1. Did the LLC agreement incorporate a core element of the traditional fiduciary duty of loyalty?

2. What is the purpose of the enforcement of a duty of loyalty?

3. Was not the manager free to utilize his voting power to exploit the opportunity for his own best interest?

Minority members in a Delaware limited liability company, Peconic Bay, LLC, brought a breach of fiduciary duty action against the LLC’s manager and its majority interest holder regarding the sale of the LLC at an auction to the manager of the LLC. The “manager” was Gatz Properties, LLC, which was managed and partially owned by William Gatz. Peconic Bay, LLC, held a long-term lease on valuable property in New York that allowed the LLC to operate a firstrate Robert Trent Jones, Jr. designed golf course, called Long Island National Golf Course. The golf management company, American Golf, held a sublease on the property after it opened in 1999, never made a profit, and let the course fall into disrepair. Gatz knew in 2004 that American Golf would exercise its early termination option in 2010, yet he did nothing to plan for its exit. Rather, Gatz made a series of decisions that placed Peconic Bay in an economically vulnerable position. Then Gatz decided to put Peconic Bay on the auction block without engaging an experienced broker to market it to golf course managers or owners. Gatz, on behalf of Gatz Properties, was the only bidder to show up at the auction He purchased Peconic Bay for a nominal value over the debt, and merged Peconic Bay into Gatz Properties.

JUDICIAL OPINION

STRINE, Ch.… The LLC agreement here does not displace the traditional duties of loyalty and care that are owed by managers of Delaware LLCs to their investors in the absence of a contractual provision waiving or modifying those duties. The Delaware Limited Liability Company Act (the “LLC Act”) explicitly applies equity as a default and our Supreme Court, and this court, have consistently held that default fiduciary duties apply to those managers of alternative entities who would qualify as fiduciaries under traditional equitable principles, including managers of LLCs. Here, the LLC agreement makes clear that the manager could only enter into a selfdealing transaction, such as its purchase of the LLC, if it proves that the terms were fair. In other words, the LLC agreement essentially incorporates a core element of the traditional fiduciary duty of loyalty. Not only that, the LLC agreement’s exculpatory provision makes clear that the manager is not exculpated for bad faith action, willful misconduct, or even grossly negligent action, i.e., a breach of the duty of care. The manager’s course of conduct here breaches both his contractual and fiduciary duties. Using his control over the LLC, the manager took steps to deliver the LLC to himself and his family on unfair terms. When the LLC had a good cushion of cash from the remaining years of the lease, it was in a good position to take the time needed to responsibly identify another strategic option to generate value for the LLC and all of its investors. Although the economy was weakening, the golf course was well-designed and located in a community that is a good one for the profitable operation of a golf course. With a minimally competent and loyal fiduciary at the helm, the LLC could have charted a course that ………………………