Delaware Business Litigation Report

Chancery Addresses Claims Arising Out of LLC Dispute Involving Parallel Venture

Largo Legacy Group, LLC v. Evens Charles, C.A. No. 2020-0105-MTZ (Del. Ch. June 30, 2021)
In this LLC dispute, an investor in a hotel development company alleged that the company principals breached the operating agreement and their fiduciary duties by implementing a fraudulent scheme whereby a parallel venture, that they owned and controlled, was provided with certain adjacent land and company funds in a manner that improperly advantaged the parallel venture and the principals while harming the plaintiff. The plaintiff also alleged that the defendants had breached their fiduciary and contractual duties by refusing to provide it with financial information that it was entitled to under the operating agreement. The defendants moved to dismiss. The Court of Chancery, finding, as an initial matter, that laches did not block the claims, held that while plaintiff had failed to plead its fraud claim with adequate particularity, it had properly pled both its breach of fiduciary duty claim in connection with the alleged scheme and its breach of contract claim in connection with the company’s refusal to provide certain financial information. In addition to dismissing the fraud claim, the Court also dismissed plaintiff’s duplicative breach of fiduciary duty claim relating to the withheld financial information. 

The defendants argued that the claims should be dismissed on laches grounds because the parallel venture was formed in 2016, and that is when the land and funds at issue were provided to the parallel venture. In rejecting this argument, the Court noted that the plaintiff’s theory was not that the wrong occurred 2016 with the transfer of the land and the funds, but rather that it occurred later—within the analogous statute of limitations period—when actions taken by the principals made it clear that the share of the money owed to plaintiff in connection with the land and the funds provided to the parallel venture would not be repaid as the principals had previously represented. Moreover, the Court found that the plaintiff had adequately pled that the limitations period should be tolled as it was not on inquiry notice of the wrongdoing until mid-2017. 

In connection with the breach of fiduciary duty claims against certain of the principals, the defendants argued that dismissal should be granted because the company’s operating agreement permitted the actions taken in connection with the parallel venture as long as 70% of the company’s membership interests authorized the actions, which had occurred here. Noting that the operating agreement did not disclaim the traditional fiduciary duties of care and loyalty, the Court rejected this argument, stating that even if an action may be done legally it could fail to satisfy the standard of conduct owed by a fiduciary. The Court did, however, dismiss plaintiff’s fiduciary duty claim regarding the defendants’ refusal to provide plaintiff with certain financial information to which he was contractually entitled because it was duplicative of plaintiff’s breach of contract claim involving the same allegations.

The Court also dismissed plaintiff’s fraud claim finding that the plaintiff had not pled the existence of a fraudulent scheme orchestrated by the defendants with sufficient particularity as the alleged scheme hung on “unreasonable and insufficiently pled assumptions.”

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