DDR obtains affirmation on appeal of dismissal of fiduciary duty claim

Client(s) Developers Diversified Realty Corporation

On May 17, 2011, the New York Appellate Division, First Department, unanimously affirmed the dismissal of a fiduciary duty claim against Jones Day client Developers Diversified Realty Corporation ("DDR"). The plaintiff, Coventry Real Estate Fund II, had entered into LLC agreements with DDR to co-invest in various properties. While the first investment platform between DDR and Coventry had been a success, the second platform, which suffered through the global financial crisis, was less successful. With respect to this second platform, Coventry asserted various claims against DDR based on its alleged mismanagement of the properties, including a claim for breach of fiduciary duty, seeking over $500 million in supposed damages.

The trial court dismissed Coventry's fiduciary duty claim against DDR, and the appeals court agreed, holding that DDR had no fiduciary duty as a matter of Delaware law, which governed the agreements. The Appellate Division recognized that, under Delaware law, fiduciary duties are imposed only on managers and those designated as controlling members of an LLC, and the LLC agreements here designate Coventry Real Estate Fund II as the sole managing member. The Appellate Division also rejected Coventry's contention that, regardless of its designation under the LLC agreements, DDR was the LLC's de facto managing member by virtue of its control over LLC operations. Since DDR is not a majority or controlling member of the LLCs, the court concluded, it has no fiduciary duties under the LLC agreements. Finally, the Appellate Division upheld the trial court's decision denying Coventry leave to replead its claim.

Coventry Real Estate Advisors, LLC v. Developers Diversified Realty Corporation, Index No. 115559/09 (N.Y. Appellate Div., First Dept.)