By: Thomas S. Tripodianos Published: August 2014

Does a Non-Managing Mmember of an LLC Owe any Duty of Good Faith or Loyalty?

Question.        Does a non-managing member of an LLC owe any duty of good faith or loyalty?

Answer. No.

Member A and Member B are the sole members of 123 Main Road, LLC ("LLC") with each having a 50 percent interest therein. The LLC owns a two-story building and ground lease for premises located at 123 Main Road in New York (the "premises"). The accounting firm, Member B, Company, LLC, in which Member B is a partner, is one of two principal subtenants in the building. The other principal subtenant was a separate business run by Member A.

Member A alleges Member B breached its fiduciary duty as a 50 percent member of the LLC. Specifically, the Plaintiffs seek to recover consequential and punitive damages flowing from: (1) Member B's failure to timely advise, and to instead affirmatively mislead, Plaintiffs regarding his intention to have his accounting firm not renew its sublease which expired on April 30, 2013; (2) refusing to allow Plaintiffs the opportunity to show the lease space to potential tenants; and (3) damaging the premises by replacing a set of glass doors with a single wooden door.

Here, Member A and Member B are members of the LLC with an equal interest in its profits and losses. However, the Operating Agreement of 123 Main Road LLC ("operating agreement") identifies Member A as the managing member. Specifically, paragraph 5 of the operating agreement, entitled "Powers", states that the "business and affairs of the Company shall be managed by Member A in his sole discretion. Member A shall have the power to do any and all acts necessary or convenient to or for the furtherance of the purposes described herein, including all power, statutory or otherwise possessed by the members under the LLCL"

The operating agreement specifically delineates Member A as the managing member of the LLC and omits any language granting management powers or duties to Member B. Member B, thus, is a non-managing member of the LLC.

New York case law is replete with cases demonstrating that a managing member of an LLC has a fiduciary duty to other members of the LLC

Pursuant to Limited Liability Company Law §409, "a manager shall perform his or her duties as a manager * * * in good faith and with a degree of care that an ordinary prudent person in a like position would use under similar circumstances." The acts of working in concert and managing a limited liability company clearly gives rise to a relationship among the members which is analogous to that of partners who, as fiduciaries of one another, owe a duty of undivided loyalty to the partnership's interests.

A partner, and by analogy, a [minority managing] member of a limited liability company, has a fiduciary obligation to others in the partnership or limited liability company which bars not only blatant self-dealing, but also requires avoidance of situations in which the fiduciary's personal interest might possibly conflict with the interests of those to whom the fiduciary owes a duty of loyalty.

It is noted that section 409(a) of New York's Limited Liability Company Law sets forth, inter alia, the duties of a limited liability company manager, as follows, "A manager shall perform his or her duties as a manager, including his or her duties as a member of any class of managers, in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances". Noticeably absent from the Limited Liability Company Law, which expressly imposes a duty of good faith upon managers of an LLC, is any concomitant duty on a non-managing member

Given the Legislature's intent to specifically omit any duty of good faith or loyalty on behalf of a non-managing member of an LLC, coupled with the fact that the operating agreement gives Member A the sole discretion to manage the business and affairs of the LLC, Member B, as a non-managing member, did not breach any duty to the LLC or to Member A.

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