http://www.ncbusinesslitigationreport.com/Judicial Serendipity: North Carolina And Delaware On Fiduciary Duties Of LLC Members And ManagersDoes The Manager Of An LLC Have A Fiduciary Duty To The Members Of The LLC?LLC Investor Did Not Owe A Fiduciary Duty To The LLC Or Its MembersMESSAGE FROM ASSOC. PROF. PAMELA S. EVERS, ATTORNEY AT LAWThis 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 LLCMembers And Managers Posted on April 27, 2009 by Mack Sperling The fiduciary duties owed by members and managers of limitedliability companies are very different under North Carolina andDelaware law. In a bit of judicial serendipity, the North CarolinaCourt of Appeals and the Delaware Court of Chancery each issuedopinions on those issues last week, just a day apart. The North Carolina case is Kaplan v. O.K. Technologies, LLC (April21). the Delaware Court of Chancery case is Bay CenterApartments Owner, LLC v. Emery Bay PKI, LLC (April 20). Thetwo cases highlight the differences in the nature and scope offiduciary duties in the LLC context.The Delaware ViewThe 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 otherthe traditional duties that directors owe a corporation.'North Carolina on Fiduciary Duties of LLC MembersNorth 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 notcreate fiduciary duties among members. Members of a limited liability company are likeshareholders in a corporation in that members do not owe a fiduciary duty to each other orto 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 ManagersA manager of a North Carolina LLC does owe a fiduciary duty, as does a manager of a DelawareLLC. 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 theCourt 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 SperlingThe 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 co-manager 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 impressioncautiously, 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
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