Under Delaware law, indirect controllers of a Delaware limited liability company (“LLC”) can owe limited fiduciary duties to the LLC and its members if they exert control over the LLC’s assets, unless those duties are clearly and unambiguously waived by the LLC’s operating agreement.  Accordingly, where management of a Delaware LLC is vested in an entity, rather than an individual, the duties and standard of care applicable to the persons who ultimately control the LLC should be carefully addressed by the company’s operating agreement.

Factual Background

In 77 Charters v. Gould, three groups of investors acquired a shopping mall in Tennessee through a Delaware LLC.  The mall holding company (“MHC”) had two initial owners – (1) Kimco Preferred Investor LXXIII, Inc. (“Kimco”), which owned the preferred ownership interest, and (2) Stonemar Cookeville Partners, LLC (“SCP”), which owned the non-preferred interest.  SCP was in turn owned by Plaintiff, 77 Charters, Inc. (“77 Charters”), and Defendant, Jonathan Gould (“Gould”), who also controlled SCP.

Gould managed the mall’s day-to-day operations through a number of entities ultimately owned and managed by him.

In 2013, Kimco decided to sell its preferred ownership interest.  Unknown to 77 Charters, a three-step transaction was negotiated by Gould, Kimco, and Eightfold Cookeville Investor, LLC (“Eightfold”) whereby Eightfold and a different Gould entity, Cookeville Corridor, LLC (“Cookeville Corridor”), ultimately acquired Kimco’s preferred ownership interest in MHC:

  1. First, Gould acquired 100% of Kimco’s preferred interest, giving him complete voting control over MHC through its two entity owners, both of which Gould controlled.
  2. Second, Gould amended MHC’s operating agreement to further benefit the LLC’s preferred investor (i.e., himself and eventually Eightfold) by, among other changes, increasing the distribution preference for preferred members from a 9% annual rate of return to 12.5%.
  3. Third, Gould sold part of Kimco’s interest to Eightfold for the same price Gould paid for the entire interest and retained a portion of the preferred interest for himself.

At this point, MHC had three members: (1) SCP, which owned the non-preferred interest, and was owned in part by 77 Charters and Gould, (2) Cookeville Corridor, which held Gould’s share of the preferred interest, and (3) Eightfold, which owned the remaining preferred interest.

In 2018, Gould and Eightfold sold the mall, resulting in approximately $4.7 million in profits available for distribution to MHC’s members. 77 Charters did not receive any of the proceeds from the sale. 77 Charters sued Gould (among others) claiming that he and certain entities controlled by him breached their fiduciary duties owed to MHC and its members by acquiring Kimco’s preferred interest, amending MHC’s operating agreement to benefit the preferred interest, and then selling the mall at the expense of 77 Charters.


Section 409 of the Delaware Limited Liability Company Act expressly imposes fiduciary duties (i.e., the duties of care and loyalty) on members of a member-managed LLC and managers of a manager-managed LLC; however, those duties may be expanded or restricted by the LLC’s operating agreement so long as the waiver is clear and unambiguous.  Under a traditional analysis, these duties only apply to the direct managers and members of a Delaware LLC, not the controlling persons of an entity-member or entity-manager of a Delaware LLC.

Perhaps acknowledging that Gould’s status as a “remote controller” would not give rise to traditional fiduciary duties, 77 Charters rested its claims upon the framework established in In re USACafes, L.P. Litigation, 600 A.2d 43 (Del. Ch. 1991), where the court acknowledged that remote controllers of LLCs (such as Gould) and limited partnerships will owe limited fiduciary duties if they exert control over the assets of such alternative entity. Notably, to date, USACafes duties have only been extended to “classic self-dealing transactions” and have not been found to impute other aspects of the duty of loyalty or the duty of good faith on remote controllers.

To determine whether 77 Charters pled sufficient facts to support its breach of fiduciary duty cause of action, and thus, survive the motion to dismiss, the court engaged in a three-part analysis: (1) whether Gould owed fiduciary duties as a remote controller; (2) if so, whether those fiduciary duties were waived; and (3) if not, whether Gould may have breached such duties based on the facts pled.

First, citing USACafes, the court found that Gould exerted control over MHC’s and SCP’s assets by, among other things, approving and effecting transfers of the Kimco interest, making distributions, and amending MHC’s operating agreement, and as a result of such control, Gould owed limited fiduciary duties (i.e., the duty of loyalty) as a remote controller.  In the second part of its analysis, the court looked to SCP’s operating agreement and found that it clearly and unambiguously waived the corporate opportunity doctrine, but it left other aspects of the duty of loyalty intact (i.e., restrictions on self-dealing).

Since the SCP operating agreement did not waive the self-dealing aspect of the duty of loyalty, the court then analyzed whether Gould, after he acquired the preferred interest through Cookeville Corridor, could have engaged in self-dealing by “selfishly” amending MHC’s operating agreement to “shift economic value” to the preferred investors, thereby increasing “the Preferred Interest’s economic value at the expense of 77 Charters.”  The court noted that although Gould and the entities he controlled had the right to amend MHC’s operating agreement pursuant to its terms, that right did not “immunize” him “from a claim that they did so inequitably.” Accordingly, the court sustained the breach of fiduciary claim on that basis.

With respect to 77 Charters’ remaining fiduciary-based claims, the court found that Cookeville Corridor’s acquisition of Kimco’s preferred ownership interest, without first offering the interest to SCP, was factually insufficient to support a breach of fiduciary claim because SCP’s operating agreement unambiguously waived the corporate opportunity doctrine, and therefore, allowed its members to compete with each other and the company. The court also found that the sale of the mall was insufficient to support a standalone breach of fiduciary claim because SCP’s operating agreement also gave Gould, through his management entity, the “exclusive authority to cause SCP to consent to the [s]ale without the consent of the members.”

Key Takeaway

This case serves as a reminder to corporate law practitioners that layering entities alone will not insulate the ultimate controllers of such entities from fiduciary liability unless their respective operating agreements clearly and unambiguously waive the controlling persons’ fiduciary duties.