In 77 Charters, Inc. v. Gould, the Delaware Court of Chancery refused to dismiss breach of fiduciary duty claims against an indirect, “remote controller” of a limited liability company in connection with a series of transactions whereby the controller purchased preferred interests in the limited liability company from a member and subsequently amended the limited liability company’s operating agreement to increase the preferred’s distribution preference to the detriment of the holder of the limited liability company’s common interests. The decision serves as a cautionary reminder to investors that their actions may not be insulated from fiduciary liability—no matter how many intermediaries are involved—unless the applicable operating agreement clearly and expressly disclaims fiduciary duties.

Background

In 2007, as part of an investment in a retail shopping center, Cookeville Retail Holdings, LLC (Cookeville Retail) was formed by its managing member, Stonemar Cookeville Partners, LLC (Stonemar Cookeville), and its preferred member, Kimco Preferred Investor LXXIII, Inc. (Kimco). Around the same time, Stonemar Cookeville was formed by its managing member, Stonemar MM Cookeville, LLC (Stonemar MM), and its nonmanaging members, one of which is 77 Charters, Inc. (plaintiff). Jonathan D. Gould (Gould) is the managing member of Stonemar MM. Under the Limited Liability Company Agreement of Cookeville Retail (the CRA), Kimco was first allocated a 9 percent distribution on its capital contributions, while the excess was distributed to Stonemar Cookeville and its members (including the plaintiff). The following chart depicts the parties’ relationships.

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