Fiduciary Strings Attached to Members of Limited Liability Companies

photo - LLC duties strings attached (Wikipedia)Managers and managing members of limited liability corporations (LLC’s) owe duties of care and loyalty (called fiduciary duties) to the LLC and its members. A member of an LLC has far more responsibility to fellow shareholders than an employee would have to an employer.

Duties, Responsibilities and How They Can be Modified

The Revised Uniform Limited Liability Company Act (RULLCA), which went into effect this year, sets out the fiduciary duties of managers and managing members and limits the fiduciary duties to the duty of care and the duty of loyalty. Members,

  • Must account to an LLC and hold as trustee for it any property, profit, or benefit derived by the member in the conduct and winding up of the activities of an LLC or derived from a use by the member of an LLC property, including the appropriation of an LLC opportunity.
  • Must not deal with an LLC in the conduct of its business or winding up of its activities as or on behalf of a party having an adverse interest to the LLC.
  • Must not compete with an LLC in the conduct of its business or winding up of its activities.
  • Duty of care to an LLC and its other members in the conduct of its business and winding up of the activities is limited to refraining from grossly negligent or reckless conduct, intentional misconduct or a knowing violation of law.

§17704.09(a)-(c).

The managers’ or managing members’ fiduciary duties can be modified to a limited extent.

  • Any modification of the fiduciary duties can only be done by a written operating agreement.
  • Neither the duty of care, the duty of loyalty, nor the contractual duty of good faith and fair dealing may be eliminated, and the duty of care may not be unreasonably reduced.

§17701.10.

Treating LLC Assets as Your Own Violates Fiduciary Duties

The possible breaches of fiduciary duties are limited only by the imagination of those willing and able to take his or her fellow LLC members for a ride. One example is the case of 139 S. Occidental Blvd., LLC, v. Ha, 2013 WL 2421073. It involves an LLC formed to develop and sell condos in Los Angeles. James Ha was the LLC’s sole manager.

According to a Court of Appeals decision, Mr. Ha was found to have violated his fiduciary duties several ways and found no grounds to overturn the decision. These violations included fraud, gross negligence, wilful misconduct and in bad faith by Mr. Ha,

  • He failed to tell fellow members of a $34,120 commission from selling of the original property.
  • He took out $60,000 from the LLC’s account in checks small enough not requiring another member to sign to pay off a supposed $50,000 loan to the LLC from his brother-in-law (there was no explanation as to what happened to the extra $10,000).
  • He took a $200,000 check from a member intended for the LLC and deposited it in his personal bank account.

If you’re involved in an LLC and think there may be members no living up to their fiduciary duties, call my office at (800) 360-7001 for a consultation.