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Court Of Chancery Holds That Unlike Corporations, LLC Agreements Can Mandate Arbitration For Fiduciary Breach Claims

Douzinas, et al. v. American Bureau of Shipping, Inc., et al., C.A. No. 1496-N (Del. Ch. Jan. 24, 2006) (published at 888 A.2d 1146 (Del. Ch. 2006). Minority shareholders brought a breach of fiduciary duty action against the managing member of the LLC. Additionally, they plead aiding and abetting conspiracy and unjust enrichment claims against defendants' affiliate entities. Relying on Delaware Supreme Court precedent, the defendants insist all claims require mandatory arbitration under the LLC agreement. The court agreed. The plaintiffs allege that defendant injured the plaintiff company - Nautical Technology Corp. - which the former managed, by covertly transferring plaintiffs' software to itself and distributing that software free to benefit defendant, depriving the plaintiffs of revenues. Plaintiffs disagree with the interpretation of precedent as advanced by the defendants. Distinguishing Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999) and Parfi Holding AB v. Mirror Image Internet, Inc., 817 A.2d 149 (Del. 2002), the court held that the plaintiffs' argument was not sustainable. Observing that Atochem allowed broad provisions in the LLC context permitting even arbitration of fiduciary breach claims, Parfi addressed the non-arbitrability of such claims in a corporate, rather than an alternate-entity context. Thus, the court observed, there was far greater contracting freedom in the LLC context. The court observed that both - Texas and Delaware - jurisdictions converged on this issue. The court held against the plaintiffs, compelling them to submit to mandatory arbitration to decide all claims including those extending to alleged breaches of fiduciary duties. Authored by: Raj Srivatsan 302-888 6831 Share


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