LLC Members Do Not Owe Fiduciary Duties to Each Other, Virginia Supreme Court Rules

Last Spring, we profiled two Circuit Court decisions in Virginia that addressed whether members of Virginia Limited Liability Companies owed fiduciary duties to each other. See March 30, 2008 post, click here. The cases had held that: (1) members and managers of LLCs did not owe fiduciary duties to members, but only to the entity itself; and (2) a member could not sue a manager directly for breach of fiduciary duty, but could only maintain the suit in a derivative capacity. The cases were significant because the Virginia Supreme Court had not addressed the issues.

This week the Supreme Court issued an opinion in one of those cases, Remora Investments, LLC v. Orr. Click here. The opinion affirmed the decision of the Fairfax Circuit Court sustaining the defendant’s demurrer and dismissing the case.

The Supreme Court initially focused on the statutory basis for duties owed by members of an LLC. It noted that neither the Limited Liability Company Act nor the Virginia Stock Corporation Act imposed fiduciary duties “between members of an LLC, between members and managers of an LLC, between stockholders of a corporation, or between individual shareholders and officers and directors.” General partnership law in Virginia, on the other hand, specifically provides that partners owe the duties of loyalty and care both to the partnership and to other partners. Moreover, the court reaffirmed that, in the corporate context, the fiduciary duty owed by officers and directors is owed to shareholders as a class and not individually.

The court also examined the Operating Agreement for the LLC and found that it did not establish any fiduciary duties between the members or between the members and a manager. It specifically held, however, that such duties may be included in Operating Agreements if the members so desire and, thus, arise by contract.

For these reasons the court concluded that as a member of the LLC, Orr lacked standing to pursue a direct claim against the LLC’s manager.

Now that the Supreme Court has spoken on the issue, those forming LLCs would be wise to discuss whether such duties between the members or the members and manager of the LLC should be addressed in the Operating Agreement.