Posted on May 18, 2008 by Teri Rasmussen

Fiduciary Duties of LLC Members to Each Other

Suppose your fellow LLC member starts a new business which competes with the LLC's business.  Can he or she do that?  Well the answer depends upon what state your LLC is organized in and what your Operating Agreement says.  It may also depend on how sophisticated the members are.

In Ohio, the default presumption is that fiduciary duty among members of an LLC, especially in what might be called a "closely held" LLC with few owners, exists and would prevent this sort of behavior.  However, Ohio courts have shown a willingness to allow parties to restrict or modify this obligation with the provisions of the operating Agreement itself. 

McConnell v. Hunt Sports Enterprises.  In Ohio, the key case is McConnell v. Hunt Sports Enterprises, 132 Ohio App.3d 657, 725 N.E.2d 1193 (10th App. Dist. 1999).  The case involved Lamar Hunt and Columbus' "Mr. Mac" who eventually became the majority owner of the Columbus Blue Jackets NHL hockey team.  It arose in the context of Columbus' efforts to attract a professional sports team.  McConnell and Hunt were both members of an LLC called Columbus Hockey League, LLC ("CHL") which was formed according to its Operating Agreement to "invest and operate a franchise in the National Hockey League". 

At some point along the way, Mr. Mac and some of the Columbus members of CHL, individually and not on behalf of CHL, went ahead and signed a lease and ownership agreement for an NHL team.  This group then filed a declaratory judgment against Lamar Hunt's entity to the effect that they had not violated CHL's Operating Agreement.  The Hunt group then counterclaimed alleging breach of fiduciary duty and seeking an injunction preventing the NHL from granting the franchise to Mr. Mac's group.  

Both the trial court and the Ohio Court of Appeals found that the Operating Agreement itself allowed competition and held that consequently no breach of fiduciary duty occurred.  Indeed section 3.3 of the Operating Agreement provided:

Members May Compete.  Members shall not in any way be prohibited from or restricted in engaging or owning an interest in any other business venture of any nature, including any venture which might be competitive with the business of the Company...  

The Court further explained:

In the case at bar, a limited liability company is involved which, like a partnership, involves a fiduciary relationship.  Normally, the presence of such a relationship would preclude direct competition between members of the company.  However, here we have an operating agreement which by its very terms allows members to compete with the business of the company.  Hence, the question we are presented with is whether an operating agreement of a limited liability company may, in essence, limit or define the scope of the fiduciary duties imposed upon its members.  We answer in the affirmative.

In reaching this conclusion, the Court considered existing caselaw which established a fiduciary duty in the close corporation context.  It harmonized these cases with its holding as collectively standing for the proposition that both close corporation agreements and operating agreements could permissibly limit the scope of fiduciary duties that would otherwise apply.  It also made it clear that "[i]n general terms, members of limited liability companiesowe one another the duty of utmost trust and loyalty." 

Recent Ohio Caselaw.  More recently, in All Star Land Title Agency v. Surewin Investment, Inc., 2006 Ohio 5729, (8th App. Dist.), the Cuyahoga County Court of Appeals held:

In the present case, a limited liability company is involved which involves a fiduciary relationship.  Normally, the presence of such a relationship would prevent direct competition between the members of the company.  However, here we have an operating agreement which, by its very terms, allows members to compete with the business of the company.

Delaware.  Delaware is even more accepting of a contractual waiver of fiduciary duty.  Section 18-1101 of the Delaware limited Liability Company Act specifically authorizes the restriction or even elmination of any fiduciary duty:

(c) To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing....

(e) A limited liability company agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a member, manager or other person to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement; provided, that a limited liability company agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.

As explained by Francis Pileggi in his Delaware Corporate and Commercial Litigation blog post entitled "Chancery Gives Victory to 'Freedom of Contract'and Refuses to 'Find' Fiduciary Duties in LLC Agreement When Not Clearly Stated", the recent Delaware case of Fisk Ventures, LLC v. Segal underscores this willingness to accept the parties' contractual agreement that no fiduciary duty applies.  Francis believe this case will gather much attention in an ongoing discussion regarding whether fiducairy duties should differ between LLCs and corporations.

Virginia.  A recent post "Members of Virginia LLCs May Not Owe Fiduciary Duties to Each Other" on the Womble Carlyle Unfair Business Practices blog by Mike Holm explores two Virginia cases which found the absence of statutory provisions regarding fiducary duty in the Virgina LLC Act, as compared with their presence in the Virginia Partnership Act to be dispositive in determining that LLC members have no fiduciary duties towards one another.     

Florida.  In Florida, Fla Stat. Section 608.4225 sets forth a number of fiduciary duties for members of limited liability companies.  In addition, pursuant to Fla Stat. Section 608.423 prohibits elimination fo the duties found in Fla. Stat. 608,4225, but does allow the operating agreement to

      1. Identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; and

      2. Specify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty;    (c) Unreasonably reduce the duty of care under s. 608.4225;    (d) Eliminate the obligation of good faith and fair dealing under s. 608.4225, but the operating agreement may determine the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;

 California.  In California,  in a manger-managed LLC, a manager owes members the same duties as a partner does to a partnershiop and to the other partners under Cal Corp. section 17153.  According to Cal Corp Code section 17005, "[t]he fiduciary duties of a manager to the limited liability company and to the members of the limited liability company may only be modified in a written operating agreement with the informed consent of the members."  No similar specific provision appears to exist with respect to the obligations between members.

Other States and Resources.  For discussions of the law in other states, visit:

And for those really wanting to get into detail on a slightly different related topic, check out Miller, "What Fiduciary Duties Should Apply to the LLC Manager After More Than a Decade of Expermimentation?", 32 Iowa J. Corp. L. 565 (2007).

Analysis.  I like the Ohio approach of very strong presumption of a fiduciary duty among LLC members, especially in "closely held" LLCs.  When only a few owners are involved and are engaged in the day-to-day running of the company, there seems to be little rationale for varying the standard of care owed one's fellow owners by virtue of the form of business entity chosen. 

For more sophisticated LLCs,  I suppose a case can be made for allowing members to decide among themselves what level of loyalty and care they want.  However, what about publicly traded LLCs or privately held LLCs in which some members are individual investors who responded to a private placement memorandum?  In this case, it seems hard to me to explain why the form of entity chosen will determine the level of loyalty and care owed these perhaps less sophisticated members.  

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