Court of Chancery Finds That Manager Breached Her Fiduciary Duty of Loyalty by Engaging in Numerous Self-Interested Transactions

By Nick Froio and Zack Sager

In this memorandum opinion, the Delaware Court of Chancery found Sandra Manno (“Manno”), the manager of CanCan Development, LLC, a Delaware limited liability company (the “Company”), liable for breaching her fiduciary duty of loyalty to the Company by engaging in numerous self-interested transactions.

A manager of a Delaware limited liability company owes traditional fiduciary duties of care and loyalty unless the organizational documents of the limited liability company modify such duties.  The Court, citing Feeley v. NHAOCG, LLC, 62 A.3d 649 (Del. Ch. 2012), implied that the organizational documents of the Company did not modify the traditional fiduciary duties.

According to the Court, the essence of a claim for beaching the fiduciary duty of loyalty is the assertion that a manager misused power over company property or processes in order to benefit herself rather than advance company purposes. The Court found that Manno misused company property and processes by, among other things, (i) unilaterally increasing her compensation to an amount greater than what was entirely fair to the Company, (ii) employing siblings and paying them salaries in excess of what was entirely fair to the Company, (iii) causing the Company to expend resources on her personal projects, and (iv) diverting Company funds to pay for personal expenses.

The Court also found that Manno committed waste. According to the Court, although traditionally viewed as a separate cause of action, “a waste claim is best understood as one means of establishing a breach of the duty of loyalty’s subsidiary element of good faith.” The Court will infer bad faith and a breach of duty when the decision in question lacks any rationally conceivable basis. The Court found that Manno committed waste in two instances: first, by using Company funds to rent a box suite at New Orleans Saints games for personal use, and second, by inexplicably hiring a known felon to provide real estate consulting services. According to the Court, no rational person would hire a convicted felon from New Jersey, who needed permission from his parole officer to travel out of state, to work in Mississippi in the highly regulated casino industry.

The Court then addressed counterclaims brought by Manno against one of the members, Robert Granieri (“Granieri”), alleging, among other things, that Granieri (i) unfairly diluted her interest in the Company, (ii) usurped a company opportunity, and (iii) breached his duties when he dissolved the Company and purchased its assets. The Court rejected all of these counterclaims.

With respect to the first of these claims, Manno alleged that after Granieri gained control of the Company, he breached his fiduciary duties by making capital calls, which diluted Manno’s interest in the Company. The Court acknowledged that once Granieri gained control of the Company, he owed fiduciary duties to the Company for the benefit of all of the equity holders and that when he caused the Company to make a capital call, he engaged in a self-interested transaction subject to entire fairness review. Once entire fairness applies, the respondent must establish that the transaction was the product of both fair dealing and fair price. The transaction itself must be objectively fair, although a perfect outcome is not required. The Court found that Manno acquiesced and expressly consented to many of the capital calls in question. The Court found that the other capital calls were entirely fair pointing to the fact that Granieri determined, after consulting with advisors, that the calls were necessary to avoid immediate failure, were made at a time when financing on comparable terms was not available from the market, were priced comparably to similar transactions to which Manno had agreed, and valued the Company well in excess of what it was actually worth.

The Court then rejected Manno’s claim that Granieri usurped a company opportunity by having his separate entity purchase land that could have been used by the Company for its venture. According to the Court, a fiduciary violates his duty of loyalty by usurping a company opportunity when (i) the company is financially able to undertake the opportunity, (ii) the opportunity falls within the line of the company’s business, (iii) the company has an interest or a reasonable expectancy in the opportunity, and (iv) the fiduciary’s interests conflict with those of the company. The Court found that Manno could not satisfy the first element because the Company had no resources to purchase the property and could not raise money from third parties. In addition, the Court found that Granieri structured the purchase of the property to be fair to the Company. Specifically, Granieri caused his separate entity to grant an option to the Company to purchase the property on favorable terms.

The Court then found that Granieri did not breach his duties by dissolving the Company and purchasing its assets. According to the Court, because this transaction was self-interested, it was subject to the entire fairness standard of review. Although a heavy burden, the Court found that Granieri satisfied this standard because the Company would have had to dissolve if it did not receive additional funds, and Granieri exhausted a search for third party funding (which was unavailable), solicited, but did not receive, additional capital from members of the Company, and caused his separate entity to purchase the assets of the Company at a fair (and perhaps excessive) price.
CanCan Development