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Officers Have No Fiduciary Duties In Manager-Managed LLCs, Court Says

Corporate Law Roundup

Sharp Thinking

No. 157      Perspectives on Developments in the Law from Sharp-Hundley, P.C.     August 2018

Officers Have No Fiduciary Duties In

Manager-Managed LLCs, Court Says

By John T. Hundley, 618-242-0200, john@sharp-hundley.com

            In manager-managed limited liability companies, the manager “alone” is responsible for the “management and conduct of the company’s business,” and he, “exclusively,” decides any matter relating to the company’s business. 

            So said the Appellate Court in Chicago recently in exonerating an LLC vice-president who was alleged to have breached fiduciary duties to the company.  800 S. Wells Commercial LLC v. Cadden, 2018 IL App (1st) 162882.

            In 800 S. Wells, after the company came under new management it brought a lawsuit alleging breach of fiduciary duties against the former manager and officers.  One of the persons sued, Cadden, had had the title of vice-president but was actually neither a member nor a manager for the LLC (he was an employee of the manager). Plaintiff claimed he had fiduciary duties by virtue of his position of vice-president, arguing for an officer-liability doctrine for LLCs analogous to that in the corporate context.                               

          The panel rejected the idea that the corporate doctrine could be transplanted into the LLC context.  “When dealing with limited liability companies and the fiduciary duties owed to them, we must look – first, foremost, and primarily – to the [Illinois Limited Liability Act (805 ILCS 180)],” the court said.  It construed § 15-1(c) of that act to vest management of manager-managed LLCs “alone” and “exclusively” in the formal managers.  Noting that 805 ILCS 180/15-3(g)(1) provided that “a member who is not a manager owes no duties to the company or to the other members solely by reason of being a member,” it reasoned that Cadden, a non-member, could not be held to have such duties either. 

            While 800 S. Wells can be read to make the act the critical decision-making factor in such analyses (“first, foremost, and primarily”), it also can be read to have a narrower basis.  This is because the LLC in that case had an extremely “strong-manager” operating agreement, which, it fairly can be said, vested in the manager all the power the act permits.  800 S. Wells relied upon those provisions as well.  Query whether the result might be different if the operating agreement diffused decision-making power.

            800 S. Wells hints that it might.  Citing 805 ILCS 180/15-5(a), it says the act (or more correctly, most of the act) is a gap filler the provisions of which the operating agreement may change.  So, if the operating agreement were not so pro-manager as the one there, 800 S. Wells might not control.

We are not convinced that 800 S. Wells was correctly decided.  The decision treats the LLC act as if it existed in a vacuum.  The LLC from today is used by some very large organizations.  They likely would be surprised to learn that none of their agents or employees have any fiduciary duties to them.  But for some reason – perhaps because Cadden was not paid by the LLC, perhaps because it wasn’t argued – 800 S. Wells fails to explore, let alone decide, Cadden’s potential liability as an agent and putative employee. 

“Cause” For Termination Of LLC Member Has High Standard

            A limited liability company contract allowing termination of a member for unspecified “cause” does not involve the common dictionary definition of that term, but rather invokes a much higher standard, a panel of the Appellate Court’s Third District has ruled.    

            Writing in McManus v. Richards, 2018 IL App (3d) 170055, the court said the standard for determining whether there was proper cause for one orthodontist to terminate the other was “whether McManus’s conduct made it unreasonable for the two to continue working together.”

            It rejected an argument from the terminating party that was based upon a common dictionary definition, and it rejected an argument that the standard used in an employment context should apply. 

            Rather, the court relied upon provisions of the Illinois Limited Liability Company Act (805 ILCS 180) governing when a court could expel a member involuntarily in selecting the higher standard.

Litigant Remedies Expanded Under Business Corporation Act

            Successful litigants in judicial dissolutions and shareholder suits under the Illinois Business Corporation Act (805 ILCS 5) have increased options to recover attorney fees and expenses from parties that have engaged in arbitrary, vexatious or otherwise not-in-good-faith actions.

            That’s the message sent by the Appellate Court for the First District in a recent decision.  Machnicki v. Kurowski, 2018 IL App (1st) 171077.

            Machnicki has at least two important teachings:

            ►  While the current statute (805 ILCS 5/12.60(j)) still requires that the respondent have “acted arbitrarily, vexatiously, or otherwise not in good faith,” it does not require that the misconduct “take place in the litigation.”  Thus out-of-court misconduct by a party can support a motion for sanctions under the current statute.

           ►   The current statute imposes no requirement that the fees and expenses awarded be “necessitated by the offending party’s actions.”   Thus, “any argument by the plaintiffs that some or all of the fees and expenses awarded . . . were not a direct result of plaintiffs’ actions fails,” the court said.

 

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