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Mke Holdings Ltd. v. Schwartz

Court of Chancery of Delaware

September 26, 2019

MKE HOLDINGS LTD. and DAVID W. BERGEVIN, Plaintiffs,
v.
KEVIN SCHWARTZ, DAVID BUCKERIDGE, ANGELOS DASSIOS, DAVID BROWNE, ROBERT BERENDES, JEFFREY R. GROW, KENNETH AVERY, ADAM FLESS, ALEXANDER CORBACHO, and PAINE SCHWARTZ PARTNERS, LLC, Defendants, and VERDESIAN LIFE SCIENCES, LLC, Nominal Defendant.

          Date Submitted: June 17, 2019

          Thomas E. Hanson, Jr., of BARNES & THORNBURG LLP, Wilmington, Delaware, Attorney for Plaintiffs.

          Blake Rohrbacher, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: John F. Hartmann and Abdus Samad Pardesi, of KIRKLAND & ELLIS LLP, Chicago, Illinois, Attorneys for Defendants and Nominal Defendant.

          MEMORANDUM OPINION

          GLASSCOCK, VICE CHANCELLOR

         This matter requires me to construe an LLC operating agreement. My father was an engineer. He frequently remarked that machinery would not be so poorly designed if the designer were condemned personally to keep it operating.[1] I am a lawyer. I am struck that LLC agreements would be better drafted if the drafters were compelled to litigate over them, or worse, construe them as judges. In any event, such is the task I must undertake here.[2]

         This suit was brought derivatively by members of an LLC, Verdesian Life Sciences, LLC ("Verdesian"), alleging breaches of duty by the managers under Verdesian's operating agreement. That agreement attempts to supplant common-law fiduciary duties by imposing contractual duties, in a manner I found, at first read, confusing and internally inconsistent. Before me is the Defendants' Motion to Dismiss. After harmonizing the provisions of the LLC agreement and applying contractual duties to the facts alleged, I find the Defendants' Motion must be granted. The Plaintiffs also bring direct claims. Those claims will be addressed in a separate opinion.

         My reasoning is below.

         I. BACKGROUND

         I draw the following facts from the Plaintiffs' First Amended Verified Complaint (the "First Amended Complaint") and to a limited extent documents incorporated therein.[3] The allegations of the First Amended Complaint, as discussed below, are assumed true for purposes of this Motion.

         A. The Parties

         Plaintiff MKE Holdings, Ltd. ("MKE") is an Indiana corporation and a Member of Nominal Defendant Verdesian.[4] MKE holds 261, 887 Class A Units of Verdesian.[5]

         Plaintiff David W. Bergevin[6] founded Northwest Agricultural Products, LLC in 1989.[7] Bergevin sold Northwest Agricultural Products, LLC to Verdesian in 2013, and, as a result of the acquisition, became a Member of Verdesian.[8] Bergevin holds 365, 471 Class A Units of Verdesian.[9]

         Nominal Defendant Verdesian is a Delaware limited liability company with a principal place of business in Cary, North Carolina.[10] It was formed by Defendant Paine Schwartz Partners, LLC ("Paine") in 2012.[11] Verdesian develops, licenses, manufactures, markets, and distribute fertilizers, pesticides, and related agricultural products.[12] It employs a business strategy focused on acquisition, targeting "companies holding proprietary specialty plant health technologies."[13] Verdesian is managed by an eight-member Board of Managers (the "Board of Managers, " or, the "Board"), and each member of the Board is appointed by the "Paine Members, " a group of entities defined in Verdesian's LLC operating agreement, as described in more detail below.[14]

         Defendant Paine is a Delaware limited liability company with a principal place of business in San Mateo, California.[15] Paine was founded in 2006[16] and is a successor entity to Fox Paine & Company ("Fox Paine").[17] Affiliates of Paine own over seventy percent of the Class A Units of Verdesian.[18] Paine also has a contractual relationship with Verdesian whereby Paine is paid management service fees based on Verdesian's financial performance, and paid transaction fees on certain Verdesian acquisitions.[19]

         Defendant Kevin Schwartz is the President, Chief Executive Officer ("CEO"), and a Founding Partner of Paine.[20] Schwartz has served as a Manager of Verdesian since August 2012.[21]

         Defendant David Buckeridge is a Partner at Paine, and previously was the Operating Director of Fox Paine.[22] Buckeridge has served as a Manager of Verdesian since August 2012.[23]

         Defendant Robert Berendes is the Operating Director of Paine.[24] Berendes has served as a Manager of Verdesian since August 2014.[25] Berendes has worked at, among other places, McKinsey & Company ("McKinsey"). He is also the Chairman of the Board of Directors of Indigo Ag, Inc. ("Indigo), a potential competitor to Verdesian.[26]

          Defendant Jeffrey R. Grow is the Chairman of Verdesian and served as its CEO from August 2012 to September 2016.[27] Grow has served as a Manager of Verdesian since August 2012.[28]

         Defendant Kenneth Avery is the current CEO of Verdesian, replacing Grow in September 2016.[29] Avery has served as a Manager of Verdesian since September 2016.[30]

         Defendant Adam Fless is the Managing Director of Paine.[31] Fless has served as a Manager of Verdesian since August 2017.[32]

         Defendant Alexander Corbacho is a Principal of Paine.[33] Corbacho has served as a Manager of Verdesian since August 2017.[34]

         Defendant Angelos Dassios is a Partner at Paine.[35] Dassios served as a Manager of Verdesian from 2012 to 2016, and continues to serve as a member of the Board of Manager's audit committee.[36]

         Defendant David Browne is a former Director of Paine, a position he left in June 2017.[37] Browne served as a Manager of Verdesian from 2012 to 2017, and continues to serve as a member of the Board of Manager's audit committee.[38]

         B. Verdesian Life Sciences, LLC's Operating Agreement

         Verdesian was formed in August 2012 to sell agricultural products, such as fertilizers and pesticides, the rights to which it planned to obtain through an acquisition strategy targeting entities with proprietary technology.[39] According to Verdesian's Operating Agreement (the "Operating Agreement"), the "full and exclusive discretion" to "manage and control, have the authority to obligate and bind, and make all decisions affecting the business and assets of [Verdesian]" was vested in the Board of Managers.[40] "Members" of Verdesian are listed in the Operating Agreement, and include, among others, MKE and Bergevin.[41]

         1. The Board of Managers of Verdesian

         The Board of Managers-per the Operating Agreement-consists of up to eight members (each individually a "Manager", and collectively, the "Managers")[42]and the current Board has seven members.[43] All Managers are appointed by the "Paine Members, "[44] which is a defined term in the Operating Agreement meaning "Paine & Partners Capital Fund III AIV III, L.P., Paine & Partners Capital Fund III Co-Investors, L.P., Verdesian Co-Investment, L.P. and Verdesian Co-Investment Blocker, Inc."[45] The Paine Members, all affiliates of Paine, own over seventy percent of the Class A Units of Verdesian.[46]

         According to the Operating Agreement, a "Manager shall perform his duties as a manager in good faith, in a manner he reasonable believes to be in or not opposed to the best interests of the Company, and with the care that an ordinarily prudent person in a similar position would use under similar circumstances."[47] However, this standard is explicitly subject to another subsection of the Operating Agreement, whereby:

. . . whenever in this Agreement a Manager or Member is permitted or required to make a decision (i) in its, his or her discretion or under a grant of similar authority, such Manager or Member shall be entitled to consider only such interests and factors as such Manager or Member desires, including its, his or her own interests, and shall, to the fullest extent permitted by applicable law, have no duty or obligation to give any consideration to any interest of or factors affecting the Company or any other Person, or (ii) in its his or her good faith or under another express standard, such Manager or Member shall act under such express standard and shall not be subject to any other or different standards.[48]

         Additionally, the Members, by agreeing to the Operating Agreement, "acknowledge that the Managers may or could have conflicts of interest to the extent that they are requested or obliged to make decisions . . . with respect to . . . the rights of the Members."[49] The Members "to the fullest extent permitted under the LLC Law . . . waive any such conflicts of interest directly or indirectly associated with decisions, and agree that each such Manager shall be entitled to make decisions and determinations as Member or Manager in his, her or its self-interest."[50]

         Further according to the Operating Agreement, "to the extent that, at law or in equity, a Manager . . . has duties, including fiduciary duties, and liabilities relating thereto to the Company . . . such Person acting under this Agreement shall not be liable to the Company . . . for its good faith reliance on the provisions of this Agreement . . . ."[51] Furthermore, "[n]otwithstanding anything contained in this Agreement to the contrary, to the fullest extent permitted under the LLC Law, the Members of Verdesian hereby waive any fiduciary duty of the Managers, so long as such Person acts in a manner consistent with [the Operating Agreement]."[52]

         The Operating Agreement also provides that Managers, as "Covered Person[s], " are not liable "to the Company . . . for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of the authority conferred on such Covered Person by this Agreement."[53] Managers, specifically, are also not liable "to the Company or to any Member for any actions taken in good faith and reasonably believed to be in or not opposed to the best interests of the Company, or for errors of judgment, neglect or omission."[54]

         The Managers are charged with managing "the affairs of [Verdesian]."[55]Under the Operating Agreement, Verdesian will "[c]ause to be prepared and distributed to each Member holding Class A, Class A-1 or Class A-2 Units audited annual financial statements within ninety (90) days after the end of each fiscal year or as soon thereafter as is reasonably practicable and monthly unaudited financial statements within forty-five (45) days after the end of each month."[56]

         C. MKE and Bergevin Become Members of Verdesian

         After its formation in August 2012, Verdesian made its first acquisitions between September 2012 and April 2013.[57] Verdesian acquired Biagro Western Sales, Inc. ("Biagro"), [58] Northwest Agricultural Products, LLC ("NAP"), [59] and Plant Syence Ltd. ("Plant Syence").[60] NAP was founded by Plaintiff Bergevin in 1989.[61]Verdesian acquired NAP from Bergevin in February 2013 for $34 million.[62]

         Bergevin invested $7 million of the proceeds of his sale of NAP back into Verdesian.[63] Bergevin received 278, 441 Class A Units and became a Member of Verdesian.[64] Bergevin also became a guest of the Board of Managers.[65]

         Verdesian later acquired INTX Microbials, LLC ("INTX"), [66] which was formed in 2002, from Plaintiff MKE in a two-part transaction, one part in September 2013, and the second part in January 2014.[67] Verdesian acquired INTX from MKE for $32 million.[68] MKE invested $5 million of the proceeds of its sale of INTX back into Verdesian.[69] MKE received 198, 887 Class A Units and became a Member of Verdesian.[70] MKE's principal also became a guest of the Board of Managers.[71]

         Verdesian's revenue for 2013 was $53 million and it had an Adjusted EBITDA in 2013 of $14.5 million.[72] Paine received management fees from Verdesian of $196, 630 in 2013.[73] Paine also received, in 2012 and 2013, a combined $3.7 million in transaction fees related to Verdesian's acquisition of Biagro, NAP, Plant Syence, and INTX.[74]

         D. Verdesian's Acquisition of Specialty Fertilizer Products, LLC

         During a May 15, 2014 meeting of the Board of Managers, Verdesian's management announced it had executed a purchase agreement to acquire Specialty Fertilizer Products, LLP ("SFP") for $313.5 million.[75] SFP's revenue for 2013 was $68.1 million and it had an Adjusted EBITDA of $26.6 million.[76]

         1. Concerns Related to the Specialty Fertilizer Products, LLC Acquisition

         On April 10, 2014, as part of the SFP acquisition, KPMG prepared a due diligence report for Verdesian.[77] KPMG's report (the "KPMG Report") noted that year-to-date sales for SFP in March 2014 were fifteen percent lower than for the same period the previous year.[78] The KPMG Report also detailed SFP's introduction "in the second half of [fiscal year] 2013" of a "bulk and early fill sales program."[79]Prior to this program, SFP's "sales season peaked in spring during the planting season."[80] The bulk and early fill sales programs "incentiviz[ed] dealers with discounts" in order "to increase dealer demand, accelerate business growth, enhance operational capacity and allow access to a high volume market."[81] According to KPMG, the 2013 "programs were successful and, as a result, sales peaked a second time in FY 13 during Q3 and Q4."[82] In other words, SFP's 2013 sales results included two sales peaks.[83] KPMG noted that there was "a risk [that] this double sales peak will not recur next year, " as the bulk and early fill programs had accelerated sales from the first quarter of 2014 into the fall of 2013.[84] As a result, KPMG wrote, "FY 13 includes a onetime benefit due to the business shift."[85]

         United Suppliers, Inc. ("United Suppliers"), one of SFP's primary retail customers, also provided commentary on SFP.[86] United Suppliers warned Verdesian that SFP had presold a significant amount of product in 2013, and would therefore be unable to achieve the same level of sales in the future.[87] In other words, United Suppliers represented to Verdesian's Managers that SFP had "stuff[ed] the channel."[88] United Suppliers did, however, expect its order with SFP to increase year-over-year.[89]

         2. Verdesian Proceeds with the Specialty Fertilizer Products, LLC Acquisition

         With knowledge of the KPMG Report and the communications with United Suppliers, Verdesian's Managers decided to acquire SFP.[90] Verdesian funded the $313.5 million acquisition of SFP through $200 million in third-party debt financing and $160 million in new equity financing.[91] On June 1, 2014, as part of the new equity financing, Verdesian issued a "Notice of Preemptive Rights" and offered its existing unitholders the opportunity to purchase additional Class A Units at a price of $47.11.[92] In soliciting this new equity financing from Verdesian's Members, the Managers did not specifically disclose the findings of the KPMG Report or the communications with United Suppliers.[93] Instead, the Managers indicated that SFP's 2013 earnings were a reliable indicator of its future performance.[94] The Managers also sent to the Members a presentation on the SFP acquisition, prepared for the rating agencies, which indicated that "SFP underperformance y-o-y driven in part by transition of portion of business from spring planting season to autumn as part of an Early Fill program. Expect meaningful uptick in summer and fall months."[95] The Managers also represented to the Members that Verdesian, with SFP, would have an enterprise value of $514 million.[96]

         In connection with the new equity financing, MKE contributed $3 million and Bergevin contributed $4.1 million.[97] The SFP acquisition closed on July 1, 2014.[98]

         Paine, by contract, receives a management service fee based on Verdesian's financial performance and transaction fees on certain Verdesian acquisitions.[99] Accordingly, Paine received a transaction fee of $6 million for Verdesian's acquisition of SFP.[100] In 2014, Verdesian's Adjusted EBITDA (including SFP) was $45.3 million.[101] In 2014 and 2015, following the acquisition of SFP, Paine received management service fees of $1, 145, 053 and $1, 205, 798, respectively.[102] In 2013, Paine had received a management service fee of less than $200, 000.[103]

         E. Verdesian Acquires QC Corporation

         On September 30, 2014, Verdesian acquired QC Corporation ("QC") from Paine.[104] Paine had previously acquired QC and managed it separately from Verdesian.[105] QC had environmental liabilities (mostly related to neighboring properties and employees) as well as other liabilities, which are now borne by Verdesian.[106] As of August 31, 2017, QC holds an intercompany loan receivable of $18 million.[107]

         F. The Management of Verdesian

         1. The Officers

         Defendant Grow, who served as Verdesian's CEO from August 2012 to September 2016, received bonus compensation from 2014 to 2016 totaling more than $1 million and received option grants of 228, 055 Class M-1 Units and 97, 968 Class M-2 Units.[108]

         Defendant Avery, who took over as Verdesian's CEO in 2016, received 65, 000 Class M-1 Units in 2016.[109] Avery's hire as CEO, to replace Grow, was made with little Board deliberation.[110] Directly before becoming Verdesian's CEO, Avery worked for Monsanto Company, and previously worked for Delta and Pine Land Company, Eagle Materials, and Arthur Anderson.[111] Avery had previously been suspended from practicing before the Securities and Exchange Commission.[112]

         In 2013, the Managers hired as Verdesian's Chief Financial Officer ("CFO") non-party Frank Pirozzi ("Pirozzi"), who had no prior experience as a CFO or with mergers and acquisitions.[113] 2. Operating Performance in 2016 and 2017 In August 2016, Verdesian performed an "Operational Expenses Assessment, " which recommended a reduction in workforce and changes in Verdesian's management structure.[114] The Assessment also noted that "Verdesian's total cost (salary, bonus, T&E) for corporate services and sales force are high for this size company in this space."[115] Since Avery has taken over as CEO, and under the Managers' control, Verdesian has continued to engage in advance sales of products at discounted prices, has changed financial reporting practices (related to finished goods inventory and accrual for product returns), and has consistently paid bills late.[116]

         Verdesian's year-to-date EBITDA in August 2016 was $15.3 million.[117] Its EBITDA for the same period in August 2017 had dropped to $6.92 million.[118] Even as Verdesian's operating performance has declined, as measured by Adjusted EBITDA or EBITDA, the Managers of Verdesian have spent liberally on corporate perks, corporate meetings, and corporate retreats.[119]

         On June 28, 2017, Moody's downgraded Verdesian's credit ratings and indicated a negative ratings outlook.[120] S&P Global Ratings would also later lower its credit rating for Verdesian on January 9, 2019.[121]

         In 2018, Verdesian hired McKinsey to develop initiatives to drive sales and reduce costs.[122] McKinsey was paid over $900, 000 for its work, and the initiatives it developed purported to provide the opportunity for a $6 million increase in 2018 revenue.[123] Verdesian derived no material benefit from McKinsey's initiatives.[124]

         G. Verdesian's Class P Offering

         MKE received its K-1 for 2016 for Verdesian in May 2017, and afterwards inquired to the Managers about the loss in value of its interest in Verdesian due to Verdesian's poor performance.[125] Instead of addressing Verdesian's performance, the Managers responded that Verdesian was being positioned for a sale.[126] The Managers represented that a sale was being targeted for the fourth quarter of 2018 or the first quarter of 2019, and that Class A unitholders would be able to recoup their investments in such a sale.[127] Verdesian's Adjusted EBITDA for 2017 was $30.2 million.[128]

         On August 20, 2018, Verdesian issued an Offering Notice to its Members, notifying them of its intent to issue a new class of preferred units, Class P Units.[129]Each Class P Unit would be offered at $44.30 per unit.[130] At that price, Verdesian was valued at a six percent loss relative to its value after acquiring SFP in July 2014.[131] During the intervening time, Verdesian's EBITDA had decreased by thirty-three percent.[132] The new Class P Units also had a distribution preference: in the event of a sale, Class P unitholders would receive double the Class P Unit price.[133]Class P Units' preference would supersede Class A Units' first priority in the event of a distribution from a liquidity event.[134] Verdesian's management was also allowed to participate in the Class P offering.[135]

         On September 13, 2018, MKE and Bergevin sent a letter to Verdesian asking it to retract the offering of Class P Units.[136] Verdesian responded by letter on September 14, 2018.[137] Verdesian refused to retract the offering and indicated that it believed the offering to be fair because Class A unitholders could participate.[138]In separate communications with MKE, Verdesian indicated that it could find a buyer for MKE's Class A Units at price not to exceed $30.55.[139]

         Verdesian closed the Class P offering on November 30, 2018.[140] Prior to the Offering, Paine Members and Buckeridge together held eighty-five percent of Verdesian's Class A Units.[141] Paine Members purchased 397, 165 Class P Units, Verdesian's management (Grow and Avery) purchased 11, 396 Class P Units, and Buckeridge, indirectly, purchased 5, 201 Class P Units.[142] None of the minority Class A unitholders (that is, the non-Paine-related Class A unitholders) participated in the Class P offering.[143] Given the Class P Units' preference in the event of a sale, Verdesian would have to be sold for $560 million in order for all Class A unitholders to receive proceeds sufficient to fully return their investment.[144]

         H. MKE's Books and Record Demand

         MKE made a books and record demand on Verdesian on October 12, 2017.[145]Verdesian made productions to MKE on November 28, 2017, December 5, 2017, December 7, 2017, and December 22, 2017.[146] These productions included audited financial statements, which had never been provided to MKE (or Bergevin) despite being required by the Operating Agreement.[147] Following the productions, Verdesian continued to fail to provide MKE and Bergevin with audited financial statements going forward; the audited financial statements for 2017 were due to them, per the Operating Agreement, on April 1, 2018.[148]

         I. Procedural History

         MKE and Bergevin filed a Complaint on October 9, 2018. They then filed the First Amended Complaint on January 14, 2019.[149] The Defendants filed a Motion to Dismiss the First Amended Complaint on March 1, 2019. I heard Oral Argument on the Motion to Dismiss on June 17, 2019, and considered the Motion submitted for decision on that date.

         II. ANALYSIS

         The Plaintiffs bring four counts against the Defendants: breach of contract (the Operating Agreement), breach of fiduciary duty, fraud, and aiding and abetting. The Plaintiffs have brought the breach of Operating Agreement and breach of fiduciary duty counts (at least in part) derivatively. The Defendants have moved to dismiss the derivative claims under Court of Chancery Rule 23.1, the fraud claim under Rule 9(b), and all claims under Rule 12(b)(6). The Defendants further argue that many, if not all, of the Plaintiffs' claims are time barred. I analyze the derivative claims below.

         A. Derivative Claims

         The Plaintiffs' derivative claims arise from the SFP acquisition, the QC acquisition, management of Verdesian after those acquisitions (specifically: advance sale of products in 2018 and 2019, changes in accrual practices, overspending on corporate perks, the hiring of certain executives, and changes in financial accounting practices of inventory), and Verdesian's maintenance of the fee agreement with Paine.[150] The Defendants argue that the derivative claims should be dismissed because the Plaintiffs failed to make a demand on the Board when, per the Defendants, it was not futile to do so. The Defendants further contend that many of the derivative claims are stale. The Defendants also argue that all of the derivative claims should be dismissed for failure to state a claim because the complained of actions by the Managers do not violate the Operating Agreement. I find this last argument compelling and accordingly dismiss all the derivate claims brought by the Plaintiffs under Rule 12(b)(6).

         1. Assumption of Demand Futility

         The Defendants have moved to dismiss the Plaintiffs' derivative claims, in part, because the Plaintiffs failed to first make a demand upon the Board of Managers as required by Court of Chancery Rule 23.1.[151] The Plaintiffs pled in their First Amended Complaint that such demand would have been futile.[152] Here five of the seven current Managers are either directors or executives of Paine; two former Managers of Verdesian are or were directors or executives of Paine. Paine's indirect majority ownership of, and contractual fee-generating relationship with, Verdesian are central to the Plaintiffs' derivative claims. The Defendants argue that the Managers involved in the transactions and activity questioned by the Plaintiffs do not face a substantial likelihood of liability and are therefore capable of being impartial. As a result, per the Defendants, the other Managers affiliated with Paine who have since joined the Board can likewise be impartial, despite their business and personal connections to other Paine-affiliated Managers. I need not decide the question of demand futility because the Plaintiffs have not, as explained below, met the comparatively lower standard for failure to state a claim.[153]

         2. The Plaintiffs Have Failed to State Derivative Claims for Which Relief Can be Granted

         In considering a motion to dismiss under Chancery Court Rule 12(b)(6), I assume as true all well-pled allegations of fact in the complaint, and likewise accept as true all inferences that can be reasonably drawn in favor of the Plaintiffs from those well-pled allegations of fact.[154]

         a. The Verdesian Operating Agreement Imposes a Good Faith Standard

         A contractual duty (if any) created by an LLC operating agreement is a matter of contract interpretation and therefore appropriate for review on a motion to dismiss.[155] The Operating Agreement here eschews common-law duties, and imposes contractual duties in their stead. I find that the sole duty imposed on Managers by the Operating Agreement is good faith.

         Verdesian was formed as a Delaware limited liability company and, therefore, pursuant to Delaware law its operating or governing agreement may eliminate the fiduciary duties its managers would otherwise owe.[156] The Operating Agreement contains such a provision, which waives "any fiduciary duty of the Managers, so long as such Person acts in a manner consistent with [the Operating Agreement]."[157]In the place of common law fiduciary duties, the Operating Agreement imposes contractual duties on the Managers.

         The Operating Agreement first states the standards that govern each Manager, who must act in "good faith, in a manner he reasonably believes to be in or not opposed to the best interests of the Company, and with the care that an ordinarily prudent person in a similar position would use under similar circumstances."[158] This tripartite standard, in its first part, imposes a subjective duty not to act in ways inimical to the entity, that is, "good faith." The second requirement provides that the Manager must act "in a manner he reasonably believes to be in or not opposed to the best interests of" Verdesian. This appears to contain good faith within the hedge of reason; that is, Managers must act in objective good faith. Finally, the Manager must employ the "care that an ordinarily prudent person in a similar position would use under similar circumstances." This is a simple negligence standard, which is a higher standard than the common law imposes on a corporate fiduciary. What is the purpose of this unusual recitation of disparate duties, in light of the rejection of common-law duties, and in terms of the contractual standard of review I must apply to managerial actions? Reading the Operating Agreement as a whole, as I must, it becomes clear that the ordinary prudence standard is aspirational; the balance of the Operating Agreement makes manifest that the Managers are only liable for action taken in bad faith.

         The Operating Agreement provides that Managers are explicitly expected and permitted to make conflicted decisions[159] and that the Members "waive any such conflicts of interest.[160] The Operating Agreement then eschews liability for a Manager's action "taken in good faith and reasonably believed to be in or not opposed to the best interests of the Company, or for errors of judgment, neglect or omission."[161] Therefore, while the contractual duty prescribed by the Operating Agreement includes an ordinary prudent person standard, any liability for an action that deviates from an ordinary prudence, but is nonetheless taken in good faith and is reasonably believed to be in or not opposed to the best interest of Verdesian, is exculpated. In this respect the Operating Agreement applies in a manner similar to the common-law duties in a corporation with an exculpation clause. The standards of conduct for a corporate fiduciary are the fundamental duties of loyalty and care, to act only in the corporate interest and in an informed manner. Liability for damages resulting from mere uninformed decisions may be exculpated under the DGCL, [162] however; if so, liability attaches only for breaches of loyalty and for actions taken in bad faith, and not for grossly negligent actions. Similarly, I find, the Operating Agreement here directs the Mangers to operate in good faith and with ordinary care. It effectively exculpates Mangers for conflicted, negligent and other detrimental decisions, however, so long as taken in good faith.

         In determining that good faith is the contractual duty established by the Operating Agreement, I have construed, as I must, the contract as a whole. I note that the Plaintiffs make a facile argument based on their contention that one provision of the Agreement revivifies common-law duties of loyalty and care. They point to the language waiving such duties: "[n]otwithstanding anything contained in this Agreement to the contrary, to the fullest extent permitted under the LLC Law, the Members of Verdesian hereby waive any fiduciary duty of the Managers, so long as such Person acts in a manner consistent with [the Operating Agreement]."[163] As I understand their theory, it is this: the company has performed poorly, raising an inference at least of negligence; negligent conduct is not "consistent" with the standard of care-ordinary prudence-provided for in the Agreement; thus, on a finding that negligence is implied, I must impose the default duties, and the duty of care standard-gross negligence-becomes the standard of review. Moreover, despite the express waiver, conflicted decisions must be afforded entire fairness review.

         The Defendants contend that similar arguments have been rejected by our courts, and point to cases following Norton v. K-Sea Transportation Partners, L.P.[164] I do not find that case dispositive, because the "so long as" clauses there refer to the subjective beliefs of the fiduciary, not (as here) objective consistency with the Agreement. I find, however, that Plaintiff's reading of the Operating Agreement would be nonsensical. It would eviscerate, and make surplus, the good faith standard and conflict-waiver provisions of the Operating Agreement. No reasonable drafter, or reader, would construe an explicit waiver of all duties but good faith-including a waiver of conflict and gross negligence-to be contingent on the actor avoiding simple negligence. The natural reading of the "so long as . . . consistent" language is that the waiver of duties applies to actions taken consistent with those managerial tasks assigned the Managers, and that it is not directed at a standard of care. There is no ambiguity here; only multiple reasonable readings of contract language create ambiguity, [165] and, in the context of the agreement as a whole, the Plaintiffs' reading is not reasonable. I further note that the Plaintiffs appear to concede (in their First Amended Complaint, in briefing, and at Oral Argument) that bad faith is the operative contractual standard.[166] The Plaintiffs' argument, nonetheless, was both clever and contextually based. Bad drafting leads to such arguments.

         Reading the Operating Agreement as a whole, I find that in order to be liable for breach of the contractual duty, a Manager must act in bad faith. That is the standard under which I review the actions of the Managers to ...


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