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Superior Court Applies Affiliate Privilege Doctrine To Dismiss Tortious Interference Claim Against Controller, While Sustaining Fraud Claims Against LLC Managers

Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, C.A. No. N19C-11-092 PRW CCLD (Del. Super. Jan. 13, 2021)

In adjudicating a dispute over a scuttled deal in the music festival industry, the Delaware Superior Court applied the so-called affiliate privilege doctrine, which can immunize a controller from tort liability for its affiliates’ contractual breaches, and addressed the viability of fraud claims against individual managers of certain LLCs.

First, the Court explained that affiliate privilege is a doctrine that can justify dismissing a claim for tortious interference with contract against a controller. So long as a controller does not face non-conclusory factual allegations of having induced—in bad faith—its affiliates to breach their contractual obligations, the controller may invoke this defense to avoid what otherwise would be a backdoor disregarding of the corporate form, piercing of the corporate veil, or a framework of respondeat superior. Here, the Court found the controller to be an affiliate of parties to the underlying contract in the circumstances and concluded the complaint lacked non-conclusory allegations that the controller had acted in bad faith, as opposed to having acted with legitimate economic goals.

Next, addressing fraud claims against individual managers of certain LLCs, the Court applied a plain-meaning analysis to determine that, although one provision of the contract disclaimed liability against individual signatories generally, a separate exclusive-remedies provision explicitly permitted fraud-based claims. Having found the contract allowed such claims—and noting that Delaware law does not permit contracts to insulate against intentional fraud—the Court sustained the fraud-based counterclaims after determining that defendants pled them with the requisite particularity and that they were not bootstrapped breach-of-contract claims.



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