What are the Fiduciary Duties of Managers in Limited Liability Companies?
A manager of a limited liability company (“LLC”) owes certain duties to both to the LLC, and its members. These duties are known as fiduciary duties, and include a duty of loyalty and a duty of care. A manager’s breach of their fiduciary duties will generally entitle the LLC or its members to monetary or other relief. What are the Fiduciary Duties of Managers in Limited Liability Companies? What is the scope of a manager’s fiduciary duties? Can these fiduciary duties be changed? If you are a LLC member with these or other questions regarding the fiduciary duties of an LLC manager, the Orange County business litigation attorneys at Brown & Charbonneau, LLP can help.
Fiduciary Duty of Loyalty
An LLC manager’s fiduciary duty of loyalty to the LLC and its members, includes:
- A duty to account to the LLC, and hold any property, profit or LLC benefit, as a trustee for the LLC;
- A duty to refrain dealing with the LLC while having (or on behalf of anyone having) an interest adverse to LLC; and
- A duty to refrain from competing with the LLC
Examples of a manager’s breach of the duty of loyalty may include using of LLC funds for personal purposes, taking an LLC business opportunity for themselves, or ownership or other interest in an entity in competition with the business of the LLC.
Fiduciary Duty of Care
A manager’s duty of care to the LLC and its members includes a duty to refrain from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
Examples of a manager’s breach of the duty of care may include making decisions on behalf of the LLC without any reasonable investigation or inquiry, or providing LLC financial information to an outside party when the manager has taken no steps to ensure that such information is accurate.
Modification of Fiduciary Duties
The California Corporations Code provides that a LLC operating agreement “shall not” eliminate the statutory duty of loyalty, but “may” identify specific activities that do not violate the duty of loyalty (if not manifestly unreasonable), or specify a number or percentage of LLC members that may authorize (after full disclosure) a specific activity that may otherwise violate the statutory duty of loyalty. Also, an LLC operating agreement “shall not” unreasonably reduce the statutory duty of care.
The Corporations Code further provides that the fiduciary duties of a manager shall only be modified in a written operating agreement with the informed consent of the members, and that assenting to an operating agreement, by itself, shall not constitute informed consent. In other words, even when the fiduciary duties of a manager can be properly modified, this modification must be approved by the members in writing, after full disclosure to and with the understanding of the members. A member does not give informed consent by simply signing an operating agreement.
Getting Legal Help
Brown & Charbonneau, LLP represents LLCs and their members, as well as LLC managers, in fiduciary duty and all other forms of LLC disputes. If you are involved in such a dispute, or would like to learn about your rights and how to protect your business, we can provide you with the information you need. Contact Brown & Charbonneau, LLP today by calling 714-505-3000 to schedule your appointment or email us at inquiries@bc-llp.com.
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