Contractual v. Fiduciary “Good Faith.” More on R & R Capital, LLC.

     posted by Gary Rosin

As I have already noted, the recent opinion in R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, CA No. 3803-CC, 2008 WL 3846318 (Del. Ch. Ct. August 19, 2008). Indeed, Chancellor Chandler opens by quoting Shakespeare, and then declaring that “for a Delaware limited liability company, the contract's the thing.” 2008 WL 3846318, at *1 (emphasis in original).

That said, when considering the argument that the courts refusal to allow judicial dissolution leaves plaintiffs without an equitable remedy, the Chancellor does not even mention fiduciary duties. Nor does the chancellor indicate whether the LLC Agreement waived them. The only solace offered is the implied contractual duty of good faith:

The LLC Act does not abandon petitioners with no recourse…. Instead, the LLC Act preserves the implied covenant of good faith and fair dealing. *** It is the unwaivable protection of the implied covenant that allows the vast majority of the remainder of the LLC Act to be so flexible. There is no threat to equity in allowing members to waive their right to seek dissolution, because there is no chance that some members will be trapped in a limited liability company at the mercy of others acting unfairly and in bad faith.

2008 WL 3846318, at *7 (footnotes omitted) (emphasis added).

To assure us of the ample protection of the unwaivable implied covenant of good faith and fair dealing, the Chancellor quotes from Prof. Deborah A. DeMott’s article, Fiduciary Preludes: Likely Issues for LLCs, 66 U. COLO. L.REV. 1043, 1059-62 (1995). 2008 WL 3846318, at *7 n.50. Francis G.X. Pileggi suggests that

[t]he Court describes the important legal parameters and basis for this non-waivable duty, and suggests that the petitioner in this case would likely have been able to obtain relief based on that non-waivable duty--but did not avail itself of that claim.

Prof. Larry Ribstein seems less optimistic:

The outcome of that suit will depend on the contract, determined in the light of the implied covenant.

It is odd that the Chancellor quotes Prof. DeMott.  She suggests that a “robust” implied covenant of good faith and fair dealing will be required to avoid an implied “gift.” Yet the implied contractual covenant of good faith and fair dealing is entirely different from the fiduciary duty of good faith. The latter is part of the duty of loyalty. The former could hardly be called robust. It cannot be used to “rewrite” the contract to add an obligation not already in it, especially an obligation as open-ended as “fairness.” 

And that’s the problem with the mere contractual entity approach.

Update:  A link to the slip opinion in R & R Capital, LLC, via Richard, Layaton & Finger, is on Chancery Court Champions Contractual Flexibility of LLC Act and Allows Waiver of Member's Right to Seek Dissolution   (Del. Corp. & Comm. Litigation Blog).