By Andrew S. Hicks and James A. Keefe

The Delaware Limited Liability Company Act allows for the fiduciary duties of a member to be expanded, restricted, or eliminated by provisions in the operating agreement of a limited liability company (“LLC”).^[1] If drafters intend to eliminate fiduciary duties, this intent must be plain and unambiguous.^[2] Delaware’s Chancery Court recently emphasized the importance of this “plain and unambiguous” requirement in In re Cadira Group Holdings, LLC.^[3]

In Cadira, Knights Genesis Healthcare, LLC (“KGH”) and Beau Gertz, with his company Perseverance Med, LLC, started a healthcare joint venture with Cadira Group Holdings, LLC (“Cadira”). The joint venture would operate as the parent company of already-existing healthcare-related companies.^[4] After the transaction closed, KGH learned that Cadira and Gertz were being sued by numerous health insurance companies for healthcare fraud.^[5] Less than a month later, KGH filed a lawsuit alleging, inter alia, that Gertz breached his fiduciary duty owed to KGH as a member.^[6]

In response to the claim for breach of fiduciary duty, Gertz argued that Cadira’s operating agreement had replaced the traditional fiduciary duties with contractual duties and KGH had failed to state a claim for breach of those duties.^[7] The court noted that at first glance, Section 13.02 of Cadira’s operating agreement evinced an intent to replace the traditional fiduciary duties with the following: “[i]t is the intent of this Section [13.02] to restrict the liability and fiduciary duties of the Members and the Managers to the maximum extent permitted by applicable law.”^[8] But Section 13.02 proceeded to allow claims against member and managers arising from “bad faith, gross negligence, willful misconduct or actual fraud.”^[9] The court emphasized that a contractual duty to refrain from willful misconduct or bad faith corresponded with the traditional duty of loyalty, and a contractual duty to refrain from gross negligence corresponded with the traditional duty of care.^[10]

After analyzing the language of Section 13.02 in its entirety, the court concluded that the drafters of the operating agreement failed to evince a “plain and unambiguous” intent to displace the traditional fiduciary duties.^[11] Accordingly, the court found that Gertz owed KGH traditional duties of care and loyalty.^[12]

Cadira underscores the need for contracting parties to carefully consider their language if the intent is to eliminate the traditional fiduciary duties of loyalty and care within an LLC operating agreement. Anything short of “plain and unambiguous” language eliminating these duties will be deemed insufficient under Delaware law.

Andy Hicks is the managing partner and James Keefe is an associate at Schiffer Hicks Johnson PLLC, a Houston-based trial law firm.

[1] 6 Del. C. § 18–1101(c); Zimmerman v. Crothall, 62 A.3d 676, 702 (Del. Ch. 2013).

[2] Ross Holding and Mgmt. Co. v. Advance Realty Grp., LLC, C.A. No. 4113-VCN, 2014 WL 4374261, at *13 (Del. Ch. Sept. 4, 2014) (quoting Feeley v. NHAOCG, LLC, 62 A.3d 649, 664 (Del. Ch. 2012)).

[3] C.A. No. 2018-0616-JRS, 2021 WL 2912479, at *1 (Del. Ch. July 12, 2021).

[4] Id. at *1.

[5] Id.

[6] Id.

[7] Id. at *11.

[8] Id. at *12.

[9] Id.

[10] Id. at *11 (citing United Bhd. of Carpenters Pension Plan v. Fellner, C.A. No. 9475-VCN, 2015 WL 894810, at *4 (Del. Ch. Feb. 26, 2015) (“Willful misconduct is one standard for evaluating whether a fiduciary breached the duty of loyalty by acting in bad faith.”); Feeley, 62 A.3d at 664 (“Gross negligence is the standard for evaluating a breach of the duty of care.”)).

[11] Id. at *12.

[12] Id.