Auriga Capital Corp. v. Gatz Properties, LLC

OPINION

I. Introduction

The manager of an LLC and his family acquired majority voting control over both classes of the LLC’s equity during the course of its operations and thereby held a veto over any strategic option. The LLC was an unusual one that held a long-term lease on a valuable property owned by the manager and his family. The leasehold allowed the LLC to operate a golf course on the property.

The LLC intended to act as a passive operator by subleasing the golf course for operation by a large golf management corporation. A lucrative sublease to that effect was entered in 1998. The golf management corporation, however, was purchased early in the term of the sublease *842by owners that sought to consolidate its operations. Rather than invest in the leased property and put its Ml effort into making the course a success, the management corporation took short cuts, let maintenance slip, and evidenced a disinterest in the property. By as early as 2004, it was clear to the manager that the golf management corporation would not renew its lease.

This did not make the manager upset. The LLC and its investors had invested heavily in the property, building on it a first-rate Robert Trent Jones, Jr. — designed golf course and a clubhouse. If the manager and his family could get rid of the investors in the LLC, they would have an improved property, which they had reason to believe could be more valuable as a residential community. Knowing that the golf management corporation would likely not renew its sublease, the manager failed to take any steps at all to find a new strategic option for the LLC that would protect the LLC’s investors. Thus, the manager did not search for a replacement management corporation, explore whether the LLC itself could manage the golf course profitably, or undertake to search for a buyer for the LLC. Indeed, when a credible buyer for the LLC came forward on its own and expressed a serious interest, the manager failed to provide that buyer with the due diligence that a motivated seller would typically provide to a possible buyer. Even worse, the manager did all it could to discourage a good bid, frustrating and misleading the interested buyer.

The manager then sought to exploit the opportunity provided by the buyer’s emergence to make low-ball bids to the other investors in the LLC on the basis of materially misleading information. Among other failures, the manager made an offer at $5.6 million for the LLC without telling the investors that the buyer had expressed a willingness to discuss a price north of $6 million. The minority investors refused the manager’s offer. When the minority investors asked the manager to go back and negotiate a higher price with the potential buyer, the manager refused.

This refusal reflected the reality that the manager and his family were never willing to sell the LLC. Nor did they desire to find a strategic option for the LLC that would allow it to operate profitably for the benefit of the minority investors. The manager and his family wanted to be rid of the minority investors, whom they had come to regard as troublesome bothers.

Using the coming expiration of the golf management corporation’s sublease as leverage, the manager eventually conducted a sham auction to sell the LLC. The auction had all the look and feel of a distress sale, but without any of the cheap nostalgic charm of the old unclaimed freight tv commercials. Ridiculous postage stamp-sized ads were published and unsolicited junk mail was sent out. Absent was any serious marketing to a targeted group of golf course operators by a responsible, mature, respected broker on the basis of solid due diligence materials. No effort was made to provide interested buyers with a basis to assume the existing debt position of the LLC if they met certain borrower responsibility criteria. Instead, interested buyers were told that they would have to secure the bank’s consent but were given an unrealistic amount of time to do so. Worst of all, interested buyers could take no comfort in the fact that the manager — who controlled the majority of the voting power of the LLC— was committed to selling the LLC to the highest bidder, as the bidding materials made clear that the manager was also planning to bid and at the same time re*843served the right to cancel the auction for any reason.

When the results of this incompetent marketing process were known and the auctioneer knew that no one other than the manager was going to bid, the auctioneer told the manager that fact. The manager then won with a bid of $50,000 in excess of the LLC’s debt, on which the manager was already a guarantor. Only $22,777 of the bid went to the minority investors. For his services in running this ineffective process, the auctioneer received a fee of $80,000, which was greater than the cash component of the winning bid. Despite now claiming that the LLC could not run a golf course profitably and pay off the mortgage on the property, the manager has run the course himself since the auction and is paying the debt.

A group of minority investors have sued for damages, arguing the manager breached his contractual and fiduciary duties through this course of conduct. The manager, after originally disclaiming that he owed a fiduciary duty of loyalty to the minority, now rests his defense on two primary grounds. The first is that the manager and his family were able to veto any option for the LLC as their right as members. As a result, they could properly use a chokehold over the LLC to pursue their own interests and the minority would have to five with the consequences of then-freedom of action. The second defense is that by the time of the auction, the LLC was valueless.

In this post-trial decision, I find for the plaintiffs. For reasons discussed in the opinion, I explain that the LLC agreement here does not displace the traditional duties of loyalty and care that are owed by managers of Delaware LLCs to their investors in the absence of a contractual provision waiving or modifying those duties. The Delaware Limited Liability Company Act (the “LLC Act”) explicitly applies equity as a default1 and our Supreme Court, and this court, have consistently held that default fiduciary duties apply to those managers of alternative entities who would qualify as fiduciaries under traditional equitable principles, including managers of LLCs. Here, the LLC agreement makes clear that the manager could only enter into a self-dealing transaction, such as its purchase of the LLC, if it proves that the terms were fair. In other words, the LLC agreement essentially incorporates a core element of the traditional fiduciary duty of loyalty. Not only that, the LLC agreement’s exculpatory provision makes clear that the manager is not exculpated for bad faith action, willful misconduct, or even grossly negligent action, ie., a breach of the duty of care.

The manager’s course of conduct here breaches both his contractual and fiduciary duties. Using his control over the LLC, the manager took steps to deliver the LLC to himself and his family on unfair terms. When the LLC had a good cushion of cash from the remaining years of the lease, it was in a good position to take the time needed to responsibly identify another strategic option to generate value for the LLC and all of its investors. Although the economy was weakening, the golf course was well-designed and located in a community that is a good one for the profitable operation of a golf course. With a minimally competent and loyal fiduciary at the helm, the LLC could have charted a course that would have delivered real value to its investors. Had the manager acted properly, for example, the buyer he rebuffed could have entered into a new lease or purchased the LLC on terms that would have at least gotten the LLC’s mi*844nority investors back what they had put in and some modest return.

The manager himself is the one who has created evidentiary doubt about the LLC’s value by failing to pursue any strategic option for the LLC in a timely fashion because he wished to squeeze out the minority investors. The manager’s defense that his voting power gave him a license to exploit the minority fundamentally misunderstands Delaware law. The manager was free not to vote his membership interest for a sale. But he was not free to create a situation of distress by failing to cause the LLC to explore its market alternatives and then to buy the LLC for a nominal price. The purpose of the duty of loyalty is in large measure to prevent the exploitation by a fiduciary of his self-interest to the disadvantage of the minority. The fair price requirement of that duty, which is incorporated in the LLC agreement here, makes sure that if the conflicted fiduciary engages in self-dealing, he pays a price that is as much as an arms-length purchaser would pay.

The manager is in no position to take refuge in uncertainties he himself created by his own breaches of duty. He himself is responsible for the distress sale conducted in 2009. Had he acted properly, the LLC could have secured a strategic alternative in 2007, when it was in a stronger position and the economy was too. A transaction at that time would have likely yielded proceeds for the minority of a return of their invested capital plus a 10% total return, an amount which reflects the reality that the manager’s desire to retain control of the LLC would have pushed up the pricing of the transaction due to his incentive to top any third-party bidder. I therefore enter a remedy to that effect, taking into account the distribution received by the plaintiffs at the auction, and add interest, compounded monthly at the legal rate, from that time period. Because the manager has made this litigation far more cumbersome and inefficient than it should have been by advancing certain frivolous arguments, I award the plaintiffs one-half of their reasonable attorneys’ fees and costs. This award is justified under the bad faith exception to the American Rule, and also ensures that the disloyal manager is not rewarded for making it unduly expensive for the minority investors to pursue their legitimate claims to redress his serious infidelity. I do not award full-fee shifting because I have not adopted all of the plaintiffs’ arguments and because the manager’s litigation conduct, while sanctionably disappointing, was not so egregious as to justify that result.

II. Basic Factual Background

For the sake of clarity, I will make many of the key factual determinations in the course of analyzing the claims. To provide a framework for that integrated analysis, I set forth some of the key foundational facts.

A. The Parties

The LLC in this case is Peconic Bay, LLC (“Peconic Bay” or the “Company”). The “Manager” of Peconic Bay is defendant Gatz Properties, LLC, an entity which is itself managed, controlled, and partially owned by defendant William Gatz. Because William Gatz as a person was the sole actor on behalf of Gatz Properties at all times, I typically refer to “his” actions or “him,” because that is what best tracks how things happened.

The plaintiffs in this case are certain minority investors in Peconic Bay: Auriga Capital Corporation, Paul Rooney, Hakan Sokmenseur, Don Kyle, Ivan Benjamin, *845and Glenn Morse.2 William Carr is the founder and principal of Auriga, which encouraged the other plaintiffs to invest in Peconic Bay.3 For the sake of clarity, I typically refer to the plaintiffs as the “Minority Members.”

B. The Formation Of Peconic Bay

In 1997, Gatz, through Gatz Properties, and Carr, through Auriga, formed Peconic Bay for the purpose of holding a long-term leasehold in a property owned by the Gatz family (the “Property”). The idea was to develop a golf course on the Property, which was farmland in Long Island that had been in the Gatz family since the 1950s. Gatz came to this idea from reading a report authored by the National Golf Foundation predicting a boom in demand for golf courses in Long Island and opining that the area suffered a shortage of courses to meet current and future demand. He thus set out to raise cash for the construction of a golf course on the Property, and approached a local bank to gauge its interest in financing the project. The bank then referred Gatz to Carr, who had worked with the bank on a previous occasion to secure the financing for another golf course in Long Island. On this advice, Gatz reached out to Carr, and Carr agreed to commit Auriga to help finance and develop the course. Auriga agreed to assume responsibility for securing debt financing and raising additional equity, as well as overseeing the construction of the course, which would be named Long Island National Golf Course (the “Course”).

Financing was located and contracts were drafted to create the structures that would reflect the parties’ business dealings, including an entity — ie., Peconic Bay — in which the equity investors could hold capital. Peconic Bay took out a note worth approximately $6 million to finance the Course’s construction (the “Note”), which was collateralized by the Property. The Gatz family formed Gatz Properties to hold title to the Property, which was then leased to Peconic Bay under a “Ground Lease,” dated January 1,1998.4

The Ground Lease set an initial term of 40 years, with a renewal option for two 10-year extensions, which were exercisable by Peconic Bay.5 The terms of the Ground Lease also restricted the Property’s use to a high-end daily fee public golf course.6 Thus, absent an agreement between Pe-conic Bay and the Gatz family, the Property was to be locked up for use by Peconic Bay as a golf course until 2038.

C. Peconic Bay’s Membership

Peconic Bay in turn was governed by an Amended and Restated Limited Liability Company Agreement (the “LLC Agree*846ment”).7 The LLC Agreement created Class A and Class B membership interests. The Class A interests comprised 86.75% of Peconic Bay’s membership, and the Class B, 18.25%.

From the inception, Gatz Properties controlled the Class A vote, as it held 85.07% of the Class A interests. The rest of the Class A interests were held by Auriga and Paul Rooney.

From the time the Class B shares were first issued in 1998 until 2001, the Class B interests were more diversely held. The Gatz family and their affiliates (together with Gatz Properties, the “Gatz Members”) held 39.6% of the Class B interests. The Minority Members, including non-party Hartnett, held 60.3%. But, in 2001, the Gatz Members acquired control of the Class B interests through questionable purchases of certain minority investors’ Class B shares.8

Obtaining control of the Class B interests was important. Under the LLC Agreement, the Manager was forbidden from making a “major decision affecting the Company” without “Majority Approval,” 9 which was defined as the vote of 66 2/3% of the Class A interests and 51% of the Class B interests.10 Thus, control of the Class A and Class B interests gave the Gatz Members veto power over many of Peconic Bay’s key strategic options, including, most relevantly, the decision to sell the Company;11 enter into a long-term sublease with a golf course operator;12 or “otherwise deal with the [Course] in such manner as may be determined by Majority Approval of the Members,”13 such as choosing to run the Course itself. The Gatz Members’ interests in Peconic Bay were aligned and they voted their membership units as a bloc at all relevant times in this dispute.

The LLC Agreement designated Gatz Properties as Manager. Gatz, as manager of Gatz Properties, was given the “power, on behalf of [Peconic Bay], to do all things necessary or convenient to carry out the day-to-day operation of the Company.”14 But, the role of the Manager was intended to be a limited, albeit important, one, and Gatz received no management fee in connection with his services as a reflection of this understanding. The Gatzes were instead to be compensated in two other ways: (1) through their interests as members of Peconic Bay; and (2) through rent for the Property.

The Manager’s limited operational role was attributable to Peconic Bay’s initial business model. Under the LLC Agreement, Peconic Bay was initially structured as a passive “black box”15 entity that would be a conduit for cash flows rather than actually operate the course itself. The Course was instead to be run and managed by a third-party operator. The Manager would then collect rent from that *847operator, make Peconic Bay’s required debt payments on the Note, and then distribute the remaining cash surplus to the investors according to a distribution scheme set forth in the LLC Agreement, which called for payment of 95% of all cash distributions to go to the Class B members until they received a full return of their investment. After that point, the distributions were to be made pro rata.16

D. Peconic Bay Subleases The Property To American Golf

To accomplish this business purpose, Carr brought in American Golf Corporation (“American Golf’), which was at the time one of the largest golf course operators in the country. On March 31, 1998, Peconic Bay entered into a sublease with American Golf (the “Sublease”).17 The Sublease was for a term of 35 years, but it gave American Golf an early termination right after the tenth full year of operation. American Golf could terminate the Sublease at its discretion and without penalty by notifying Peconic Bay within 30 days of January 1, 2010.

Peconic Bay and American Golf had high expectations for the Course’s financial success. The Course was designed by a well-known golf course architect, Robert Trent Jones, Jr., and it was located in an affluent, rural part of Long Island that was described by Gatz’s defense expert as “an ideal location for an affordable upscale golf facility.”18

The terms of the Sublease governing rent payments reflected this initial optimism. American Golf agreed to pay “Minimum Rent” according to a fixed schedule, starting at $700,000, and rising annually by $100,000 until leveling out at $1 million per year, beginning in 2003.19 In addition to Minimum Rent, American Golf had to pay “Ground Lease Rent” equal to 5% of its revenue from operations. Although this rent would be payable to Peconic Bay, it would pass directly through to Gatz Properties as rent under the Ground Lease between Peconic Bay and Gatz Properties.20

E. A Preview Of What Happened Next

This is where events took a turn for the worse. As I will discuss in more detail later, American Golf never operated the Course at a profit, and later let the Course fall into disrepair. Gatz knew in 2004 or latest 2005 that American Golf would exercise its early termination option in 2010, yet he did nothing to plan for American Golfs exit. Rather, Gatz made a series of decisions that placed Peconic Bay in an economically vulnerable position. Once Peconic Bay was in this vulnerable state, and in the midst of a down economy, Gatz decided to put Peconic Bay on the auction block without engaging a broker to market Peconic Bay to golf course managers or owners (the “Auction”). Gatz, on behalf of Gatz Properties, was the only bidder to show up. Knowing this fact before formulating his bid, Gatz purchased Peconic Bay for a nominal value over the debt, and merged Peconic Bay into Gatz Properties (the “Merger”). Gatz now operates the Course himself through a newly created entity wholly owned by Gatz Properties and seems to be paying the debt from the cash flow of the golf course operations.

*848III. The Parties’ Contentions

The first amended verified complaint pleads five counts. Counts I, II and III are related. Counts I and II allege that Gatz Properties and Gatz, respectively, breached their fiduciary duties to Peconic Bay and the Minority Members. Count III alleges that Gatz Properties breached its contractual duties under the LLC Agreement.21 These three counts center on the squeeze out of the Minority Members. Specifically, the Minority Members claim that Gatz breached the fiduciary duties and contractual duties owed to Pe-conic Bay’s Minority Members by engaging in a “protracted course of self-interested conduct conceived and implemented in bad faith” for the purpose of eliminating the Minority Members’ interest.22 The Minority Members contend that Gatz was motivated to oust the Minority Members in order to realize the upside in value that would result from eliminating Peconic Bay’s long-term leasehold interest in the Property. Such actions include Gatz’s failure to take any steps to evaluate strategic options for Peconic Bay based on known business realities and his discouragement of a potential third-party buyer for the Company, which entertained a willingness to make an offer that would have delivered to the Minority Members a full return of their capital investment. What’s more, the Minority Members continue, Gatz used the leverage obtained from his own bad faith breaches of loyalty to make coercive buyout offers to the Minority Members, and finally to acquire Peconic Bay through a sham auction process at an unfairly low price.23

For his part, Gatz maintains that he acted reasonably and in good faith throughout the entirety of events described by the Minority Members. Primarily, Gatz grounds his defense in the argument that Gatz Properties acquired Peconic Bay for a fair price because the assets of Peconic Bay were worth less than its debt and thus the entity was insolvent. Although by the end of the trial, Gatz admitted that he and his family were never interested in selling their membership interests, he seeks to use that fact as a defensive bulwark, contending that he and his family were entitled to vote their economic interest against selling Peconic Bay to a third-party buyer and to choke off the LLC’s pursuit of any other strategic options. Throughout much of the litigation, Gatz took the view that he either owed no fiduciary duties at all;24 that if these duties existed, they allowed him to engage in a self-dealing transaction subject only to a hands-off business judgment rule review,25 and that even if a more intensive review applied, Gatz ran a thorough, professional auction upon credible independent advice, thus satisfying any fairness burden.26 As these arguments emerged at trial as having no genuine basis in law or *849fact, Gatz became more nuanced and has focused on other arguments. Finally, Gatz says, even if his actions did constitute a breach of his fiduciary duties, his actions were supposedly taken in good faith and with due care, and thus he cannot be held liable due to the terms of the exculpation clause of the LLC Agreement.

Now that we have covered the basic premise of the Minority Members’ claims and Gatz’s arguments in response, I will consider the provisions of the LLC Agreement that govern Gatz’s actions giving rise to this dispute, and assess the effect that those provisions have on the fiduciary duties owed by Gatz to the Minority Members.

IV. Analysis

A. What Duties Did Gatz Owe To The Members Of Peconic Bay?

At points in this litigation, Gatz has argued that his actions were not subject to any fiduciary duty analysis because the LLC Agreement of Peconic Bay displaced any role for the use of equitable principles in constraining the LLC’s Manager. As I next explain, that is not true.

The Delaware LLC Act starts with the explicit premise that “equity” governs any case not explicitly covered by the Act.27 But the Act lets contracting parties modify or even eliminate any equitable fiduciary duties, a more expansive constriction than is allowed in the case of corporations.28 For that reason, in the LLC context, it is typically the case that the evaluation of fiduciary duty claims cannot occur without a close examination of the LLC agreement itself, which often tailors the traditional fiduciary duties to address the specific relationship of the contracting parties.29

I discuss these general principles and their more specific application to this case next.

1. Default Fiduciary Duties Do Exist In The LLC Context

The Delaware LLC Act does not plainly state that the traditional fiduciary duties of loyalty and care apply by default as to managers or members of a limited liability company. In that respect, of course, the LLC Act is not different than the DGCL, which does not do that either. In fact, the absence of explicitness in the DGCL inspired the case of Schnell v. Chris-Craft.30 Arguing that the then newly-revised DGCL was a domain unto itself, and that compliance with its terms was sufficient to discharge any obligation owed by the directors to the stockholders, the defendant corporation in that case won on that theory at the Court of Chancery level.31 But our Supreme Court reversed and made emphatic that the new DGCL was to be read in concert with equitable fiduciary duties just as had always been the case, stating famously that “inequitable action does not become legally permissible simply because it is legally possible.”32

The LLC Act is more explicit than the DGCL in making the equitable overlay mandatory. Specifically, § 18-1104 of the LLC Act provides that “[i]n any case not provided for in this chapter, the rules of law and equity ... shall govern.”33 In *850this way, the LLC Act provides for a construct similar to that which is used in the corporate context. But unlike in the corporate context, the rules of equity apply in the LLC context by statutory mandate, creating an even stronger justification for application of fiduciary duties grounded in equity to managers of LLCs to the extent that such duties have not been altered or eliminated under the relevant LLC agreement.34

It seems obvious that, under traditional principles of equity, a manager of an LLC would qualify as a fiduciary of that LLC and its members. Under Delaware law, “[a] fiduciary relationship is a situation where one person reposes special trust in and reliance on the judgment of another or where a special duty exists on the part of one person to protect the interests of another.”35 Corporate directors, general partners and trustees are analogous examples of those who Delaware law has determined owe a “special duty.”36 Equity distinguishes fiduciary relationships from straightforward commercial arrangements where there is no expectation that one party will act in the interests of the other.37

The manager of an LLC — which is in plain words a limited liability “company” having many of the features of a corporation — easily fits the definition of a fiduciary. The manager of an LLC has more *851than an arms-length, contractual relationship with the members of the LLC.38 Rather, the manager is vested with discretionary power to manage the business of the LLC.39

Thus, because the LLC Act provides for principles of equity to apply, because LLC managers are clearly fiduciaries, and because fiduciaries owe the fiduciary duties of loyalty and care, the LLC Act starts with the default that managers of LLCs owe enforceable fiduciary duties.

This reading of the LLC Act is confirmed by the Act’s own history. Before 2004, § 18-1101(c) of the LLC Act provided that fiduciary duties, to the extent they existed, could only be “expanded or restricted” by the LLC agreement.40 Following our Supreme Court’s holding in Gotham Partners,41 which questioned whether default fiduciary duties could be fully eliminated in the limited partnership context when faced with similar statutory language and also affirmed our law’s commitment to protecting investors who have not explicitly agreed to waive their fiduciaries’ duties and therefore expect their fiduciaries to act in accordance with their interests,42 the General Assembly amended not only the Delaware Revised Limited Uniform Partnership Act (“DRULPA”),43 but also the LLC Act to permit the “elimi-natfion]” of default fiduciary duties in an LLC agreement.44 At the same time, the General Assembly added a provision to the LLC Act (the current § 18-1101(e)) that permits full contractual exculpation for breaches of fiduciary and contractual duties, except for the implied contractual covenant of good faith and fair dealing.45

If the equity backdrop I just discussed did not apply to LLCs, then the 2004 “Elimination Amendment” would have been logically done differently. Why is this so? Because the Amendment would have instead said something like: “The managers, members, and other persons of the LLC shall owe no duties of any kind to the LLC and its members except as set forth in this statute and the LLC agreement.”46 Instead, the Amendment only *852made clear that an LLC agreement could, if the parties so chose, “eliminat[e]” default duties altogether, thus according full weight to the statutory policy in favor of giving “maximum effect to the principle of freedom of contract and to the enforceability of [LLC] agreements.” 47 The General Assembly left in place the explicit equitable default in § 18-1104 of the Act. Moreover, why would the General Assembly amend the LLC Act to provide for the elimination of (and the exculpation for) “something” if there were no “something” to eliminate (or exculpate) in the first place?48 The fact that the legislature enacted these liability-limiting measures against the backdrop of case law holding that default fiduciary duties did apply in the LLC context, and seemed to have accepted the central thrust of those decisions to be correct, provides further weight to the position that default fiduciary duties do apply in the LLC context to the extent they are not contractually altered.49

Thus, our cases have to date come to the following place based on the statute. The statute incorporates equitable principles. Those principles view the manager of an LLC as a fiduciary and subject the manager as a default principle to the core fiduciary duties of loyalty and care. But, the statute allows the parties to an LLC agreement to entirely supplant those default principles or to modify them in part.50 Where the parties have clearly supplanted default principles in full, we give effect to the parties’ contract choice.51 Where the parties have clearly supplanted default principles in part, we give effect to their contract choice.52 But, where the core default fiduciary duties have not been supplanted by contract, they exist as the LLC statute itself contemplates.53

*853There are two issues that would arise if the equitable background explicitly contained in the statute were to be judicially excised now. The first is that those who crafted LLC agreements in reliance on equitable defaults that supply a predictable structure for assessing whether a business fiduciary has met his obligations to the entity and its investors will have their expectations disrupted. The equitable context in which the contract’s specific terms were to be read will be eradicated, rendering the resulting terms shapeless and more uncertain. The fact that the implied covenant of good faith and fair dealing would remain extant would do little to cure this loss.

The common law fiduciary duties that were developed to address those who manage business entities were, as the implied covenant, an equitable gap-filler. If, rather than well thought out fiduciary duty principles, the implied covenant is to be used as the sole default principle of equity, then the risk is that the certainty of contract law itself will be undermined. The implied covenant has rightly been narrowly interpreted by our Supreme Court to apply only “when the express terms of the contract indicate that the parties would have agreed to the obligation had they negotiated the issue.”54 The implied covenant is to be used “cautious[ly]” and does not apply to situations that could be anticipated,55 which is a real problem in the business context, because fiduciary duty review typically addresses actions that are anticipated and permissible under the express terms of the contract, but where there is a potential for managerial abuse.56 For these reasons, the implied covenant is not a tool that is designed to provide a framework to govern the discretionary actions of business managers acting under a broad enabling framework like a bare-bones LLC agreement.57 In fact, if the implied covenant were used in that manner, the room for subjective judicial oversight could be expanded in an inefficient *854way. The default principles that apply in the fiduciary duty context of business entities are carefully tailored to avoid judicial second-guessing.58 A generalized “fairness” inquiry under the guise of an “implied covenant” review is an invitation to, at best, reinvent what already exists in another less candid guise,59 or worse, to inject unpredictability into both entity and contract law, by untethering judicial review from the well-understood frameworks that traditionally apply in those domains.60

The second problem is a related one, which is that a judicial eradication of the explicit equity overlay in the LLC Act could tend to erode our state’s credibility with investors in Delaware entities. To have told the investing public that the law of equity would apply if the LLC statute did not speak to the question at issue, and to have managers of LLCs easily qualify as fiduciaries under traditional and settled principles of equity law in Delaware, and then to say that LLC agreements could “expan[d] or restric[t] or eliminat[e]” these fiduciary duties, would lead any reasonable investor to conclude the following; the managers of the Delaware LLC in which I am investing owe me the fiduciary duties of loyalty and care except to the extent the agreement “expand[s],” “restricts],” or “eliminate[s]” these duties.61 That expectation has been reinforced by our Supreme Court in decisions like William Penn Partnership v. Saliba, where it stated that “[t]he parties here agree that managers of a Delaware [LLC] owe traditional fiduciary duties of loyalty and care to the members of the LLC, unless the parties expressly modify or eliminate those duties in an operating agreement;”62 in a consistent line of decisions by this court affirming similar principles;63 in the reasoning of *855Gotham Partners in the analogous limited partnership context;64 and culminating with legislative reinforcement in the 2004 Elimination Amendment inspired by Gotham Partners that allowed LLC agreements to eliminate fiduciary duties altogether. Reasonable investors in Delaware LLCs would, one senses, understand even more clearly after the Elimination Amendment that they were protected by fiduciary duly review unless the LLC agreement provided to the contrary, because they would of course think that there would have been no need for our General Assembly to pass a statute authorizing the elimination of something that did not exist at all.65

*856Reasonable minds can debate whether it would be wise for the General Assembly to create a business entity in which the managers owe the investors no duties at all except as set forth in the statute and the governing agreement. Perhaps it would be, perhaps it would not. That is a policy judgment for the General Assembly. What seems certain is that the General Assembly, and the organs of the Bar who propose alteration of the statutes to them, know how to draft a clear statute to that effect and have yet to do so. The current LLC Act is quite different and promises investors that equity will provide the important default protections it always has, absent a contractual choice to tailor or eliminate that protection. Changing that promise is a job for the General Assembly, not this court.

With that statement of the law in mind, let us turn to the relevant terms of Peconic Bay’s LLC Agreement.

2. The Relevant Provisions Of The LLC Agreement

I note at the outset that the Peconic Bay LLC Agreement contains no general provision stating that the only duties owed by the manager to the LLC and its investors are set forth in the Agreement itself. Thus, before taking into account the existence of an exculpatory provision, the LLC Agreement does not displace the traditional fiduciary duties of loyalty and care owed to the Company and its members by Gatz Properties66 and by Gatz, in his capacity as the manager of Gatz Properties.67 And although LLC agreements may displace fiduciary duties altogether or tailor their application, by substituting a different form of review, here § 15 of the LLC Agreement contains a clause reaffirming that a form akin to entire fairness review will apply to “Agreements with Affiliates,” a group which includes Gatz Properties, that are not approved by a *857majority of the unaffiliated members’ vote. In relevant part, § 15 provides:

15. Neither the Manager nor any other Member shall be entitled to cause the Company to enter ... into any additional agreements with affiliates on terms and conditions which are less favorable to the Company than the terms and conditions of similar agreements which could be entered into with arms-length third parties, without the consent of a majority of the non-affiliated Members (such majority to be deemed to be the holders of 66-2/3% of all Interests which are not held by affiliates of the person or entity that would be a party to the proposed agreement).68

This court has interpreted similar contractual language supplying an “arm’s length terms and conditions” standard for reviewing self-dealing transactions, and has read it as imposing the equivalent of the substantive aspect of entire fairness review, commonly referred to as the “fair price” prong.69 This interpretation is confirmed by the defendants’ own understanding of § 15 as requiring that Gatz pay a “fair price” to the Minority Members if Gatz were to acquire Peconic Bay, as reflected by a letter sent from Gatz’s counsel to the Minority Members.70

Importantly, however, entire fairness review’s procedural inquiry into “fair dealing” does not completely fall away, because the extent to which the process leading to the self-dealing either replicated or deviated from the behavior one would expect in an arms-length deal bears importantly on the price determination.71 Where a self-dealing transaction does not result from real bargaining, where there has been no real market test, and where the self-interested party’s own conduct may have compromised the value of the asset in question or the information available to assess that value, these factors bear directly on whether the interested party can show that it paid a fair price. Thus, as written, § 15 permits Affiliate Agreements without the approval of the majority of the Minority Members, subject to a proviso that places the burden on the Manager (here, Gatz) to show that the price term of the Affiliate Agreement was the equivalent of one in an agreement negotiated at arms-length. But, “[ijmplicit in this proviso is the requirement that the [defendants] undertake some effort to determine the price at which a transaction with [Gatz] could be effected through a deal with a third party.”72 In other words, in order to take cover under the contractual safe harbor of *858§ 15, Gatz bears the burden to show that he paid a fair price to acquire Peconic Bay, a conclusion that must be supported by a showing that he performed, in good faith, a responsible examination of what a third-party buyer would pay for the Company. As I shall soon discuss, the record convinces me that Gatz has failed to meet the terms of this proviso.

Because the terms of § 15 only apply to Affiliate Agreements, and because these terms address the duty owed by Gatz to the Minority Members as to Affiliate Agreements, they distill the traditional fiduciary duties as to the portion of the Minority Members’ claims that relates to the fairness of the Auction and Merger into a burden to prove the substantive fairness of the economic outcome. That is, § 15 distills the duty to prove the fairness of a self-dealing transaction to its economic essence.73 As to the rest of Gatz’s conduct giving rise to this dispute — such as the failure to take steps to address the impending American Golf Sublease termination and the failure to negotiate with an interested buyer in good faith — it is governed by traditional fiduciary duties of loyalty and care because the LLC Agreement does not alter them.

The LLC Agreement does, however, contain an exculpatory provision, which is functionally akin to an exculpatory charter provision authorized by 8 Del. C. § 102(b)(7). In relevant part, § 16, governing “Exculpation and Indemnification,” reads as follows:

16. No Covered Person [defined to include “the Members, Manager and the officers, equity holders, partners and employees of each of the foregoing”] shall be liable to the Company, [or] any other Covered Person or any other person or entity who has an interest in 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, in connection with the formation of the Company or 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, except that a Covered Person shall be liable for any such loss, damage or claim incurred by reason of such Covered Person’s gross negligence, willful misconduct or willful misrepresentation.74

Thus, by the terms of § 16, Gatz may escape monetary liability for a breach of his default fiduciary duties if he can prove that his fiduciary breach was not: (1) in bad faith, or the result of (2) gross negligence, (3) willful misconduct or (4) willful misrepresentation. Also, in order to fall within the terms of § 16, a Covered Person must first be acting “on behalf of the company” and “in a manner reasonably believed to be within the scope of authority conferred on [him] by [the LLC Agreement].”75 Thus, § 16 only insulates a Covered Person from liability for authorized actions; that is, actions taken in accordance with the other stand-alone provisions of the LLC Agreement. So, to the extent that the Auction and the follow-on Merger were effected in violation of the arms-length mandate set forth in § 15 (which, as I shall find, they were), such a breach would not be exculpated by § 16. Moreover, even if I were to find that § 16 operated to limit Gatz’s liability for actions taken in contravention of the terms of § 15, I find that his actions related to and *859in consummation of the Auction and follow-on Merger were taken in bad faith such that he would not be entitled to exculpation anyway.

Notably, the exculpation standard set forth in § 16 is both stronger and weaker than its corporate analogue in terms of limitation of liability. Whereas § 102(b)(7) authorizes a charter provision to exculpate a violation of the directors’ duty of care (i.e., gross negligence),76 here § 16 does not exculpate for a breach of the duty of care. Gatz may still be hable for gross negligence. But, whereas § 102(b)(7) does not authorize exculpation for breaches of corporate directors’ duty of loyalty, here § 16 does exculpate Gatz from liability for a breach of his fiduciary duty of loyalty (outside the context governed by § 15) to the extent he shows that the breach was not committed in bad faith or through willful misconduct.

I now analyze the Minority Members’ claim that Gatz breached his fiduciary and contractual duties as the Manager of Pe-conic Bay. Specifically, I conclude that Gatz breached his fiduciary duties of loyalty and care, and the fair price requirement of § 15. He has not proven that these breaches are exculpated, and regardless of whether the Minority Members had the burden to prove his state of mind (which they do not), he acted in bad faith and with gross negligence. I detail the reasons for those conclusions now.

B. Did Gatz Breach His Contractual And Fiduciary Duties To The Minority Members?

The record convinces me that Gatz pursued a bad faith course of conduct to enrich himself and his family -without any regard for the interests of Peconic Bay or its Minority Members. His breaches may be summarized as follows: (1) failing to take any steps for five years to address in good faith the expected loss of American Golf as an operator; (2) turning away a responsible bidder which could have paid a price beneficial to the LLC and its investors in that capacity; (8) using the leverage obtained by his own loyalty breaches to play “hardball” with the Minority Members by making unfair offers on the basis of misleading disclosures; and (4) buying the LLC at an auction conducted on terms that were well-designed to deter any third-party buyer, and to deliver the LLC to Gatz at a distress sale price.

1. Gatz Fails To Act Loyally To Protect The LLC When It Becomes Clear That American Golf Will Terminate Its Sublease

a. Gatz Knows There Is Trouble With The American Golf Sublease