Delaware Business Litigation Report

Chancery Addresses Pleading-Stage Arguments for Dismissal in LLC Dispute

Principal Growth Strategies LLC v. AGH Parent LLC, C.A. 2019-0431-JTL (Del. Ch. January 25, 2024)
This decision provides helpful guidance to practitioners to address pleading-stage arguments for dismissal. The plaintiff asserted fiduciary claims against the controller and manager of a Delaware LLC, who allegedly engineered an asset-swap transaction at the expense of the LLC. The Court of Chancery largely denied the motions to dismiss.

First, in response to arguments that New York law governed certain claims, the Court recognized that Delaware adopted the most significant relationship test from the Restatement (Second) of Conflict of Laws to determine choice of law. Under the internal affairs doctrine, the chartering state has the greatest interest in the claims related to the entity's internal affairs. The Court explained that external components of claims otherwise implicating the internal affairs doctrine, like a transaction agreement, do not defeat the application of Delaware law. Applying the Restatement, the Court ruled that Delaware law applied to the fiduciary duty, aiding and abetting a breach of fiduciary duty, and unjust enrichment claims.

Turning to whether the plaintiff had stated legally sufficient claims, the Court found that the plaintiff successfully pled all the elements necessary to establish the aiding and abetting claim, starting with the existence of a fiduciary relationship in the LLC. In Delaware, the controlling members and managers of an LLC owe fiduciary duties of loyalty and care in an absence of express elimination or limitation of such duties in the operating agreement. At the pleading stage, the duplicative unjust enrichment claim also survived because Delaware law, while prohibiting double recovery, allows plaintiffs to simultaneously plead two equitable claims even if they overlap. In analyzing the implied covenant claim, the Court explained that "[a]t a minimum, the implied covenant requires that the party empowered with the discretion 'use good faith in making that determination.'” The LLC agreement gave defendants discretion to choose investments, but the implied covenant required them to exercise such discretion without frustrating the agreement's basic purpose. The plaintiff demonstrated at the pleading stage that the defendants could have arbitrarily selected worthless investments to benefit themselves. Finally, the Court addressed the group pleading allegations in the complaint. In contrast to the pleading requirements of Rule 23.1, which requires specific facts supporting prohibited conduct by each director, the Court explained that in other contexts, group pleading is not prohibited even though it is disfavored.

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