Member Involvement in Management of Manager-managed LLC Did Not Give Rise to Fiduciary Duties
Member Involvement in Management of Manager-managed LLC Did Not Give Rise to Fiduciary Duties
Under New Jersey law, absent a contrary provision in the operating agreement of an LLC, only managing members owe traditional fiduciary duties of loyalty and care. In the absence of management responsibility and control, members of an LLC do not owe fiduciary duties of loyalty and care to each other.
New Jersey’s LLC statute provides that an LLC is presumed to be member-managed unless the operating agreement: (i) provides that the company will be manager-managed, (ii) provides that the management of the company will be vested in managers, or (iii) includes similar language.
With that in mind, what happens when a member of a manager-managed LLC is involved in certain discrete parts of the financial management of an LLC? Does this involvement mean that the member owes fiduciary duties to the LLC and/or other members even if the OA does not impose such duties?
A recent case out of the bankruptcy court of the district of New Jersey addressed a similar controversy. The debtor’s independent manager and Chapter 11 Plan Administrator commenced and adversary proceeding against the debtor’s former manager and four members, alleging, as relevant here, breach of fiduciary duties.
The Plan Administrator argued that the members owed fiduciary duties based on the following: (1) they involved themselves in the financial management of the debtor;
- one of the members retained his own accountants to investigate the debtor’s financial affairs;
- one of the members arranged for a loan from to fund a buyout of another member; and
- one of the members was regularly at the debtor’s premises, often
without the member, and conducted extensive business with the debtor through another legal entity. The court disagreed and granted the motion to dismiss as to the causes of action based on the non-managing member’s alleged breach of fiduciary duties. It noted that the plain language of the OA provided that the debtor was manager-managed and that nothing in the OA imposed any duty of loyalty or care upon the non-manager members.
Since the Plan Administrator’s allegations did allow for a conclusion that the non-manager members controlled the debtor (despite their involvement in discrete areas of management), and in the face of the OA’s unambiguous language, the court concluded that there was no basis to impose fiduciary duties on the non-manager members.
It also noted that the Plan Administrator’s argument would place non-manager members at risk for investigating what they may believe is wrongdoing by a manager, with the result that they may become liable for breach of fiduciary duties they did not undertake.
However, the court concluded that the non-manager members did owe duties of good-faith and fair dealing, duties which could not be waived under New Jersey law.