea Akel) which served as the managing member, and NHAOCG, LLC ('NHA') (owned by George Akel's group) which was the non-managing member.
- As the managing member of AK-Feel, Feeley exercised day-to-day control over Oculus.
- The business relationship deteriorated after a major real estate deal, 'The Gatherings project,' failed in November 2011, allegedly because Feeley tendered an incorrect deposit amount, causing Oculus to forfeit its deposit and suffer other financial losses.
- NHA also alleged that Feeley began using other entities to pursue real estate deals for his own benefit, thereby diverting opportunities that should have been presented to Oculus.
- Dissatisfied with Feeley's performance, the principals of NHA attempted to remove him and take control of Oculus.
Procedural Posture:
- Christopher Feeley and AK-Feel, LLC filed suit against NHAOCG, LLC in the Delaware Court of Chancery.
- The initial complaint sought to block NHA's attempt to take over management of Oculus Capital Group, LLC.
- The parties entered into a stipulation that resolved the immediate control dispute.
- NHA filed counterclaims against Feeley and AK-Feel, alleging breach of contract, breach of fiduciary duty, and other claims seeking damages.
- Feeley and AK-Feel, the counterclaim defendants, filed a motion to dismiss NHA's counterclaims for failure to state a claim.
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Issue:
Do the managers of a Delaware LLC owe default fiduciary duties of loyalty and care, and can the human controller of an LLC that serves as the managing member be held liable for breaching those duties?
Opinions:
Majority - Laster, Vice Chancellor
Yes, the managers of a Delaware LLC owe default fiduciary duties of loyalty and care, and the controller of a managing member can be held liable for breaches of the duty of loyalty, but not the duty of care. The Delaware LLC Act contemplates that traditional equitable fiduciary duties apply by default to managers unless an operating agreement plainly and unambiguously eliminates them. Here, the Oculus Operating Agreement’s exculpatory clause, which carves out liability for gross negligence and willful misconduct, implicitly recognizes that the underlying duties of care and loyalty exist. It merely limits the remedy of monetary damages rather than eliminating the duties themselves. Furthermore, under the doctrine established in In re USACafes, L.P. Litigation, one who controls a fiduciary (like Feeley controlling the managing member AK-Feel) also owes fiduciary duties to the underlying entity (Oculus). Equity looks to the substance of control, not the form. However, this controller liability has historically been limited to the duty of loyalty (e.g., self-dealing) and is not extended to breaches of the duty of care. Therefore, while NHA can sue AK-Feel for gross negligence and Feeley for disloyalty, it cannot sue Feeley in his capacity as controller of AK-Feel for a breach of the duty of care.
Analysis:
This decision strongly reaffirms the Delaware Court of Chancery's long-standing position that managers of LLCs owe default fiduciary duties, providing clarity despite the Delaware Supreme Court's prior reluctance to rule definitively on the issue. It establishes a critical distinction for practitioners between an exculpatory clause under LLC Act § 18-1101(e), which limits liability, and a contractual waiver under § 18-1101(c), which eliminates the duty itself. The opinion also clarifies the scope of the USACafes doctrine in the LLC context, holding that controllers of entity-fiduciaries can be held personally liable for breaches of loyalty but not for breaches of care, setting a clear boundary for future litigation against individuals in control of entity managers.
