Mary Szto – Historical Review of Fiduciary Duties in an LLC – Part 3

This is the third part of a review of Mary Szto’s article, “Limited Liability Company Morality: Fiduciary Duties in Historical Context,” 23 Quinnipiac Law Review 61 (2004-2005).  This week we get to the heart of the matter – the case law summary.

The author starts by explaining that, “In the Anglo-American tradition, principals of a firm are fiduciaries expected to lay aside self-interests.  A fiduciary’s duties, include a duty of care and a duty of loyalty owed to the firm, other principals, and/or other members of the firm.”

As the author surveys the case law involving fiduciary duties in a limited liability company context, she posits that courts “demonstrate a preference for corporate duty of care and a partnership duty of loyalty.”

Building on her history lessons she states that, “Canonists may never have imagined that the corporate form would become the chief engine for business growth today.  Nevertheless, in the 1800’s, business corporations came into prominence.  Agency, partnership, and trust duties chiefly influenced them, and still do today . . . English and American commentators readily applied agency, trust and partnership law to corporate fiduciary law.  Duties of care and loyalty were also addressed.”

Says Ms. Szto, “The duty of care cases focus on statutory or contractual corporate standards.  Duty of loyalty cases show a slight preference for partnership standards.  Also, enforcing contractual provisions, the courts still find equitable duties.  Even when LLC members ‘opt out’ of loyalty duties, courts find equitable duties that cannot be eviscerated.  This is in agreement with equity.  Many courts, notably Delaware’s and Ohio’s recognize a transcendent selfless standard for LLC fiduciaries.”

As Ms. Szto reviews the case law, she concludes, “In duty of loyalty cases, courts enforce contractual waivers and standards for fiduciary duties.  However, where there was self-serving behavior, they also found equitable duty breaches.  This was the case even when LLC operating agreements modified or limited fiduciary duties.  Of note is approach of Delaware, Ohio, New York, and Indiana.  Duty of loyalty cases may concern usurpation of firm opportunities, the duty to disclose information, conflicts of interests, and the duty not to compete with the firm.”

Ms. Szto states, “Also, when a statutory duty existed, corporate standards were applied using the best interests of the LLC as a main factor.  For example, a Maryland case found that all decisions by the LLC’s board were protected from second guessing by the business rule, which insulated the board from claims unless it ‘acted in bad fath.’  Another Maryland case noted that a majority interest holder owes a fiduciary duty to the LLC’s minority interests holder, which standard is similar to that of closely-held corporations.

The author states, “In sum recent LLC cases illustrate that in duty of care cases, corporate standards prevail.  ‘Best interests of the LLC’ are a primary focus.  In duty of loyalty cases, agency and partnership standards are favored.  Also, courts (Delaware’s chief among them), recognized equitable duties that are transcendent.  Ohio’s court stated that LLC members owe each other the ‘up most trust and loyalty.’”

The author concludes that, “Fiduciary duties are ingrained in Anglo-American jurisprudence in the business association.  They reach back to the biblical tradition, Roman, and ecclesiastical law.  They develop with fidei commissa, utilitas ecclesiae, the use, trusts, and agents.  They constitute partnerships, limited partnerships, and corporations.”

“To the extent that LLC fiduciary duties are true to their equitable roots, the LLC will take its place among enduring business entities and are constituted by a transcendent business morality.  There is promise of this in legislation that affirms equitable standards and in case law that promotes a corporate duty of care and partnership duty of loyalty that is selfless.  This is the rich legacy of fiduciary duties.”

I give this article six stars out of ten.  I would have appreciated more focus on the theories of LLCs and how these theories tie in to the particular fiduciary duties assigned by the courts, and less on the Anglo-Saxon religious roots.  In the end, the title has more sizzle than the article.

Randy Krbechek posted at 2009-10-5 Category: Law Reviews

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