WILMINGTON (LN) — Vice Chancellor Travis Laster ruled Tuesday that William Blodgett, a former executive at the Fairstead affordable housing fund complex, did not breach LLC agreements by sharing confidential information because he acted as an employee, not as a member.
The opinion addresses the boundary between employment duties and LLC member obligations, ruling that an employee’s breach of confidentiality does not automatically trigger LLC agreement breaches when the conduct was taken in an employment capacity.
Blodgett, who served as the face of the Fairstead business, developed plans to restructure the firm or leave to start a competing venture. In doing so, he shared confidential financial projections and internal valuations with family offices connected to his wife’s billionaire families, the Sussman and Tisch offices.
Fairstead Capital Management LLC and FCM Affordable LLC sued Blodgett in the Court of Chancery, alleging he breached the LLC agreements governing their affordable housing investments by disclosing and misusing confidential information.
The lawsuit followed an arbitration where an arbitrator found Blodgett breached his employment agreement by sharing confidential information without consent and downloading materials outside the ordinary course of employment.
The arbitrator ruled that Fairstead could cancel Blodgett’s equity interests in pending deals but not in non-pending deals.
In the Chancery suit, Fairstead argued that the arbitrator’s findings were preclusive and warranted summary judgment on the LLC agreement claims.
Vice Chancellor Laster agreed that the factual findings in the arbitration were binding. However, he ruled that those findings did not establish a breach of the LLC agreements.
“The factual findings in the Award nevertheless preclude Blodgett from relying on the Necessary-Or-Appropriate Exception,” Laster wrote. “Blodgett fares better, however, when arguing that he did not disclose or use any confidential information in his capacity as a member.”
The court found that Blodgett obtained, generated, and shared information in his capacity as an employee responsible for day-to-day operations, not as a minority member of the LLC.
“Everything Blodgett did on which Fairstead now relies was conduct he took as an employee,” Laster wrote. “In his capacity as a member, Blodgett was a minority owner in a holding company. He did not obtain, generate, or share information in his capacity as a minority investor in a holding company.”
The opinion warns that Delaware courts must distinguish between conduct by employees in their capacities as employees and conduct by investors in their capacities as investors.
“Delaware can stay within its lane by carefully distinguishing between (1) conduct by employees in their capacities as employees that should not implicate restrictions in constitutive entity agreements and (2) conduct by investors in their capacities as investors that properly implicate those restrictions,” Laster wrote.
The court granted summary judgment for Blodgett on Fairstead’s claims for breach of the LLC agreements.
Blodgett launched a new affordable housing venture in November 2021, two days after informing Fairstead he had started the competing business.