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Posted: September 17, 2017

Manager of Delaware LLC Must Exercise Rights Granted to it in Good Faith

On September 8, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Marbo Holdings Corp. v. Fulton Capitol, LLC, 2017 NY Slip Op. 31912(U), holding that even where an LLC manager is given discretion to act for its own benefit, it still must exercise that discretion in good faith, explaining:

Marbo asserts that Herzka, Achenbaum and Millgreen Manager breached the implied covenant of good faith and fair dealing inherent to the FCA Operating Agreement. . . . .

As to Herzka, the complaint alleges that he breached the implied covenant of good faith and fair dealing by: 1) causing Fulton to execute the Insider Note; 2) causing Fulton to enter into the Insider Note without Marbo; and 3) causing Fulton to make improper payments and engage in Self-Dealing Transactions. Herzka argues that because the FCA Operating Agreement explicitly grants him discretionary authority, the implied covenant does not apply. However, under Delaware law, even though FCA Operating Agreement may eliminate default fiduciary duties, Herzka remains bound by the implied covenant of good faith and fair dealing. Thus, even though Herzka has broad discretionary authority under the FCA Operating Agreement, that broad discretion must be exercised in good faith. Though Herzka may have had a good faith, independent reasons for executing the Insider Note, i.e., to preserve debt and avoid massive tax liability, Herzka has not demonstrated as a matter of law an independent, good faith reason for his preferential treatment of certain FCA members as direct or indirect beneficiaries of the Insider Note. Accordingly, I deny Herzka’s motion to dismiss Marbo’s third cause of action for breach of the implied covenant of good faith and fair dealing.

(Internal quotations and citations omitted).

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