Consider the following hypothetical: The operating agreement of an LLC vests management authority in its two members. In practice, and by informal mutual consent, only one of the members actively manages the LLC’s business and financial affairs. (Not an altogether unusual arrangement, by the way.) When things go awry between the two members, and the active member accuses the inactive member of engaging in misconduct violating fiduciary duties owed to the LLC and to the active member, can the inactive member disclaim those fiduciary duties on the ground he owes no such duty as a de facto non-managing member?

A disclaimer of the sort was raised and rejected in a ruling earlier this month by Manhattan Commercial Division Justice Barry Ostrager in Marcus v Antell, 2018 NY Slip Op 32527(U) [Sup Ct NY County Oct. 5, 2018], where the court relied on a strict application of New York’s LLC Law § 401 (b) (ii) providing that any member of a member-managed LLC “shall have and be subject to all of the duties and liabilities of a manager provided in this chapter.”

It’s not quite as simple as it sounds. Continue Reading Does an Inactive Member of a Member-Managed LLC Owe Fiduciary Duties?

ExitI 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?