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

Golf Course Owner out of Bounds 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 bytmtliam Gatz. Peconic Bay, LLC, held a longterm lease on valuable property in New Yorl-t that allowed the LLC to operate a first-rate Robert Trent Jones. Jr. designed golf course. called Long Island National Goif 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. Ftather. Gatz made a series of decisions that placed Peccnic Bay in an economically vulnerable position. Then Gatz decided to put Peccnic Bay on the auction block without engaging an experienced broker to market it to golf course managers or owners. Gatz. on behalf of Get: Props rties. was the only bidder to show up at the auction. He purchased Peconic Bay for a nominal value over the debt. and merged Peccnic Bay into Gatz Properties. Judicial Opinion STFIINE. Ch.. .. The LLC agreement here does not displace the traditional duties at loyalty and care that are owed by managers of Delaware LLCe to their investors in the absence of a oontractu al provision waiving or modifying those duties. The Delaware Limited Uability Company Act [the \"LLC not\") explicitly applies equity as a default and our Supreme Court. and this court. have consistently held that defauh fiduciary duties apply to those managers of alternative entities who would qualify as fiduciaries under traditional equitable principles. including managers of LLGs. Here. the LLC agreement makes clear that the manager could only enter into a self-dealing transaction. such as its purchase of the LLC, if it proves that the ten'ns were fair. In other words, the LLC agreement essentially incorporates a core element of the traditional fiduciary duty of Icyalty. Not only that. the LLC agreement's exculpatmy provision makes clear that the manager is not exculpated for bad faith action, willful misconduct, or even grossly negligent action, 129., 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 protable operation of a golf course. Iui'lrl'ith a minimally competent and loyal fiduciary at the helm, the LLB could have charted a course that would have delivered real value to its investors. Had the manager acted properly, for example, the buyer he rebuffed could have entered into a new lease or purchased the LLC on terms that would have at least gotten the LLC's minority Investors back what they had put in and some modest return. The manager himself is the one who has created evidentiary doubt about the LLC's value by failing to pursue any strategic option for the LLC in a timely fashion because he wished to squeeze out the minority investors. The manager's defense that his voting power gave him a license to exploit the minority fundamentally misu nderstands Delaware law. The manager was free not to vote his membership interest for a sale. But he was not free to create a situation of distress by failing to cause the LLC- to explore Its marl-tat alternatives and then to buy the LLC for a nominal Di'lC. The purpose Of the duty of loyalty is in large measure IO prevent the exploitation by a fiduciary of his self-interest tip the disadvantage ofthe minority. The fair price requirement of that duty, which is incorporated in the LLC agreement here. makes sure that if the conflicted fiduciary engages In self-dealing. he pays a price that Is as much as an arms-length purchaser would pay. rl'he court awarded each minority member his full capital contribution of $725300 plus 10% aggregate return of 92500.]