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Chancery Finds Adequately Pled Breach of Fiduciary Duty Based on Course of Disruptive Conduct

Posted In Fiduciary Duty

Klein v. Wasserman, C. A. No. 2017-0643-KSJM (Del. Ch. May 29, 2019).

The typical claim for breach of fiduciary duty arises out of a single transaction or event, or several closely-related transactions or events.  Still, as the Klein decision illustrates, there are circumstances in which the Court of Chancery will find an adequately stated breach of fiduciary duty claim arising out of a course of disruptive conduct.

Plaintiffs in Klein were Klein, as the largest voting LLC member, and the company, Cambridge Therapeutic Technologies LLC (“the Company or “CTT). Defendants were Wasserman, in his role as LLC manager, and the Breslows, husband and wife minority investors who had invested $12.5 million in 2016.  The Company’s Operating Agreement provided for a three-person board of directors, two appointed by Klein and one by the Breslows. During the relevant time period, the board consisted of Klein, Adams (designated by Klein) and Wasserman (designated by the Breslows). The Company asserted a claim for breach of fiduciary duty against defendant Wasserman in his role as manager of the LLC and against the Breslows for aiding and abetting.

On defendants’ motion to dismiss, the Court of Chancery held that CTT adequately alleged a breach of fiduciary duty by Wasserman as manager.  Because the Company itself asserted the claims, the Court assessed the allegations under the plaintiff-friendly standard of Rule 12(b)(6) as opposed to the heightened standard of Rule 23.1 that applies when an investor sues derivatively. The Court noted that the Operating Agreement contained exculpatory provisions and therefore CTT was required to plead that Wasserman acted “in bad faith, recklessly, fraudulently or with willful malfeasance”.  Under that standard, the Court found CTT had adequately alleged that Wasserman acted in bad faith as manager by putting the interests of the Breslows above those of CTT through a course of disruptive conduct.  The Court held that it was reasonably conceivable that Wasserman breached his fiduciary duty considering as a whole the allegations that he demanded that the board allocate its full tax losses to the Breslows, made demands directly on CTT employees in violation of Company protocol, and threatened employees with adverse consequences if they did not immediately comply, with the result that CTT’s tax accountants and chief financial officer resigned, the Company suffered delays in filing its K-1 statements, and the Company suffered internal disruption and destabilization. The Court also sustained the plaintiff’s claim that the Breslows aided and abetted the breach by Wasserman.

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