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Comparison of LLC Statutes

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Fiduciary Duties: Do Managers Owe Special Duties to the LLC or Its Members?

A fiduciary duty is a legal duty to act solely in another party’s interests.  For those familiar with the context, a fiduciary duty is often likened to the duties of a trustee to hold property in trust.  Fiduciary duties generally encompass the duty of care (i.e., duty to act in good faith and exercise reasonable care in carrying out their obligations to the LLC) and the duty of loyalty (i.e., duty to put the success of and benefits to the LLC above any personal or individual advantages).[1]  In the context of a limited liability company, however, what fiduciary duties members and managers owe to the company and its members, if at all, may vary widely, depending on the jurisdiction.

In Delaware, an LLC agreement may expand, restrict, or even eliminate a manager’s or a member’s fiduciary duty, as long as it does not eliminate the implied covenant of good faith and fair dealing.[2]  In situations where the LLC agreement is silent on fiduciary duties, the statute imposes fiduciary duties by default, holding LLC managers to the standard of duties of loyalty and care.[3]  This is a result of a recent amendment to the Delaware Limited Liability Company Act, following Gatz Properties, LLC v. Auriga Capital Corp., in which the Delaware Supreme Court disregarded the lower court’s ruling that the statute imposes default fiduciary duties unless the parties to the LLC Agreement contract otherwise.  So, as it stands now, LLC managers do owe fiduciary duties to other members under Delaware law, unless the LLC agreement says otherwise.

In Texas, as in Delaware, parties to a company agreement of a limited liability company can freely expand or restrict any duties, including fiduciary duties.[4]  Commentators and practitioners have generally assumed that managers in a manager-managed LLC and members in a member-managed LLC owe fiduciary duties, which would generally include a duty of obedience (i.e., duty to act in accordance with the principal’s instructions), as well as the duty of loyalty and care to the LLC.[5]  Members of an LLC, on the other hand, may not necessarily owe other members fiduciary duties, just as co-shareholders of a closely held corporation are not necessarily in a fiduciary relationship.[6]

In New York, a manager of an LLC has a statutory duty to act “in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances,” which many consider to be the standard fiduciary duties.[7]  As in Delaware and Texas, New York’s LLC law allows elimination or limitation of such duties in the operating agreement, but within limits.[8]  Specifically, the operating agreement may not eliminate or limit a manager’s liability in situations involving bad faith, intentional misconduct or a knowing violation of law, or personal gain or other advantage to which he or she is not legally entitled, among other things.[9]  New York’s highest court has recently enforced a contractual waiver of fiduciary duties among LLC members where the party claiming breach was sophisticated, represented by counsel, and the relationship was no longer one of trust, though it remains to be seen whether the same will hold in other contexts.[10]

This post was a part of a multi-post blog series on comparison of LLC statutes.  You can find the other posts by searching our blog.  In our next post, we will discuss availability of series LLC in these states.  

 

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; shawn.mcbride@rsmlawpllc.com, or www.mcbrideattorneys.com.

[1] NOLO, Fiduciary Duties for Members and Managers of LLCs, http://www.nolo.com/legal-encyclopedia/fiduciary-duties-for-members-managers-llcs.html (last visited Feb. 25, 2015).

[2] Del. Code Ann. tit. 6, § 18-1101(c).

[3] Id. § 18-1104.

[4] Tex. Bus. Org. Code § 101.401.

[5] E. Miller, Overview of Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations (presented at State Bar of Texas: Choice & Acquisition of Entities in Texas, May 23, 2014, San Antonio, Texas), at 8.

[6] Id. at 9 (citing an unpublished opinion in Suntech Processing Sys., L.L.C. v. Sun Commc’ns, Inc., 2000 WL 1780236 (Tex. App.—Dallas Dec. 5, 2000, pet. denied)).

[7] N.Y. LLC Law § 409(a).

[8]  Id. § 417(a).

[9] Id.

[10] See generally Pappas v. Tzolis, 20 N.Y.3d 228 (2012).

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.

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