LLC Membership Disputes: What Are the Key Duties Owed by Managers and Members?
by Adam Rabin
As of January 1, 2015, the Florida Revised Limited Liability Company Act (the “Revised Act”) took effect as to all Florida limited liability companies (“LLCs”). Under the Revised Act, there are certain key duties that apply to LLC managers and members. Which duties apply to managers and members, however, depends on the LLC’s designation of management as manager-managed or member-managed.
Under the Revised Act, How Are Managers and Members’ Duties Defined?
Under the Revised Act, the fork in the road is that the organizing members of the LLC must designate whether the LLC will be manager-managed or member-managed. This is an important distinction because the Revised Act defines managers and members’ rights and duties based upon this designation. If no designation is made, however, the LLC defaults to a member-managed LLC. In what in many cases will be an unintended consequence, this default designation will give all members the right to manage the LLC and will impose broader duties and potential liability upon all members. See § 605.0407(1), Fla. Stat.
Further, under the Revised Act, there is no longer a “managing member” of an LLC. See § 605.0407(1), Fla. Stat. The so-called managing-member of an LLC is now obsolete, and any LLC operating agreement or articles of organization should be updated to reflect this legislative change.
In this vein, any update to an operating agreement or articles of organization should also designate the management type for the LLC. From this designation, the managers and members’ specific rights and duties will follow. The operating agreement or articles of organization further may define, broaden, and limit managers and members’ rights and duties (with some non-waivable exceptions). See §§ 605.0407, 605.0105, Fla. Stat.
What are the Key Duties for Managers and Members in an LLC?
Each manager of a manager-managed LLC, or member of a member-managed LLC, owes a fiduciary duty of loyalty to the LLC and its members. This is the core duty imposed upon managers and members, the breach of which often results in litigation. Importantly, the fiduciary duty of loyalty is not imposed upon a member if the LLC is manager-managed. Members only have such a duty in a member-managed LLC. See § 605.04091(2), Fla. Stat.
The fiduciary duty of loyalty requires a manager in a manager-managed LLC, and a member in a member-managed LLC, to do the following:
- Account to the LLC, and hold for it as trustee, the LLC’s property, profit or benefit derived by the manager or member.
- Refrain from dealing with the LLC as a person having an interest adverse to the LLC.
- Refrain from competing with the LLC.
See § 605.04091(2), Fla. Stat.
The Revised Act, however, also imposes certain limits on the above fiduciary duty of loyalty. In particular, managers or members do not violate their duty of loyalty solely because their conduct furthers their own interest. See § 605.04091(5), Fla. Stat. Likewise, the manager or member is entitled to rely on information, opinions, reports or statements that are prepared by employees, professionals, or any appointed committees, if they are considered reasonably reliable. See § 605.04091(4), (6), Fla. Stat.
In addition to the duty of loyalty, a manager in a manager-managed LLC, and a member in a member-managed LLC, also owes a fiduciary duty of care to the LLC and its members. The duty of care specifically requires that the manager or member refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law. See § 605.04091(3), Fla. Stat.
Managers and members also must execute their fiduciary duties of loyalty and care consistently with the obligations of good faith and fair dealing. See § 605.04091(4), Fla. Stat.
Do Operating Agreements and Common Law Principles Supplement a Manager or Member’s Duties?
The Revised Act gives maximum effect to the principle of freedom of contract and to the enforceability of operating agreements. The principles of law and equity, including common law principles relating to the fiduciary duties of loyalty and care, supplement the provisions of the Revised Act. § 605.0111(3), Fla. Stat. This suggests that case law from other areas, including the law governing corporations, may be borrowed and applied to LLCs.
Under the Revised Act, it is critical for the organizers or management of an LLC to designate whether the LLC is manager-managed or member-managed. The key duties that govern managers and members, including the fiduciary duties of loyalty and care and the obligation to perform such duties in good faith, directly flow from this management designation. Equally important, the limitations on such duties may insulate or limit a manager or member’s liability based upon this designation. As a result, all operators of an LLC should have competent counsel review the LLC’s management designation and operating agreement, if any, to ensure that LLC is compliant with the Revised Act.
Adam Rabin is a shareholder with McCabe Rabin, P.A. and is Florida Bar Board Certified in Business Litigation. Mr. Rabin concentrates in LLC member disputes and whistleblower qui tam litigation.