The ULLCA and Operating Agreements
Only a handful of states have adopted most or all of the provisions of the ULLCA or RULLCA. These uniform laws establish fiduciary duties among members and/or managers of LLCs. Many states that do not follow the ULLCA or RULLCA nevertheless look to either their partnership or corporate statutes and case law to define the duties that exist between LLC members and managers. Other states’ acts look solely to the operating agreement for the LLC to define what duties exist, if any. At one time, only six states, including Arizona, did not specifically address fiduciary duties in LLCs by statute.
The ULLCA and RULLCA establish the fiduciary duty of due care and the fiduciary duty of loyalty. The duties are owed both by managers in manager-managed, and members in member-managed companies to the entity and its members. However, no duty is owed by a member to the company or other members “solely by reason of being a member“. The operating agreement cannot waive or eliminate these duties. However, the operating agreement may limit the scope of the duties to the extent the limitations are not “manifestly unreasonable“.
Many states allow the operating agreement to define any duties. For example, Delaware’s statute permits that the operating agreement may provide for fiduciary duties for managers and members. “Accordingly, business people may draft, define, expand or limit duties. The Arizona Act confers express authority to incorporate any term or provision into the operating agreement that does not conflict with the Arizona Act“. Because the Arizona Act is silent about duties, presumably it would permit the operating agreement to similarly allow business people to draft, define, expand or limit fiduciary duties.
However, all of this does not answer a very important question: Do fiduciary duties exist where not specified, or where limited by the operating agreement? If the operating agreement does not define duties, will duties be implied?
Under the Delaware Act, the answer appears to be yes. And Delaware law may be the best reference point for an answer because of the prominence and extent of its business law that is followed by many states when a state does not have its own controlling precedent.
In a 2009 Delaware opinion, the Delaware Court of Chancery held, “[I]n 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“. The Court of Chancery revisited the issue in 2010 and reaffirmed its 2009 holding and further held that “controlling members in a manager-managed LLC owe minority members the traditional fiduciary duties’ that controlling shareholders owe minority shareholders“.
Again, on July 23, 2010, the Delaware Court of Chancery issued an unpublished opinion providing insight on fiduciary duties in LLCs. In Related Westpac, LLC, et al. v. JER Snowmass, LLC, et al., the Court of Chancery refused to apply fiduciary duties among members in an LLC when application of the fiduciary duties would undermine the LLC’s operating agreement. Put another way, if applying fiduciary duties would nullify the partie’s express bargain (terms, promises, etc.) outlined in the LLC’s operating agreement, the Delaware Court will not impose fiduciary duties among the members. In this case, the court found that the defendant could act in a manner that served its own interests and not be liable for breach of fiduciary duties because the LLC’s operating agreement permitted defendant to act in such a manner.
In sum, where the use of default fiduciary duties would intrude upon the contractual rights or expectations of the parties, as typically outlined in an LLC operating agreement, the court will eschew fiduciary concepts and focus on a purely contractual analysis of the dispute.