Ex-Judge Can't Serve on LLCs' Special Committees: Del. Court

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By Michael Greene

June 10 — Two limited liability companies that jointly manage over $1 billion in real estate assets can't empower a retired federal judge to investigate and decide whether to pursue derivative claims on their behalf, the Delaware Chancery Court ruled June 10 ( Obeid v. Hogan, 2016 BL 185285, Del. Ch., No. 11900-VCL, 6/10/16 ).

Vice Chancellor J. Travis Laster said that under Gemini Equity Partners LLC's “corporate-style governance structure,” Michael Hogan, a former chief judge of the U.S. District Court for the District of Oregon, may not function as a one-man special litigation committee on behalf of the entity because he isn't a director.

Because there are “corporate traits” in Gemini Equity Partners' LLC agreement, corporate precedent should be applied in resolving the question of whether a non-director may serve on the entity's special litigation committee, the court said.

The court also determined that the former judge can't serve as the sole member of a special litigation committee for Gemini Real Estate Advisors LLC. It found that the entity's LLC agreement didn't allow the task to be delegated to non-managers.

Insufficient Substitute

William Obeid, one of the three members of both LLCs, filed derivative claims in New York federal court alleging that the other two members were improperly selling the entities' assets.

After the proceedings began, the two other members—Christopher La Mack and Dante Massaro—hired Hogan to function as a special litigation committee for each entity.

Hogan subsequently informed the three members that he planned to seek a stay of the New York federal action so that he could perform his work for the parallel committees.

In response, Obeid filed an action in the chancery court seeking a declaration that Hogan can't act on behalf of either entity.

In its June 10 ruling, the chancery court found that Obeid has the authority to pursue derivative claims on the LLCs' behalf.

The court also determined that La Mack and Massaro could have re-asserted authority over the derivative claims by forming a committee of independent directors, but instead formed a “quasi-committee staffed by non-directors.”

“However illustrious the credentials of that non-director might be, his involvement is not a sufficient substitute” under prior precedent, Laster wrote.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The opinion is available at http://src.bna.com/fOA.