Protorae Law
Mike Holm | LeClairRyan | UBP Team

Unfair Business Practices

This blog focuses on unfair business and trade practices such as business conspiracy, breach of fiduciary duty, misappropriation of trade secrets and other proprietary information, fraud, tortious interference with contracts and other unfair business practices that are not neatly defined. Since we are located in Tysons Corner, Virginia, many of the cases discussed will come from Virginia, Maryland and the District of Columbia courts. We hope the reader finds this blog instructive.

Sunday, March 30, 2008

Members of Virginia LLC's May Not Owe Fiduciary Duties to Each Other

According to two recent decisions from Circuit Courts in Virginia, members of Virginia Limited Liability Companies do not owe any common law or statutory fiduciary duties to each other. Instead, they only owe duties to the LLC as an entity.

In WAKA, LLC v. Humphrey, 73 Va. Cir. 310 (2007) one of the LLC's members sued the other members individually for, inter alia, breach of fiduciary duty. The other members moved to dismiss the claim. The court, therefore, had to determine whether managers, members and member-managers of Virginia LLCs owed fiduciary duties to each other. The LLC's Articles of Organization and Operating Agreement were silent as to the issue. Turning to the Virginia Code, the court found it silent as well. But when the court compared the provisions of the Virginia LLC Act with those of the Partnership Act, it found distinct differences. Most significantly, the Partnership Act contains express provisions relating to fiduciary duties owed to the partnership and other partners. The LLC Act does not. In addition, the LLC Act permits members to transact business with the LLC in the same way as non-members, compared to the Partnership Act which prohibits a partner from dealing with the partnership where the partner's interest is adverse to that of the entity.

Based upon these distinctions, the court held that the absence of statutory language creating fiduciary duties in the LLC context was intentional. Thus, members of an LLC do not owe fiduciary duties to each other, even if one is a member-manager. The only duties are owed by the member-manager to the LLC as an entity. To create such fiduciary duties, however, the LLC Act permits the members to include such provisions in the articles of organization or the operating agreement.

In the second case, Remora Investments, LLC v Orr, 2007 Va. Cir. LEXIS 198, the court considered whether an LLC member could bring a direct action against the manager of that LLC for breach of fiduciary duty. In its analysis, the court reviewed prior decisions of the Virginia Supreme Court which held that a member of an LLC owed a fiduciary duty to the LLC itself, Flippo v. CSC Assocs., (2001), and that a minority shareholder in a closely held corporation could not bring an action against corporate officers or directors for breach of fiduciary duty in an individual, as opposed to derivative capacity. Simmons v. Miller, (2001). The court also relied upon WAKA, LLC v. Humphrey, supra.

Noting that the LLC in Remora was manager-managed as opposed to member-managed, the court found that the Virginia Code did not differentiate among managers and member-managers with regard to duties owed to the LLC. And, the Operating Agreement did not provide that any fiduciary duties were owed by the manager to the members themselves. Accordingly, the court concluded that a claim for breach of fiduciary duty could only be maintained against another member or manager of an LLC in a derivative capacity.

These cases are cautionary tales for those in business who do not appreciate all of the distinctions between LLCs and partnerships. It is not unusual for disputes to arise between partners or members of LLCs. Those disputes sometimes result in unfair business practice type claims being asserted against other partners/members. In the absence of careful drafting of the organizational documents, however, in the LLC context, members may find the fiduciary duties they expect to protect them, non-existent.


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