April 6, 2011
In William Penn, the Delaware Supreme Court considered whether the Delaware Court of Chancery erred when it held that William Lingo and Bryce Lingo (jointly, the “Lingos”), through their ownership in William Penn Partnership, a Delaware limited partnership (“WP LP”), breached their fiduciary duties to the members of Del Bay Associates, LLC, a Delaware limited liability company (“Del Bay”), and awarded attorneys’ fees and costs to the plaintiff members of Del Bay due to the pre-litigation conduct of the Lingos.
Each of Anis K. Saliba (“Saliba”), Rosa Ksebe (“Ksebe”) and Robert Hoyt (“Hoyt”), each acting as trustees of separate trusts, owned a one-sixth interest in Del Bay, and WP LP owned the remaining one-half interest in Del Bay. Del Bay’s sole asset was the Beacon Motel located in Lewes, Delaware. The Lingos were the managers of Del Bay and the managing partners of WP LP, in which they each owned a one-third interest. Del Bay was governed by an operating agreement dated December 23, 1994 (the “Del Bay Agreement”). Under the Del Bay Agreement, all decisions and approvals of the members required a vote of two-thirds of the interests held by the members. The Del Bay Agreement did not expressly modify or eliminate fiduciary duties, and the parties agreed “that the Lingos owe[d] fiduciary duties of loyalty and care to the members of Del Bay.”
In May 2003, the Lingos decided to sell the motel property using the two-thirds vote provision in the Del Bay Agreement. The Lingos offered to sell the motel to J.G. Townsend Jr. & Co. (“JGT”). The Lingos and their family members collectively owned 40% of JGT and constituted a majority of its board of directors. Because Saliba and Ksebe did not want the motel property sold, they offered to purchase the interests of Hoyt and the Lingos in the property. The Lingos nevertheless moved forward with the sale to JGT. Throughout the sale process, the Lingos withheld information, provided misleading information and imposed an artificial deadline on the transaction, which frustrated Saliba’s and Ksebe’s attempt to purchase the property and resulted in the sale of the Beacon Motel to JGT against their wishes.
Saliba and Ksebe filed an action for breach of fiduciary duty against the Lingos. Because the Lingos stood on both sides of the transaction, through their interest in and status as managers of Del Bay and through their interest in JGT, they had the burden of demonstrating the entire fairness of the transaction, consisting of fair dealing and fair price. The Court of Chancery ruled that the Lingos failed to meet their burden of establishing the entire fairness of the sale and, after requesting and receiving an appraisal of the motel property, awarded attorneys’ fees and costs to Saliba and Ksebe.
On review, the Delaware Supreme Court first addressed the Chancellor’s findings regarding fair dealing and affirmed. The Court specifically pointed to the Lingos’ manipulation of the sales process through misrepresentations and repeated material omissions. The Lingos had not satisfied their burden of establishing fair dealing, as they had acted in their own self interest and against the interests of the other members, and “their actions precluded the possibility that the property would be sold pursuant to an open and fair process.”
The Court did not accept that the Lingos had demonstrated entire fairness even though they had shown that the purchase price was a premium to the appraisal price. “[T]he Lingos’ manipulation of the sales process denied Saliba and Ksebe the benefit of knowing the price a fair bidding process might have brought.” There was plenty of evidence to support the Chancellor’s conclusion that the Lingos prevented an open and fair process and “[t]he Lingos’ self interest in the transaction and their domination of the sales process tainted the entire transaction.”
The Court then considered whether the Court of Chancery abused its discretion by awarding attorneys’ fees and costs to Saliba and Ksebe. The Court acknowledged that Saliba and Ksebe were left without a typical damage award because the Court of Chancery’s appraisal of the property was lower than its sale price. The Court held, “The Chancellor’s decision to award attorneys’ fees and costs was well within his discretion and is supported by Delaware law in order to discourage outright acts of disloyalty by fiduciaries.” Without the award of attorneys’ fees and costs, the plaintiffs would have suffered monetary losses in bringing a successful claim for breach of fiduciary duty.