Chancery Interprets LLC Agreement as Not Eliminating Fiduciary Duties and Lets Aiding and Abetting Claim Survive—Calumet v. Victory Park

In Calumet Capital Partners LLC v. Victory Park Capital Advisors LLC (Jan. 29, 2026), the Delaware Court of Chancery, at the pleading stage of litigation, found it reasonably conceivable that, after Victory Park (the "Investor") invested in Calumet's lending business (the "Lender"), the Investor-"with and through" its employee, Luke Darkow, whom it had appointed to the Lender's board of managers-engaged in a scheme to undermine the Lender and establish a competing lending business ("Bespoke Capital"). The court interpreted the Lender's LLC Agreement as not having fully eliminated fiduciary duties for the managers; and found it reasonably inferable from the alleged facts that Darkow, by harming the Lender for the Investor's benefit, had breached his fiduciary duties to the Lender, aided and abetted by the Investor.

Key Points

• The decision highlights that, in an LLC (or partnership) agreement, careful drafting is critical to eliminate or limit fiduciary duties. A provision in the Lender's LLC Agreement (the "Protection Provision") stated that: fiduciary duties were eliminated for the Lender's managers; the managers would be exculpated for any fiduciary breaches; and these provisions replaced the fiduciary duties and liability that managers otherwise would have had, except in the case of fraud or willful misconduct. The court viewed the Protection Provision as either (i) creating an "exception" to fiduciary duties when fraud or willful misconduct was involved (i.e., "background law" on fiduciary duties and liability would continue to apply when the conduct involved fraud or willful misconduct) (the "Fiduciary-Exception View"), or (ii) eliminating fiduciary duties entirely and creating a contractual obligation not to engage in fraud or willful misconduct (the "Contract-Only View"). Under either interpretation, the court stated, the Plaintiff's claims would survive the pleading stage, as it was reasonably inferable that Darkow engaged in willful misconduct (i.e., acted "wrongfully and with scienter"). The court adopted the Fiduciary-Exception View-thus, tort law (not contract law) will govern the elements of the claim, burden of proof, standard of conduct, standard of review, and available remedies.
  
  
• The court viewed the exculpation language in the Protection Provision as undermining an interpretation that fiduciary duties were fully eliminated. The court adopted the Fiduciary-Exception View because, in the court's view, (i) the Protection Provision, being "poorly drafted," did not clearly and unambiguously eliminate fiduciary duties; and (ii) the inclusion of the Exculpation Language indicated that fiduciary duties were not fully eliminated, as, if they had been, there would have been no need to provide exculpation for fiduciary breaches.
  
  
• The decision underscores the potential of aiding and abetting liability for "dual fiduciaries" (such as an employee appointed to serve on a portfolio company's board). The court acknowledged that, in Mindbody (2024) and Columbia Pipeline (2025), the Delaware Supreme Court heightened the pleading standard for aiding and abetting claims. The court stated that a heightened standard was appropriate in those cases because they involved claims against third-party acquirors, who are "expected to bargain in [their] own interest." The court stated that the instant case presented a "different situation"-a claim against "an affiliate of an allegedly culpable fiduciary" (i.e., the claim that the Investor, an employer-principal, aided and abetted Darkow, its employee-agent). In this context, the court indicated, the "knowing participation" and "substantial assistance" elements of an aiding and abetting claim are more easily inferable.
  
  
• The decision serves as a reminder that-generally, a party's obligation to make a determination in its "reasonable judgment" invokes both a subjective test and an objective test; and a party's right to act in its "sole discretion" is limited by the implied covenant of good faith and fair dealing.

Background. In 2021, Calumet, an investment firm providing loans to plaintiff-side law firms, reached a business arrangement with the Investor, an alternative investment funder and manager. The parties sought to marry Calumet's expertise in sourcing and servicing loans with the Investor's ability to access capital. Calumet formed the Lender and agreed to operate its business only through that entity. The Investor invested $5 million in the Lender and received a 10% member interest; for two years (the "Investment Period"), a right of first offer for funding loans extended by the Lender; and a right to designate one of the three persons on the Lender's board of managers. The Investor formed funds (the "Investor Funds") as vehicles to raise capital and fund the loans. The business "hit the ground running"-between February and September 2022, the Lender sourced loans to three law firms totaling approximately $220 million, each of which the Investor chose to fund. The Investor then, allegedly, engaged in a scheme to "take the Lender's business for itself," and, to that end, sought to weaken the Lender and replicate its capabilities. The Lender was left "teetering on the edge of insolvency," and the Investor established Bespoke Capital, which was led by Bill Mulvey, who formerly was one of Calumet's two principals and an officer and manager of the Lender. In January 2025, Calumet filed this litigation on the Lender's behalf. In a previous decision, the court dismissed a fiduciary claim against the Investor and certain other Defendants. In this decision, the court let survive Calumet's fiduciary breach claim against Darkow, and aiding and abetting claim against the Investor.

Discussion

The parties' agreements. (i) The Servicing Agreement, between the Lender and the Investor Funds, made the Lender responsible for servicing the loans and handling borrower relations. The Lender received the servicing fees from the loan payments made by borrowers, but, if the Investor Funds determined in their "reasonable credit judgment" that a credit facility was "non-performing" (a "Non-Performing Designation"), and the Lender failed to cure the non-performance within sixty days, then the fees from that loan would be paid to the Investor instead. (ii) The Investment Agreement, among the Lender, the Investor, and the Investment Funds, provided that, if the Lender failed to raise $100 million in additional capital within the Investment Period, the Investor's member interest would increase from 10% to 20% for no additional consideration. It also provided that the Investment Period would terminate once the Investor deployed $300 million in capital to fund loans.

The court interpreted the LLC Agreement as not fully eliminating fiduciary duties. The Protection Provision in the LLC Agreement provided that (i) fiduciary duties were eliminated (the "Duty Modification Language"); (ii) liability for fiduciary breaches would be exculpated except as otherwise provided in the Agreement (the "Exculpation Language") ((i) and (ii), together, the "Elimination Language"); and (iii) these provisions replaced the fiduciary duties and liability that otherwise would have applied, except in the case of fraud or willful misconduct (the "Preserving Language"). The court criticized this drafting: first, it "unhelpfully combines the concepts of duty modification and exculpation," which are "different concepts"; and, second, it is unclear how the Preserving Language interrelates with the Elimination Language. The court stated that the Exculpation Language undermines an interpretation that the Duty Modification Language fully eliminated fiduciary duties, as no exculpation for fiduciary breaches would be needed if fiduciary duties had been fully eliminated. The court interpreted the Preserving Language as "creat[ing] an exception to the Elimination Language that allows existing law-including the law governing fiduciary duties-to continue to apply when the conduct involves fraud or willful misconduct…." In other words, "if a fiduciary duty or common law obligation would constrain a party's ability to engage in fraud or willful misconduct, then the Preserving Language allows that background law to continue to function."

The court found it reasonably conceivable that Darkow breached his fiduciary duties to the Lender-by assisting the Investor in its scheme to harm the Lender. Darkow, a "dual fiduciary," owed duties both to the Investor (his employer) and the Lender (of which he was a manager). Allegedly, the Investor, "with and through Darkow," among other things:

• put financial pressure on the Lender's principals, by restricting their access to cash so that they could not cover business expenses nor make tax distributions to themselves to cover imputed interest income;
• misused the right of first offer "to consume the Lender's time and resources," by indicating a willingness to fund a loan, then requesting information and dragging out negotiations over the terms, and, at the last minute, deciding not to fund;
• interfered with the Lender's relationships with the law-firm borrowers by communicating with them directly and establishing its own relationships with them;
• convinced Mulvey to provide confidential Lender information to the Investor, and to help the Investor establish Bespoke Capital;
• "poached" the firm the Lender had retained to help it raise $100 million in outside capital, leading to the capital not being raised and, under the parties' agreement, the Investor's 10% interest increasing to 20% without additional consideration;
• in 2024, made a "predatory low-ball offer" to buy Calumet's 80% interest in the Lender for $250,000, implicitly valuing the business at no more than $312,500-"a far cry from the $50 million valuation implied by the Investor's purchase of a 10% stake for $5 million in 2021"; and
• designated all of the Lender's loans as "non-performing," just "minutes" after the Lender rejected the Investor's low-ball offer, without providing any reason for the designation-which, under the parties' agreement, caused all of the servicing fees to go the Investor Funds instead of the Lender, making it impossible for the Lender to fund its operations or make tax distributions to its principals.

With respect to Darkow specifically, allegedly, he extracted confidential Lender information from Mulvey; convinced Mulvey to help develop Bespoke Capital; and, more broadly, "worked for the Investor," as its employee, in ways that directly conflicted with the interests of the Lender, to which he also owed duties.

The court found it reasonably conceivable that the Investor aided and abetted Darkow's fiduciary breach. For an aiding and abetting claim to survive the pleading stage, the allegations must support a reasonable inference that the alleged aider and abettor "had actual knowledge that the primary violator's conduct was a fiduciary breach, had actual knowledge that its own conduct was legally improper, and actively participated in the primary violator's misconduct." The court distinguished Mindbody and Columbia Pipeline, in which the Delaware Supreme Court made both the "knowing participation" and the "substantial assistance" elements of aiding and abetting claims more difficult to establish. The court stressed, in Calumet, that those cases involved claims that a third-party acquirer participated in a breach of fiduciary duty by sell-side directors. In that context, the court stated, "Delaware law imposes an appropriately high pleading burden because an acquirer is expected to bargain in its own interest"-so "[a] plaintiff must plead meaningful facts to support an inference that the acquirer attempted to create or exploit conflicts of interest on the board or otherwise conspired with the directors to engage in a fiduciary breach." Similarly, for "[p]olicy reasons," there is a high pleading burden where a plaintiff alleges that a third-party advisor aided and abetted sell-side directors in breaching their duties, the court stated. By contrast, however, in Calumet, the claim "is simply that the Investor carried out its scheme both with and through Darkow, its employee." "Knowledge" of Darkow's breach was imputed to the Investor "because Darkow was the Investor's agent and acted on its behalf." Darkow's "principal job" was "[w]orking for the Investor…." It was "easy to infer an agreement between Darkow and his employer to carry out the employer's scheme." Also, the Investor "participated" in the breach, as it was "elbows deep in Darkow's efforts to subvert Mulvey, extract confidential information from him, and convince him to leave the Lender and run a competing business for the Investor." The court wrote: "Darkow worked on the inside to set the Lender up for the Investor's punches…."

The court found it reasonably conceivable that the Investor Funds breached the Servicing Agreement when they declared the Lender's outstanding loans to be non-performing. The Servicing Agreement required that the Investment Funds use their "reasonable credit judgment" in determining whether loans were non-performing. The court stated that the "reasonable" qualifier meant that "the Investor Funds had to believe subjectively that their designation reflected reasonable credit judgment, and that belief had to be objectively reasonable." The alleged facts, however, supported a reasonable inference that neither test was satisfied. First, "around the same time the Investor Funds made the designation, the Investor…represented to the IRS, its auditors, its investors, and a borrower that the Lender's loans were in good standing and fully performing." Those representations "support[ed] a pleading-stage inference that the Investor Funds did not believe their own Non-Performing Designation" and "contradicted the notion that the loans were non-performing." Second, the Investor Funds made the designation, with no reasons or justifications for it, "just minutes" after the Lender declined the Investor's "predatory lowball offer" to buy out Calumet's interest. This supported an inference that the non-performing designation "was a hardball tactic rather than a serious determination that the loans were non-performing." Third, it was reasonably inferable that "the Non-Performing Designation was part of the Investor's broader effort to weaken the Lender and enable the Investor to take the lending business for itself." Designating the entire loan portfolio as non-performing led to the suspension of the Lender's servicing fees, thus cutting off the Lender's primary revenue stream, which was "consistent with the overall scheme alleged in the complaint."

The court found it reasonably conceivable that the Investor Funds, by misusing the right of first offer, breached the implied covenant of good faith. The complaint alleged that the Investor Funds, when the Lender presented them with a loan opportunity, would initially indicate that they intended to fund the loan, then would request additional information and string out negotiations, and ultimately, at the last minute, would decline to fund. Critically, in one instance, the Investor Funds rejected a loan and then secretly funded it on their own. That incident in particular supported an inference that "the Investor Funds were not exercising their right for the legitimate purpose of evaluating loans and ultimately declining to fund, but rather to harm the Lender."

The court discussed the two uses of the implied covenant of good faith. The court explained that the covenant may be invocable either (i) to fill gaps in an agreement that arise when an unanticipated development occurs, or (ii) to require that a discretion standard (such as a right to exercise "sole discretion") be exercised reasonably and in good faith. With respect to (i), the court noted that the Delaware Supreme Court emphasized in its recent Johnson & Johnson/Auris decision (Jan. 12, 2026) that the implied covenant cannot be invoked just because a development arose that the parties did not anticipate-rather, it can be invoked only when the parties could not have anticipated the development. The court acknowledged (as it noted the Supreme Court acknowledged in Johnson & Johnson/Auris) that this standard "cannot be strictly true," as almost any development could be anticipated. In Vice Chancellor Laster's commentary in Calumet, he helpfully explained that the standard requires a judicial assessment as to "whether the parties realistically could have addressed the contingency" (emphasis added). Parties could not realistically address, for example, every possible development where their intention would be patently obvious or the development would be extremely unlikely to occur-in these circumstances, the implied covenant can be invoked to fill the gap.

The court discussed the implied covenant of good faith as a limitation on "sole discretion." The more relevant aspect of the implied covenant in Calumet was (ii) above-that is, to require that "sole discretion" granted to a party be exercised reasonably and in good faith. Calumet claimed that the Investor Funds exploited their right of first offer to harm the Lender; the Defendants argued in response that the Investment Agreement provided that they could exercise the right in their "sole discretion." The court stated that "terms that attempt to enhance the breadth of discretion, such as 'sole discretion,' do not displace the implied covenant." Indeed, the court wrote: "When a party has sole discretion to make a decision, that setting provides more reason for the implied covenant to apply, not less." The implied covenant required that the Investor Funds exercise the right of first offer "reasonably and in good faith," and not "for the sole purpose of harming [the] counterparty," the court wrote. The parties, clearly, would not have intended that a party "could use a discretionary right to destroy the contractual relationship maliciously and without any justification rationally related to the shared contractual purpose." The court wrote: "A party obviously can wield a discretionary right to promote contractual goals…[or] to protect its own interests. A party with a good faith basis for its determination cannot be held liable for the intent-based version of the implied covenant. But a party cannot wield a discretionary contractual right like a mafia gangster by using it to inflict harm on the counterparty unless the counterparty does what it wants."

Practice Points

• LLC (or partnership) agreement provisions intended to eliminate or limit fiduciary duties must be drafted to be clear and unambiguous. Lengthy provisions, with complex language generally should be avoided. In Calumet, the court noted that the Protection Provision consisted of "a single 125-word sentence," followed by a "fifty-eight word sentence." Based on Calumet, the drafting should address separately, and not "combine" in a single provision, issues relating to fiduciary duties, exculpation, and fraud and willful misconduct. The drafting must be clear as to how the provisions relating to these issues interrelate.
  
  
• Parties to an agreement eliminating or limiting fiduciary duties should consider carefully whether to include (and, if included, how to draft) a related exculpation provision. As indicated in Calumet (and in Feeley v. NHAOCG (Del. Ch. 2012), cited in Calumet), providing for exculpation of fiduciary duties may be interpreted by the court as undermining a view that the parties intended to eliminate fiduciary duties fully. Drafters could consider clarifying that, while the parties intend to eliminate fiduciary duties fully, exculpation language is included to cover the contingency that a court nevertheless finds any fiduciary duties to be applicable for any reason.
  
  
• Parties to an agreement granting a party "sole discretion" should consider defining, or setting parameters for, the standard. Where parties provide for a broad waiver of fiduciary duties, they may want to reinforce the concept by providing that a party has sole discretion with respect to particular matters of concern. It should be kept in mind that, under Delaware law, generally, the implied covenant of good faith requires that "sole discretion" be exercised reasonably and it good faith. While parties cannot contractually agree to waive or eliminate the implied covenant, they can specify a standard and parameters based on which the discretion granted is to be exercised.
  
  
• Parties to an agreement granting a party a right to make a determination in its "reasonable credit judgment" (or other "reasonable judgment") should consider defining, or setting parameters for, the standard. Parties should consider specifying whether industry standards, certain data, or some other measure should be the basis for the judgment; setting forth a process for making any such judgment; requiring written justification for the judgment; requiring consultation with the other party before making the judgment; and/or stating that the judgment must be made in good faith and in furtherance of the contractual goals.
  
  
• Parties to an agreement cannot anticipate and cover in the agreement every potential development that could occur-but should seek to expressly cover developments that are likely to occur or that would be significant if they do occur.
  
  
• "Dual fiduciaries" must carefully navigate potential conflicts of interest. Delaware law is clear that there is "no dilution" of the duty of loyalty when a fiduciary holds dual or multiple fiduciary obligations. A director designated by an investor to serve on a portfolio company's board will owe fiduciary duties both to the portfolio company and the investor. Various mechanisms may be utilized to mitigate the risk of liability to the director where the interests of the parties to whom the director owes duties may conflict-including, for example, the board creating a special committee of disinterested directors to consider and vote on the matter at issue; the conflicted director abstaining from board discussion and voting on the matter; or, in the corporate context, structuring to come within the safe harbor established by the 2025 amendments to DGCL Section 144(a) (which require that the conflict was disclosed to the full board and approved by a majority of the disinterested directors).
  
  
• Depending on the circumstances, a party entering into an agreement with respect to a significant investment in its business should consider what specific protections should be included in the agreement to prevent competition with or other harm to the business. The party should consider prohibitions on competing with the business, directly communicating with the business' customers, soliciting the business' employees, and so on. Also, the investor should consider whether actions it takes could significantly harm the business. If so, it should establish a contemporaneous record establishing that it is taking the action for valid reasons and not to harm the business for some benefit to the investor.

This communication is for general information only. It is not intended, nor should it be relied upon, as legal advice. In some jurisdictions, this may be considered attorney advertising. Please refer to the firm's data policy page for further information.