Court of Chancery Allows LLC’s Breach of Fiduciary Duty, Aiding and Abetting, and Breach of Contract Claims to Proceed, But Not Fraud

By Justin H. Roeber and Peter Ayers

In Largo Legacy Group, LLC v. Evens Charles et al., C.A. No. 2020-0105-MTZ (Del. Ch. June 30, 2021), the Delaware Court of Chancery denied a motion to dismiss brought by defendants against Plaintiff Largo Legacy Group, an investor in Largo Hotel, LLC (“Largo Hotel”), a hotel development company.  The Court found that Plaintiff successfully stated claims against the company’s principals for breach of fiduciary duty, aiding and abetting, and breach of contract arising from the defendants’ efforts to launch a parallel hotel venture on an adjacent piece of land owned by Largo Hotel.  The Court, however, concluded that Plaintiff’s claim for fraud did not survive the motion to dismiss due to failure to plead the claim with particularity.

Plaintiff Largo Legacy Group was an investor in nominal defendant Largo Hotel, a hotel development company.  Largo Hotel was managed by defendant CD FD Ventures LLC (the “Manager”), which was owned and controlled by defendant Evens Charles (“Charles”). 

Largo Legacy Group’s claims arose out of Largo Hotel’s ownership of two adjacent parcels of real estate. One of the parcels of land was developed and had a hotel located upon it, while the adjacent parcel of land was vacant and undeveloped. In the transaction that gave rise to the dispute, defendant Charles and the principals of Largo Hotel launched a parallel venture on the undeveloped adjacent parcel of land through a newly formed entity, which they owned and controlled.

In the complaint, Largo Legacy Group alleged that the Defendants transferred the adjacent parcel to the newly formed entity for no consideration on the false assumption that the parcel was valueless, misdirected company funds towards the development of the adjacent parcel without reimbursement, and engaged in fraudulent bookkeeping to funnel additional funds from Largo Hotel to the newly formed venture. Additionally, Largo Legacy Group alleged that defendants attempted to shield their activities relating to the parallel venture by repeatedly refusing to disclose material details about the conveyance of the undeveloped property and the flow of funds between Largo Hotel and the newly formed entity.  Specifically, the complaint alleged that defendants falsely asserted that Largo Hotel would be reimbursed for the funds that were used in the predevelopment of the adjacent parcel, and refused to honor Largo Legacy Group’s requests for Largo Hotel’s monthly financial information, which the Manager was required to disclose under the Largo Hotel operating agreement.

When analyzing the breach of fiduciary duty claim, the Court considered the misdirection of Largo Hotel funds by defendants Manager and Charles towards the new venture, the transfer of the undeveloped property for no consideration, and the Manager’s failure to provide financial information required by the Largo Hotel operating agreement. The Court considered whether Largo Hotel’s operating agreement absolved the defendants of their traditional fiduciary duties in relation to their actions concerning the parallel venture. Specifically, the defendants argued that they could not have breached their fiduciary duties of care and loyalty because Largo Hotel’s operating agreement permitted their actions with respect to the parallel venture as long as 70% of Largo Hotel’s membership interests authorized the actions, which they contended occurred in this case.

In analyzing this defense, the Court stated that while Delaware law presumes that LLC’s owe traditional fiduciary duties to their members, these duties may be limited by an operating agreement, so long as the disclaimer is clear and unambiguous. After analyzing the pertinent provisions of Largo Hotel’s operating agreement, the Court concluded that even though the operating agreement technically allowed the defendants’ actions, this did not mean that their fiduciary duties of loyalty and care were automatically disclaimed as a check on their conduct. The Court held that such a disclaimer would have to be clearly and unambiguously stated in the operating agreement. Finding no such disclaimer in Largo Hotel’s operating agreement, the Court rejected defendants’ argument on this point.

The Manager and Charles also argued that Largo Legacy Group’s breach of fiduciary duty claim was time-barred by the doctrine of laches and should be dismissed because the transfer of Largo Hotel’s funds and property to the parallel venture occurred in 2016 and Largo Legacy Group did not file suit until 2020. In rejecting this defense, the Court reasoned that while the analogous statute of limitations period was three years, the transfer of company property and funds by itself did not give rise to Largo Legacy Group’s claim. Instead, the Court found that Largo Legacy Group’s claim did not accrue until mid-2017 when they were first notified that Largo Hotel would not be reimbursing them for the company funds that were used in the development of the adjacent parcel.

Furthermore, the Court found that even if Largo Legacy Group’s claim did arise in 2016, the doctrine of laches would have been tolled until mid-2017 because the Manager was a fiduciary, and, under the doctrine of equitable tolling, the statute of limitations is suspended for the duration a plaintiff reasonably relies upon the assurances of a fiduciary. In this case, the Court concluded that Largo Legacy Group’s reasonable reliance on the Manager, who the Court determined to be a fiduciary, did not end until Largo Legacy Group was first notified in March of 2017 that Largo Hotel would not be reimbursing them for the adjacent parcel’s predevelopment costs.

Shifting to Largo Legacy Group’s aiding and abetting claim against Charles, the Court addressed Charles’ defense that Largo Legacy Group’s claim must fail because he was acting as an agent of the Manager, and, under Delaware law, an agent cannot aid and abet their principal in the commission of a tort. Although the Court agreed with Charles’ statement of law, it also recognized that an exception to the rule applies where an agent steps out of their role as an officer and acts pursuant to their personal interests. In this case, the Court found that Largo Legacy Group sufficiently pled facts to support their claim that Charles, acting through the Manager, caused Largo Hotel to enter into self-interested transactions for Charles’ personal gain.

Next, the Court analyzed whether Largo Legacy Group had sufficiently pled facts to show that the Manager had breached Largo Hotel’s operating agreement by failing to distribute monthly financial information to its members. As the plain language of the agreement required the Manager to produce such information each month, the defendants only argued that Largo Legacy Group’s claim should be dismissed because they failed to allege an injury, which is a required element of a breach of contract claim. In a straightforward analysis, the Court ruled that Largo Legacy Group pled sufficient facts to support their claim that the Manager breached Largo Hotel’s operating agreement, and, as a result, Largo Legacy Group suffered injury in an amount to be proven at trial. Finally, the Court addressed the sufficiency of Largo Legacy Group’s claim that the defendants engaged in a scheme to defraud Largo Legacy Group. The Court found Plaintiff’s fraud allegations to be insufficient to satisfy the requirement under Delaware law that facts of a fraud claim be stated with particularity.  In this case, Plaintiff characterized Defendants’ actions as a “fraudulent scheme,” but such conclusory characterizations did not excuse the Plaintiff its burden to sufficiently allege specific misrepresentations and provide supporting particularized facts.

Finally, the Court addressed the sufficiency of Largo Legacy Group’s claim that the defendants engaged in a scheme to defraud Largo Legacy Group. The Court found Plaintiff’s fraud allegations to be insufficient to satisfy the requirement under Delaware law that facts of a fraud claim be stated with particularity.  In this case, Plaintiff characterized Defendants’ actions as a “fraudulent scheme,” but such conclusory characterizations did not excuse the Plaintiff its burden to sufficiently allege specific misrepresentations and provide supporting particularized facts. 

Copyright © 2019, K&L Gates LLP. All Rights Reserved.