MESSAGE FROM ASSOC PROF PAMELA S EVERS ATTORNEY AT LAW This article has been offered by web posting to UNCW students for educational purposes only Articles posted may have been edited for clarity and format by Pamela S Evers http www ncbusinesslitigationreport com Judicial Serendipity North Carolina And Delaware On Fiduciary Duties Of LLC Members And Managers Posted on April 27 2009 by Mack Sperling The fiduciary duties owed by members and managers of limited liability companies are very different under North Carolina and Delaware law In a bit of judicial serendipity the North Carolina Court of Appeals and the Delaware Court of Chancery each issued opinions on those issues last week just a day apart The North Carolina case is Kaplan v O K Technologies LLC April 21 the Delaware Court of Chancery case is Bay Center Apartments Owner LLC v Emery Bay PKI LLC April 20 The two cases highlight the differences in the nature and scope of fiduciary duties in the LLC context The Delaware View The Delaware view crisply stated in the Emery Bay decision was summed up by the Delaware Corporate and Commercial Litigation Blog which you should absolutely be reading as follows On the point of the fiduciary duty of a manager to the members in the absence of a contrary provision in the LLC Agreement the manager of an LLC owes the traditional fiduciary duties of loyalty and care to the members of the LLC On the point of the fiduciary duty of a member to other members the LLC cases have generally in the absence of provisions in the LLC Agreement explicitly disclaiming the applicability of default principles of fiduciary duty treated LLC members as owing each other the traditional duties that directors owe a corporation North Carolina on Fiduciary Duties of LLC Members North Carolina goes off in a different direction entirely on the fiduciary duty of an LLC member to another member There is none though there can be exceptions But the general rule stated in the Kaplan case is that The North Carolina Limited Liability Company Act N C Gen Stat 57C 1 01 et seq does not create fiduciary duties among members Members of a limited liability company are like shareholders in a corporation in that members do not owe a fiduciary duty to each other or to the company The exception is when the member has majority control Then a controlling shareholder owes a fiduciary duty to minority shareholders and an LLC member with control would owe a fiduciary duty to the minority members North Carolina on Fiduciary Duty of LLC Managers A manager of a North Carolina LLC does owe a fiduciary duty as does a manager of a Delaware LLC But in North Carolina the fiduciary duty is not owed directly to other members as it is in Delaware It is instead owed to the LLC Managers of limited liability companies are similar to directors of a corporation in that u nder North Carolina law directors of a corporation generally owe a fiduciary duty to the corporation and where it is alleged that directors have breached this duty the action is properly maintained by the corporation rather than any individual creditor or stockholder Thus like directors managers of a limited liability company also owe a fiduciary duty to the company and not to individual members The principles described above are default rules applied by the North Carolina and Delaware courts in the absence of provisions in the LLC Operating Agreement as to the duties of members and managers The members are free to provide for the imposition of fiduciary duties which the Court found they had in the Emery Bay case or to provide for no or limited fiduciary duties as they did in the Kaplan case It s pretty common for North Carolina attorneys to be advising clients regarding Delaware LLC issues because so many corporate attorneys opt for formation under Delaware law There were 111 820 LLCs formed in Delaware in 2007 and 81 923 in 2008 The North Carolina numbers show significantly fewer LLC formations here there were 33 212 LLCs formed in NC in 2007 and 29 384 formed in 2008 These numbers were provided by the Division of Corporations at the Delaware Secretary of State and by the Director of Corporations at the North Carolina Secretary of State I originally wrote about the Kaplan case when it was decided by the Business Court in June 2008 You can find that post here Does The Manager Of An LLC Have A Fiduciary Duty To The Members Of The LLC Posted on August 4 2008 by Mack Sperling The United States District Court for the Middle District of North Carolina dismissed an LLC member s fiduciary duty claims against a manager based on grounds of standing in Morris v Hennon Brown Properties LLC The Defendant LLC was an investor and member of three limited liability companies It alleged in a counterclaim that the Plaintiff the manager of three of the LLCs owed it a direct fiduciary duty and that Plaintiff had violated that duty by comingling funds of the LLCs and using them for his personal benefit Plaintiff pitched its Motion to Dismiss on the argument that a comanager of the LLC does not have a fiduciary duty to its members under N C Gen Stat Sec 57C 3 22 which sets out the duties of LLC managers The Court declined to decide the case on this basis noting that there was no North Carolina state court authority on the point and stating that it had an obligation to approach an issue of first impression cautiously and to avoid it if possible The Court instead framed the issue as follows the more important question in this case is to whom is that duty owed to the LLCs or to the member individually The Court found that the breaches of duty alleged by the Defendant would have affected all of the members of the LLC not just the Defendant and that the Defendant therefore was not entitled to assert a direct claim for breach of fiduciary duty The Court concluded as follows in granting the Motion In the instant case Defendant fails to make any allegations of a special duty owed only to it and not the other members of the LLCs nor has it shown that it suffered a special loss separate and distinct from the harm to the LLCs and other members of the LLCs Consequently Defendant has no standing to bring a direct or individual action against a member manager of the LLCs For this reason Defendant s claims alleging breach of fiduciary duty should be dismissed This case was decided about a month ago I picked it up from this week s North Carolina Lawyers Weekly LLC Investor Did Not Owe A Fiduciary Duty To The LLC Or Its
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