MHS Capital LLC v. Keith Goggin
Unreported Memorandum Opinion (Del. Ch. May 10, 2018) (2018)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under Delaware's contractarian approach to LLCs, claims for breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and unjust enrichment will be dismissed as duplicative when an operating agreement expressly defines the manager's duties. A breach of contract claim may survive a motion to dismiss despite an exculpatory clause if equitable remedies may be available and the interaction between the contractual duties and the exculpation is unclear.
Facts:
- MHS Capital LLC invested $5 million in East Coast Miner LLC (ECM), which was formed to purchase a senior debt note from U.S. Coal, Inc.
- The debt note gave ECM a security interest in U.S. Coal's Licking River (LR) assets, including the right to 'credit bid' for those assets in a bankruptcy.
- Keith Goggin, as ECM's sole manager, represented to MHS that ECM would use its credit-bid right to acquire a majority stake in the LR assets for the benefit of ECM.
- After U.S. Coal went bankrupt, Goggin created new entities, including Licking River Lenders, a consortium comprised of ECM, ECM II (another Goggin entity), Goggin himself, and his friend Michael Goodwin.
- Goggin caused Licking River Lenders to exercise ECM's exclusive credit-bid right, which diluted ECM's interest and diverted a significant portion of the LR assets' value to entities controlled by Goggin and Goodwin.
- Goggin also formed another entity, Ember Energy LLC, with his friend John Collins, and allegedly used ECM's confidential information to transfer a separate set of LR assets to Ember.
- When MHS requested information about these transactions, Goggin refused to provide it and instead sent a consent package seeking to ratify his past actions without full disclosure.
Procedural Posture:
- MHS and ECM initially sued Goggin, Goodwin, and Collins in New York state court.
- The action was removed by Collins to the U.S. District Court for the Southern District of New York.
- The defendants' motion to transfer venue to the U.S. Bankruptcy Court in Kentucky was denied, and the case was remanded to New York state court.
- The New York state court dismissed the complaint: against Goodwin and Goggin based on an exclusive Delaware venue provision in the operating agreement, and against Collins for lack of personal jurisdiction.
- MHS filed the current action in the Delaware Court of Chancery.
- All defendants subsequently filed Motions to Dismiss for failure to state a claim under Court of Chancery Rule 12(b)(6).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an LLC operating agreement that expressly defines a manager's duties of good faith and care, but also contains an exculpatory clause barring monetary damages, require dismissal of a breach of contract claim for self-dealing and other duplicative common law claims at the pleading stage?
Opinions:
Majority - Vice Chancellor Glasscock
No, the operating agreement does not require dismissal of the breach of contract claim, but it does require dismissal of the duplicative common law claims. A breach of contract claim can survive a motion to dismiss despite an exculpatory clause because the availability of equitable remedies and the unclear effect of the clause on a breach of the contractual duty of good faith must be determined on a developed record. The court reasoned that equitable relief, such as a constructive trust on the proceeds of the self-dealing, is not necessarily precluded by the bankruptcy court's sale orders. Because a non-monetary remedy may be available, the court does not need to decide at the pleading stage whether the exculpatory clause bars monetary damages for a bad faith breach. However, the court dismissed MHS's other claims because they were subsumed by the contract claim. The fiduciary duty and implied covenant claims were dismissed as duplicative because the operating agreement expressly defined the manager's duties of good faith and care, leaving no 'gap' to fill. The unjust enrichment claim failed because a contract governs the relationship. The fraud claim was dismissed for lack of particularity and for being an improper 'bootstrap' of the contract claim.
Analysis:
This opinion strongly reinforces Delaware's contractarian approach to alternative entities, affirming that specific provisions in an LLC agreement will displace generalized common law duties. The court's dismissal of the fiduciary, implied covenant, and unjust enrichment claims demonstrates the primacy of contract law when the parties' obligations are expressly defined. This provides certainty for parties drafting LLC agreements. However, the decision also signals that even broad exculpatory clauses are not an absolute shield at the pleading stage, particularly when bad faith is alleged and equitable remedies may be fashioned, thus preserving a potential avenue for relief against disloyal managers.
