In Stone & Paper Investors, LLC v. Blanch, C.A. No. 2018-0394-PAF (Del. Ch. July 30, 2021), Vice Chancellor Paul A. Fioravanti, Jr. recounted a scheme by two business partners to induce a multi-million dollar investment in a new stone-based paper venture and then, when that venture failed, to drain the invested funds for personal gain in a series of undisclosed transactions. The court articulates the well-known principle that, under Delaware law, absent an unambiguous waiver, fiduciary duties are imposed on limited liability company managers by default. The court observed that the LLC agreement at issue did, in fact, limit personal liability; however, liability was not eliminated for “acts or omissions in bad faith or involving intentional misconduct or knowing violation of law or personal financial benefit to which the manager is not entitled.” After an extensive analysis in the Court’s 100+ page decision, it ultimately ruled that the breaches of fiduciary duty constituted intentional misconduct.
By way of background, in 2014, business partners Diamond and Carter formed Stone & Paper Investors, LLC to invest $3.5 million in Clovis Holdings, LLC, a new venture formed and managed by their colleague, Skinner – who Diamond and Carter had come to regard as family over their years together – and a new associate, Blanch. Clovis was formed to acquire ViaStone, a business with rights to distribute paper products made from stone. Stone & Paper’s investment represented the culmination of a plan devised by Skinner and Blanch to squeeze profits from Skinner’s relationship with Diamond and Carter. Shortly after forming Clovis, both Skinner and Blanch began drawing a salary of $20,000 per month, which they characterized as management fees or consulting fees. Diamond gave permission for Skinner to draw a salary for his management services, but did not approve any payments to Blanch or his associates. Skinner and Blanch nevertheless wired equivalent monthly payments to Blanch in the guise of “consulting” fees to one of his companies.
Throughout 2014 and 2015, Skinner and Blanch devoted Clovis’s resources to efforts to acquire ViaStone, as required under the LLC agreement. However, late 2015, they had abandoned that effort and began to drain Clovis’s accounts, diverting its funds to alternative investments and to pay their personal expenses. By May 2018, when this scheme was uncovered by an accountant, Skinner and Blanch had transferred $2.5 million from Clovis to themselves or their affiliates. (Clovis was left with only $6,500 in its accounts.) Stone & Paper filed suit against Skinner and Blanch, alleging that they had fraudulently induced Stone & Paper to invest in Clovis and then misappropriated the capital for their own personal use, in violation of both the LLC operating agreement and their fiduciary duties to the company. Skinner and Blanch directed Clovis to assert counterclaims alleging that Stone & Paper also breached the operating agreement and misappropriated company funds by causing Clovis to pay more than $100,000 in unauthorized credit card charges.
Ultimately, the Court found in favor of the plaintiff on the core contractual and fiduciary claims. The Court held that the managers’ self-dealing constituted a breach of the operating agreement and a breach of the managers’ duty of loyalty, and that their deceitful attempts to have the payments to themselves categorized as “loans” constituted fraudulent concealment of such misconduct. The plaintiff was awarded over $2 million in damages in connection with the successful prosecution of its claims.
