Law News and Tips

LLC Members’ and Managers’ Duties

Fred Vilbig - Wednesday, August 27, 2014

In the case of Hibbs v. Berger (Mo. E.D. App. 2014), the court considered what duties were owed by an LLC manager to members. The case was brought by a 5% owner of the LLC. The LLC manufactured doors, windows, and the like, and it got caught up in the “Great Recession.” The principal member lent large amounts of money to the LLC to keep it afloat, but in the end, the Recession won the battle. The lending-member had taken a security interest in all of the LLC’s assets, and on default, he took those assets as repayment, sort of like a foreclosure. The minority owner got nothing. The minority owner then brought suit alleging that the lending-owner had breached its fiduciary duties to him, and as a result, he had lost all of his interests in the company.

The legal theories bantered about were pretty extensive, but what interests me in this case are several findings of the court as follows:

1.Members of an LLC and LLC managers (whether members or not) owe a fiduciary duty to the LLC itself. We tend to think of an LLC as an extension of the members, but it is actually a separate entity with rights.

2.LLC managers (whether members or not) owe a fiduciary duty to the members of the LLC. We all kind of knew that, but this may be the first case where a court actually stated this principal.

3.However, an LLC in its operating agreement can reduce the fiduciary duties owed by the manager to the LLC or members. This duty is not a common law duty but is one created by statute, and the statute allows the members to agree to cut it back.

4.A non-managing member of a manager-managed LLC does not owe anyone a fiduciary duty.

One interesting point that the court made was that it refused to rule on whether the controlling LLC members owe a fiduciary to non-manager minority members since no one in the case had asked that question. That seems to me to be the most interesting issue, but we’ll have to wait to see what the courts actually find in that regard. In the meantime, I am telling clients to assume that they do. It is the safer position.
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