I wish I could tell you this post will answer the question posed by its title, but it won’t. Let’s start with a few basic, non-controversial propositions concerning the default duties of LLC members and managers under the laws of New York and, I would hazard a guess, most if not all other states:
- Managers of a manager-managed LLC owe fiduciary duties of care and loyalty to the LLC and its members.
- Non-managing members of a manager-managed LLC do not owe fiduciary duties of care and loyalty to the LLC and its members.
- Members of a member-managed LLC owe fiduciary duties of care and loyalty to the LLC and its members.
Now let’s tamper with the last of the above default rules. Assume the Acme company is a two-member, 50/50, New York LLC whose articles of organization do not designate it as manager-managed hence its management is “vested” in its members subject to provision otherwise in its operating agreement as authorized by LLC Law § 401 (a). Further assume Acme’s operating agreement expressly vests sole management authority in one of the two members. Does Acme’s other, non-managing member owe fiduciary duties? About two years ago, in Kalikow v Shalik which I wrote about here, Nassau County Commercial Division Justice Vito M. DeStefano answered that question in the negative, reasoning that § 401 (a)’s vesting of management powers in the members is made subject to the operating agreement, and that LLC Law § 409 (a) imposes duties on LLC “managers” with no mention of non-managing members. So far so good. Now let’s try another, stickier variation. Assume Acme has no operating agreement, that from inception its two 50/50 members jointly managed it, but there came a time when one member announces to the other that he “withdraws” from all management responsibility — but still maintaining his membership interest and entitlement to his pro rata share of Acme’s profits — following which he forms and operates a competing business. Has the “withdrawn” member taken on the status of a non-managing member and successfully shed his fiduciary duties, thereby permitting him to compete freely against his own company? Continue Reading Can LLC Members Walk Away From Fiduciary Duties?