by Louis T. M. Conti
Limited liability companies (LLCs) have become the predominant form of business entity for private companies in America. The question generally is not whether to use an LLC for most privately held businesses, but rather where to form the entity. The jurisdiction of formation choice is narrowed to either the “home state” where the principal office and activities of the business will be based, or Delaware, the most generally accepted foreign forum. Evaluating the jurisdiction of formation turns on several key concepts that are beyond the scope of this article, but the most important factors are the state LLC statute’s fiduciary duty provisions and caselaw addressing fiduciary duties.
This article describes the fiduciary duty law that applies to Florida LLCs, with a special focus on consequences of the “un-cabining of fiduciary duties” occasioned by the Florida Revised LLC Act, as amended in 2015.
History in Florida
Florida law on fiduciary duties in business entities, including LLCs, initially derived from common-law principles, which developed through trusts and then partnerships. The term “fiduciary” itself was adopted to apply to situations falling short of the trustee to trust beneficiary relationship, but in which one person was nonetheless obligated to act like a trustee, to accommodate the separation of ownership from control. These relationships typically included “agent to principal,” “director to corporation,” “partner to partner,” “guardian to ward,” and “lawyer to client.”
The seminal case most often cited on fiduciary duties is Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928), when Judge Benjamin Cardozo compared Morton Meinhard and Walter Salmon’s joint venture to both a partnership and a trust, and applied the duty of loyalty to the participants in the joint venture.
The Florida LLC Act’s statutory fiduciary duty provisions were substantially modified in 2015 by “un-cabining” the statutory fiduciary duties and by expressly adopting common law principles of law and equity relating to fiduciary duties as an express part of the act. These changes gave greater importance to the application of the “manifestly unreasonable” standard of review to be considered by courts when evaluating operating agreement provisions that attempted to reduce or eliminate fiduciary duties. These changes to the act, along with recent caselaw, form the basis for this article.
Florida Changes Statutory Law on Fiduciary Duties in LLCs
When Florida initially adopted the Florida Revised LLC Act (Ch. 605) in 2013, the legislature followed prior Florida law, which “cabined-in” fiduciary duties, meaning courts looked only to the defined duties of care and loyalty as they were described in §605.04091 when evaluating whether a fiduciary breached the duty of care or duty of loyalty. When Florida revised Ch. 605 in 2015, it adopted the “un-cabined” fiduciary duty format found in the Revised Uniform Limited Liability Company Act (RULLCA), which meant the statutory definitions of the duties of care and loyalty described in RULLCA were not exclusive, and courts could consider broader interpretations of the fiduciary duties owed by those in control of the LLC, including common law duties beyond the language in the statute.
In essence, Florida intentionally changed its longstanding view of “cabined-in” fiduciary duties and adopted the “un-cabined” formulation in 2015, which it had eschewed in the initial 2013 drafting process. This was controversial within The Florida Bar Drafting Committee, which drafted Ch. 605, as some members of the committee were concerned that un-cabining fiduciary duties would lead to inconsistent judicial interpretations of the duties of care and loyalty and could open the door to imposition of new or additional fiduciary duties in Florida LLCs.
Florida also modified §605.0111(2) in 2015 to provide: “Unless displaced by a particular provision of this chapter, the principles of law and equity, including the common law principles relating to the duties of care and loyalty, supplement this chapter.”1 Consequently, these changes mean that courts can now consider fiduciary duty principles beyond the LLC act’s stated description of the duties of care and loyalty.
Fiduciary Duties in Florida Limited Liability Companies
The early versions of LLC-enabling acts did not contain listed fiduciary duties for members or managers.2 Instead, early statutes relied on caselaw to govern the fiduciary duties of members and managers of LLCs. During the rapid expansion of LLC acts in the 1990s, state statutes reflected a wide variety of fiduciary standards for members and managers of LLCs.3 Florida included statutory “standards of conduct” in its LLC act in 1997 and 1999, as well as throughout subsequent amendments to Ch. 608.
Today, §605.04091 continues to apply “the fiduciary duties of loyalty and care” to an LLC’s members in a member-managed LLC and to managers in a manager-managed LLC, and it has also codified the obligation of good faith and fair dealing for those in control of a Florida LLC. In some instances, courts have also applied a “duty to disclose” information to members of the LLC, which is addressed in greater detail later in this article.4
The duty of care provisions in current LLC enabling acts can be broken down into five categories,5 based on the standard of care required of members and managers: 1) ordinary care;6 2) gross negligence or willful misconduct;7 3) good-faith business judgment;8 and 4) recklessness.9 Delaware law makes up the fifth category, which imposes a duty on managers’ reliance on information provided by others.10 Delaware fails to statutorily state definitions of its fiduciary duties in its act, instead relying on caselaw to define the fiduciary duties of members and managers in LLCs.11 The Delaware Code specifically references this reliance on common law in §18-1104, which states: “In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.”12
Florida adopted an even more robust codification of the common law and equitable principles in revised §605.0111(2) when addressing fiduciary duties in a Florida LLC. Regardless of the standard of care applied, these duty-of-care provisions deal with a manager’s actions or omissions in discharging his or her duties to the LLC and to its members.13
Florida’s §605.04091(3) provides that the duty of care in the conduct or winding up of the company’s activities and affairs “is to refrain from engaging in gross negligence or reckless conduct, willful or intentional misconduct, or a knowing violation of the law.” RULLCA describes the duty of care in exactly the same language. Both Florida and RULLCA also codify the contractual obligation of good faith and fair dealing for fiduciaries in discharging their duties and obligations under the operating agreement and the act. 14
Members in member-managed LLCs, and managers in manager-managed LLCs, also owe a duty of loyalty to the LLC and to the other members.15 This duty of loyalty includes: accounting and holding as trustee any LLC property, profit, or benefit derived by the manager or member; refraining from acting adversely to the LLC’s interest; and refraining from competing with the LLC prior to dissolution.16 The duty of loyalty also protects the LLC from self-dealing transactions and conflict of interest transactions involving the manager or member in a fiduciary capacity.17 The application of the business judgment rule as a defense to the duty of care in LLCs means that members and managers are more likely to face liability for violations of the duty of loyalty.18
Whether these duties run to both the LLC and the other members depends on the management structure of the LLC.19 Members in a member-managed LLC owe fiduciary duties to the company and the other members; while members in a manager-managed LLC do not owe fiduciary duties solely because of their status as members.20 Actions taken to further a member’s own interests are not per se violations of the duty of loyalty for members in a member-managed LLC, nor for a manager in a manager-managed LLC.21
The un-cabining of fiduciary duties in Florida’s LLC act, in concert with the changes to §605.0111, opens the door to courts interpreting and applying duties beyond the statutorily stated duties of loyalty and care to LLCs.22 Parties often form LLCs without entering into formal operating agreements, or with operating agreements that heavily rely on the default rules found in enabling statutes.23 To date, courts in Florida have not added additional duties to LLC members or managers beyond those described in the Florida act.
The fiduciary duties that apply to LLCs were generally derived from trust, corporate, and/or partnership law.24 These traditional sources could provide additional duties that have not yet been applied to Florida LLCs. Any additional duties applied to trusts, partnerships, or corporations could also find their way to LLCs eventually. Fiduciary duties applied to those in control of LLCs by Delaware or other state courts are also a source of adding new fiduciary duties for LLCs in Florida.25 Finally, courts could look to other fiduciary relationships for additional LLC fiduciary duties. Given the extreme contractual flexibility of the LLC, courts could also potentially analogize the relationship between the managers and members of an LLC to other relationships in which fiduciary duties exist.
Delaware’s preeminence in corporate law has made its caselaw highly persuasive in other jurisdictions.26 This preeminence in corporate law has carried over into the realm of LLCs.27 The un-cabining of fiduciary duties in Florida brings it closer to Delaware’s reliance on caselaw to establish fiduciary duties. By un-cabining fiduciary duties, Florida has placed its courts in a central role of determining fiduciary duties for LLC members and managers.
The Duty to Disclose
Given the persuasive nature of Delaware caselaw, along with the newfound importance Florida’s LLC Act has placed on caselaw by un-cabining fiduciary duties, the “duty to disclose” may prove to become one of the expanded fiduciary duties applied to LLCs in Florida. The duty to disclose could be considered a subset of the duty of loyalty if a conflict of interest is present, or it could be considered a subset of the duty of care.28 Courts could also view it independently of those duties.29 The Delaware chancery court in Metro Communication Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 153 (Del. Ch. 2004), described the duty to disclose as one that has generally applied in the corporate context. The court went on to say that corporate duties often served “as the default rule in the alternative entity context.”30 In Metro Communication, the potential duty to disclose arose in the context of a periodic capital call by the LLC’s management. The court found the managers had a duty to not mislead members in the managers’ disclosures to the members in relation to the capital call.31 While the court in Metro Communication did not hold the managers of the LLC had breached their duty to disclose, it discussed the existence of such a duty in reaching its conclusion.
This duty to disclose certainly is not absolute.32 In Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451, at *11 (Del. Ch. Apr. 20, 2009), the Chancery court found that managers had a duty to disclose material facts when the LLC operating agreement requires member approval of a transaction. The court did not impose a duty to disclose in every instance, just when a transaction required member approval.33 This is consistent with RULLCA’s §410 requirement that managers disclose material information in instances when the managers are seeking members’ vote or consent on a matter.34
Florida has, in fact, adopted a conditional duty to disclose in §605.0410(3)(d), in the context of a manager-managed LLC, when the member has a right under the act or the operating agreement to vote or consent to a matter. In those instances, the statute requires that “before the consent is given or withheld, the company shall, without demand, provide the member with all information that is known to the company and is material to the member’s decision.”
Courts in at least three other states besides Delaware have also applied a duty to disclose to LLC members and managers.35 In two of these instances the duty to disclose was applied in the context of a potential breach of the duty to loyalty. In Genesis Tech. & Fin., Inc. v. Cast Navigation, LLC, 905 N.E.2d 569, 576 (2009), a manager of the LLC failed to disclose that another related party would have an enforceable interest in a software license.36 The court in Genesis Technical found that the manager breached his duty to disclose when he failed to inform the LLC’s board of the potential conflict.37 In denying a motion for summary judgment, the court in Zanker Group, LLC v. Summerville at Litchfield Hills, LLC, 2005 WL 3047268 (Conn. Super. Ct. 2005), found that the defendant’s (a member of the LLC) exercising of an option to purchase a nursing home facility without informing the LLC of the option was a potential breach of the member’s duty to disclose.38 In each of these instances, the courts bifurcated the duty to disclose and the duty of loyalty. Essentially, the breaching party engaged in two types of improper activity: 1) failing to disclose an opportunity to the LLC, and 2) taking that opportunity for themselves. By bifurcating the duty of loyalty these courts are, in effect, creating a separate duty to disclose. Courts in Florida could engage in similar reasoning when a member or manager usurps an LLC opportunity, and could create an uncodified duty to disclose that is broader than currently exists in the Florida LLC statute.
Fiduciary duties apply to a number of relationships outside the business entity context.39 The flexibility of an LLC as a business entity could lead a court to a comparison between an LLC and these other fiduciary relationships. For example, the relationship between a member who invests in an LLC, and a manager of a manager-managed LLC who manages the funds or investments through an LLC used as an investment vehicle strongly resembles the relationship between a trustee and a beneficiary. Once the member invests capital in the LLC, the manager will manage those funds for the benefit of the LLC and the member, much like the way a trustee manages the principal of a trust for the benefit of a beneficiary.40 A court could analogize the LLC to a trust and potentially apply fiduciary duties that are normally imposed on a trustee to the manager of the LLC.
Courts have held that trustees have a duty of disclosure of material facts that may impact the rights of a beneficiary.41 A court in a RULLCA state, like Florida, could find that a manager, like a trustee, has an affirmative duty to disclose material information to members of the LLC even in circumstances in which the member was not asked to consent or vote on an action by the manager. The fact that courts could apply the duty to disclose to members and managers of an LLC through multiple avenues makes it a likely addition to the fiduciary duties required of members or managers of LLCs formed in Florida.
Eliminating or Reducing Fiduciary Duties for Limited Liability Companies
The wide variety in the types of businesses and professions that use the LLC form makes inflexible fiduciary duties impracticable.42 Consequently, parties who assume responsibility for managing an LLC often look to eliminate or reduce their fiduciary duties in the LLC operating agreement. One study of 150 operating agreements43 published in 2012 found that over 72 percent of the studied operating agreements had modified or eliminated the duty of loyalty, and 68 percent expressly condoned competing with the LLC.44 However, only 8.5 percent of the agreements purported to modify or eliminate any fiduciary duty of care owing among members.45 The data provided by this study highlights the prevalence of fiduciary duty modifications or waivers. Allowing parties to completely eliminate fiduciary protections in their governing agreements is, however, not without its problems.46
In fact, the Senate sponsor of Florida’s Revised LLC Act (a Florida lawyer with experience litigating LLC fiduciary duty issues), was indeed concerned with the potential for abuse or oppression by parties in control of an LLC, which had members without any participation in or control over the activities and affairs of the LLC. That Senate sponsor of Ch. 605 intentionally sought to un-cabin fiduciary duties to allow courts to apply their equitable powers in considering fiduciary duty cases, and to consider principles of law and equity beyond the literal statutory definitions of care and loyalty in evaluating whether a fiduciary acted appropriately.
The Manifestly Unreasonable Standard
The Uniform Law Conference (ULC) acknowledged the problems associated with eliminating all fiduciary duties in an LLC when it adopted the manifestly unreasonable standard for evaluating provisions, which sought to eliminate or reduce fiduciary duties in RULLCA.47 The ULC Drafting Committee explained its reasoning for this decision in the commentary for RULLCA §110. Quoting Professors Carter Bishop and Daniel Kleinberger (the co-reporters for RULLCA), the commentary noted the “open-ended nature of fiduciary duty reflects the law’s long-standing recognition that devious people can smell a loophole a mile away.”48 The addition of the manifestly unreasonable standard provides courts with a way to check oppressive conduct otherwise allowed in operating agreements.49 The manifestly unreasonable standard presents a “middle ground” between “the strictly contractarian approach of Delaware and the ‘fiduciarian’ approach of ULLCA.”50 As pointed out by one knowledgeable commentator, the manifestly unreasonable standard, presents issues because of its amorphous nature.51
Some commentators recommend parties in RULLCA states specifically eliminate any unknown or unspecified fiduciary duties not listed in the state LLC act when entering into their operating agreement.52 Florida §605.0105(4)(c) permits members to eliminate (subject to limitations) or reduce fiduciary duties in their operating agreement, if not “manifestly unreasonable”:
“If not manifestly unreasonable the operating agreement may:
“1. Alter or eliminate aspects of the duty of loyalty under s.605.04091(2);
“2. Identify categories or activities that do not violate the duty of loyalty;
“3. Alter the duty of care but may not authorize willful or intentional misconduct or a knowing violation of the law; and
“4. Alter or eliminate any other fiduciary duty.”
Florida §605.0105(5) further provides “the court shall decide as a matter of law whether a term of an operating agreement is manifestly unreasonable under paragraph (3)(f) or (4)(c).”
The ULC attempted to address the issue of defining manifestly unreasonable in RULLCA §110(h), and Florida utilized that definition in its LLC act when it adopted §605.0105(5). Accordingly, a Florida court (not the jury) should determine as a matter of law if provisions in the operating agreement that seek to eliminate or reduce a fiduciary duty are “manifestly unreasonable,” considering only circumstances existing at the time the parties adopted those provisions into their operating agreement.53
RULLCA and the Florida act also provide guidance as to the type of provisions courts may invalidate.54 In making the manifestly unreasonable determination, courts may invalidate the term only if, considering the purposes and activities of the LLC, it is “readily apparent that (A) the objective of the term is unreasonable; or (B) the term is an unreasonable means to achieve the provision’s objective.”55 In providing guidance for the standard, the ULC defines “manifestly unreasonable” as actions that are obviously not reasonable under the circumstances. Placing the word unreasonable in the definition provides little guidance to parties attempting to enter into an operating agreement with reduced or eliminated fiduciary duties. Obviously, much discretion is left to the court, and the court will consider the circumstances and consequences when exercising that discretion.
The manifestly unreasonable standard is found in several other model or uniform laws. It is used in seven provisions of the Uniform Commercial Code.56 The Revised Uniform Partnership Act (RUPA) also uses the manifestly unreasonable standard for prescribing the standards for the duty of care, duty of loyalty, and the obligation of good faith and fair dealing.57 Though these uniform laws employ the “manifestly unreasonable” standard, they provide scant authority for its interpretation, although comments to U.C.C. §1-302 offer some limited guidance.58
Courts interpreting the standard rarely explain why a provision is manifestly unreasonable when applying the standard.59 Instead, courts often simply state that a provision is unreasonable without actually explaining why.60 Provisions that fail the manifestly unreasonable standard have been said to be “beyond ‘the outer limit of permissiveness.’”61 Courts have also looked to relevant circumstances at the time the parties entered into their agreement to determine whether a provision is manifestly unreasonable.62 This examination includes looking at the relative bargaining power of the parties at the time they entered into the agreement.63 The greater the disparity in the bargaining power between the parties, the more likely a court will be to find a provision manifestly unreasonable. Courts can also look to the prior dealings between the parties and the business practices of the industry in question when making a manifestly unreasonable determination.64
One commentator who wrote in defense of the manifestly unreasonable standard identified four factors that could be applied when determining whether a provision is manifestly unreasonable: 1) Did the waiver clearly and unambiguously relate to the conduct at issue? 2) From an ex ante perspective, was any party adversely affected by the waiver? 3) Would enforcement of the waiver damage the entity in a way that the parties could not have anticipated when the waiver was executed? and 4) Was the entity closely or widely held?65 Courts could consider these factors to help determine whether the elimination or reduction of fiduciary duties in an operating agreement is manifestly unreasonable, but there is no legal precedent requiring them to do so. One thing is certain, it will take time for caselaw to develop a cohesive and consistent body of law to make practitioners comfortable with the limits of the manifestly unreasonable standard.66
Delaware caselaw provides little help to parties seeking to eliminate or reduce fiduciary duties in states that have enacted RULLCA. Delaware does not base its LLC act on RULLCA. The Delaware LLC Act takes a purely contractarian approach, including allowing parties to fully eliminate fiduciary duties, regardless of the reasonableness or unreasonableness of the provision.67 Thus, parties will not likely get much help from Delaware’s well-developed caselaw on whether the elimination or reduction of fiduciary duties for an LLC’s members or managers was “manifestly unreasonable.”
Courts are playing catch-up to evolving statutory LLC changes. Moreover, there is a lack of uniformity in states’ treatment of fiduciary duties in LLCs. Most state LLC acts have cabined-in fiduciary duties, thereby limiting them to the specified duties of care and loyalty, while other states, like Florida, have adopted RULLCA’s un-cabined fiduciary duties structure.
The un-cabining of fiduciary duties in a Florida LLC may provide some comfort to noncontrolling members of an LLC, as it may allow courts to fashion appropriate equitable remedies to prevent abuse of power; however, it does so at the cost of uncertainty, by opening up the actions of fiduciaries to the courts and the common law principles of law and equity, which will now be applied on a case-by-case basis. The result may be new and unexpected fiduciary duties, including an unspecified duty to disclose. Moreover, these new duties could come from traditional sources like partnership or corporate law, as well as from laws governing other fiduciary relationships.
Finally, for those looking to eliminate or reduce fiduciary duties in their operating agreements (including provisions seeking to eliminate any possible expansion of fiduciary duties), those provisions are subject to review by a court applying the somewhat indeterminate manifestly unreasonable standard of review, which may result in further uncertainty, but which may also result in fairer applications of a court’s exercise of equity.
Ultimately Florida’s un-cabined fiduciary duties approach, like other states that have adopted RULLCA’s fiduciary duties, attempts to strike a middle ground between allowing parties to conduct their business in any way they see fit, and protecting parties who face inequitable treatment because of the predatory elimination or reduction of fiduciary duties.
While pure contractual freedom would seem ideal to those in control of LLCs, those facing an inequitable result because of predatory drafting would disagree. Therefore, although Florida’s approach to fiduciary duties may create some uncertainty for those attempting to reduce or eliminate fiduciary duties in their operating agreements, the protection it provides may be worth the uncertainty once courts have settled some of the issues surrounding the drafting of provisions governing fiduciary duties. Until those issues are settled, caution and very careful drafting are ever more important when addressing fiduciary duties in an LLC operating agreement.
1 Emphasis added.
2 See, e.g., Fla. Stat. §608.401 (1982).
3 Sandra K. Miller, What Standards of Conduct Should Apply to Members and Managers of Limited Liability Companies?, 68 St. John’s L. Rev. 21, 60 (1994) (discussing the wide variety of standards applied to the duty of care).
4 See Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 153 (Del. Ch. 2004) (finding that the managers of the LLC owed members a duty to disclose the existence of a bribery scheme); see also Salm v. Feldstein, 20 A.D.3d 469 (2d Dept. 2005) (finding that a duty to disclose existed when a member was presented with an offer to purchase business in connection with acquisition of co-member’s interest).
5 Carter G. Bishop & Daniel S. Kleinberger, Limited Liability Companies ¶10.02 (2016).
6 See, e.g., Mich. Comp. Laws Ann. §450.4404 (West 2015) (requiring a manager to discharge their duties with the “care an ordinarily prudent person in a like position would exercise under similar circumstances”).
7 See, e.g., N.M. Stat. Ann. §53-19-16 (West 2015) (removing managing-member liability for their actions “unless such act or omission constitutes gross negligence or willful misconduct”).
8 See, e.g., Va. Code Ann. §13.1-1024.1 (West 2015) (requiring only a manager to discharge their duties with the “good faith business judgment of the best interests of the limited liability company”); RULLCA §409(c) (subjecting a member or managers duty of care to the business judgment rule).
9 See, e.g., Ind. Code Ann. §23-18-4-2 (West 2015) (removing member or manager liability unless their “act or omission constitutes willful misconduct or recklessness”).
10 Bishop & Kleinberger, Limited Liability Companies at ¶10.02.
11 See, e.g., Gatz Properties, LLC v. Auriga Capital Corp., 59 A.3d 1206, 1209 (Del. 2012) (determining that traditional fiduciary duties apply when the parties operating agreement is silent).
12 Del. Code Ann. Tit. 6, §18-1104 (West).
13 See, e.g., Fla. Stat. Ann. §605.04091 (West 2015); Mich. Comp. Laws Ann. §450.4404 (West 2015).
14 See Fla. Stat. Ann. §605.04091(3) and (4) (West 2015); and RULLCA §409(c) and (d). In at least one bankruptcy case, these duties were addressed as potentially running to creditors as well if the LLC is insolvent. See In re Mendick, 2011 WL 4962902 (Bankr. D. Neb. 2011). Creditors of insolvent corporations have standing to bring derivative claims for breaches of fiduciary against insolvent corporations. See id. These same rights may extend to creditors of insolvent LLCs. The court in In re Mendick recognized this potential right, but left the question for another day.
15 See Fla. Stat. Ann. §605.04091(1) and (2) (West 2015); and RULLCA §409 (b).
16 See Fla. Stat. Ann. §605.04091(2) (West 2015); and RULLCA §409(b).
17 See Fla. Stat. Ann. §605.04092 (West 2015); William Penn P’ship v. Saliba, 13 A.3d 749, 756 (Del. 2011) (finding that members bear the burden of demonstrating the entire fairness of a transaction involving self-dealing).
18 F. Hodge O’Neal & Robert B. Thompson, O’Neal and Thompson’s Close Corporations and LLCs §9:47 (Rev. 3d ed.).
19 Colin P. Marks, Piercing the Fiduciary Veil, 19 Lewis & Clark L. Rev. 73, 80-81 (2015).
20 See id.
21 See Fla. Stat. Ann. §605.04091(5) (West 2015).
22 See Larry E. Ribstein, An Analysis of the Revised Uniform Limited Liability Company Act, 3 Va. L. & Bus. Rev. 35, 62 (2008) (discussing what Professor Ribstein calls a Pandora’s Box of potential uncertainty regarding additional fiduciary duties).
23 See Sandra K. Miller, The Best of Both Worlds: Default Fiduciary Duties and Contractual Freedom in Alternative Business Entities, 39 J. Corp. L. 295, 309 (2014). See also Matthew D. Maser & Joseph R. Hefflinger, Nebraska’s New Limited Liability Company Act: A Welcome Improvement for Legal Guidance Concerning Limited Liability Companies, 89 Neb. L. Rev. 470, 483 (2011) (questioning the existence of additional fiduciary duties under RULLCA and what those duties might be).
24 See Robert R. Keatinge, Larry E. Ribstein, Susan Pace Hamill, Michael L. Gravelle & Sharon Connaughton, The Limited Liability Company: A Study of the Emerging Entity, 47 Bus. Law. 375, 391 (1992) (comparing the fiduciary duties of corporate directors to those of LLC managers); Mary Szto, Limited Liability Company Morality: Fiduciary Duties in Historical Context, 23 QLR 61, 66 (2004) (“LLC statutes use a variety of agency, partnership, and corporate standards.”).
25 See Maser & Hefflinger, Nebraska’s New Limited Liability Company Act: A Welcome Improvement for Legal Guidance Concerning Limited Liability Companies, 89 Neb. L. Rev. at 484 (predicting Nebraska courts could potentially find additional fiduciary duties for Nebraska LLCs using Delaware caselaw). See also, e.g., Int’l Ins. Co. v. Johns, 874 F.2d 1447, 1459, n. 22 (11th Cir. 1989) (using Delaware corporate law to interpret a case involving a Florida corporation).
26 See Lyman Johnson, Rethinking Judicial Review of Director Care, 24 Del. J. Corp. L. 787, 833 (1999) (“Delaware corporate law decisions not only affect Delaware corporations but are frequently used by other state courts for guidance.”).
27 See, e.g., Kagan v. HMC-New York, Inc., 94 A.D.3d 67, 77 (2012) (dissenting opinion) (relying on Kelly v. Blum, No. CIV. A. 4516-VCP, 2010 WL 629850, at *2 (Del. Ch. Feb. 24, 2010) as persuasive authority regarding the elimination of fiduciary duties in LLC operating agreements); Hibbs v. Berger, 430 S.W.3d 296, 315 (Mo. Ct. App. 2014) (citing Feeley v. NHAOCG, 62 A.3d 649, 660 (Del. Ch. 2012) for the proposition that managers generally owe fiduciary duties to the LLC).
28 See Metro Communication, 854 A.2d at 156 (describing the duty to disclose in the context of the duty of care).
29 Michelle M. Harner & Jamie Marincic, The Naked Fiduciary, 54 Ariz. L. Rev. 879, 881 (2012) (citing Tamar Frankel, Fiduciary Law 7-13 (2011)).
30 Metro Communication, 854 A.2d at 156, n.78.
31 Id. at 159.
32 See Larry E. Ribstein & Robert R. Keatinge, Ribstein and Keatinge on Limited Liability Companies §9:5 (2015) (discussing how the affirmative duty to disclose likely requires a transaction or event that would “lead the member to expect disclosure”).
33 See Bay Ctr. Apartments Owner, LLC, 2009 WL 1124451, at *11.
34 RULLCA §410.
35 See, e.g., Genesis Tech. & Fin., Inc. v. Cast Navigation, LLC, 74 Mass. App. Ct. 203, 212 (2009) (finding that a member had a duty to disclose an opportunity that could have benefitted the LLC); Bryan D. Scofield, Inc. v. Susan A. Daigle, Ltd., 999 So. 2d 311 (La. Ct. App. 3d Cir. 2008) (failing to disclose secret conversations between members about terminating other members may be a breach of the duty to disclose); Zanker Group, LLC v. Summerville at Litchfield Hills, LLC, 2005 WL 3047268 (Conn. Super. Ct. 2005) (keeping a transaction secret from the other members may rise to the level of a breach of the duty to disclose).
36 Genesis Tech. & Fin., 74 Mass. App. Ct. at 212.
37 Id. at 576.
38 Zanker Group, LLC, 2005 WL 3047268.
39 The relationship between an attorney and their client. See, e.g., Elkind v. Bennett, 958 So. 2d 1088, 1091 (Fla. 4th DCA 2007). The relationship between the executor and
the personal representative of an estate. See, e.g., DeVaughn v. DeVaughn, 840 So. 2d 1128, 1132 (Fla. 5th DCA 2003). The relationship between an agent and their principal. See, e.g., Doyle v. Maruszczak, 834 So. 2d 307, 309 (Fla. 5th DCA 2003). The relationship between trustee and beneficiary. See, e.g., Brundage v. Bank of America, 996 So. 2d 877, 882 (Fla. 4th DCA 2008). A lender who also acts as a financial advisor to the borrower. See, e.g., Susan Fixel, Inc. v. Rosenthal, Inc., 842 So. 2d 204, 208 (Fla. 3d DCA 2003); Capital Bank v. MVP, Inc., 644 So. 2d 515, 518 (Fla. 3d DCA 1994); Hooper v. Barnett Bank of West Florida, 474 So. 2d 1253, 1257 (Fla. 1st DCA 1985).
40 The structure of the relationship between the manager, member, and the LLC would obviously depend on the LLC’s operating agreement.
41 See, e.g., Trostle v. Trostle, 77 S.W.3d 908, 914 (Tex. App. 2002) (requiring a full disclosure of all material facts by the trustee); Anweiler v. Am. Elec. Power Serv. Corp., 3 F.3d 986, 991 (7th Cir. 1993) (“Fiduciaries must also communicate material facts affecting the interests of beneficiaries.”).
42 See Miller, The Best of Both Worlds: Default Fiduciary Duties and Contractual Freedom in Alternative Business Entities, 39 J. Corp. L. at 305.
43 The operating agreements selected came from Securities and Exchange Commission databases, and, thus, do not represent operating agreements used to form small businesses. Harner & Marincic, The Naked Fiduciary, 54 Ariz. L. Rev. at 898. Over half of the operating agreements used in the study came from Delaware LLCs. Id. at 901.
44 Id. at 906. These findings are limited because of the type of operating agreements used in the study. They do, however, provide an interesting look at how large business entities view fiduciary protections.
45 Id. at 906.
46 The Delaware Legislature would disagree with this contention. See Del. Code Ann. Tit. 6, §18-1101 (West 2015) (“It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements….To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.”). Delaware’s contractarian approach to fiduciary duties will be discussed further.
47 RULLCA §110(d) (“If not manifestly unreasonable, the operating agreement may…alter any other fiduciary duty, including eliminating particular aspects of that duty.”).
48 RULLCA §110 cmt. (d) (quoting Bishop & Kleinberger, Limited Liability Companies ¶14.05[a][ii]).
49 See RULLCA §110 cmt. (d).
50 Maser & Hefflinger, Nebraska’s New Limited Liability Company Act: A Welcome Improvement for Legal Guidance Concerning Limited Liability Companies, 89 Neb. L. Rev. at 479.
51 Ribstein, An Analysis of the Revised Uniform Limited Liability Company Act, 3 Va. L. & Bus. Rev. at 69-70.
52 Maser & Hefflinger, Nebraska’s New Limited Liability Company Act: A Welcome Improvement for Legal Guidance Concerning Limited Liability Companies, 89 Neb. L. Rev. at 485 (describing the elimination of these unknown fiduciary duties as prudent).
53 See Fla. Stat. Ann. §605.0105(5)(a); and RULLCA §110(h)(1).
54 See Fla. Stat. Ann. §605.0105(5)(b); and RULLCA §110(h)(2).
55 RULLCA §110(h)(2).
56 U.C.C. §1-201(28) (Am. Law Inst. & Unif. Law Comm’n 1997) (requiring the discount rate used to determine present value not be manifestly unreasonable); U.C.C. §1-302(b) (Am. Law Inst. & Unif. Law Comm’n 1997) (requiring the definitions of the standards of performance obligations not be manifestly unreasonable); U.C.C. §2A-103(u) (Am. Law Inst. & Unif. Law Comm’n 1997) (requiring the discount rate used to determine present value not be manifestly unreasonable); U.C.C. §4-103(a) (Am. Law Inst. & Unif. Law Comm’n 1997) (requiring provisions altering the standard’s governing a bank’s responsibility to act in good faith and exercise ordinary care not be manifestly unreasonable); U.C.C. §8-402(c) (Am. Law Inst. & Unif. Law Comm’n 1997) (requiring provisions altering the standard for guarantying a signature not be manifestly unreasonably); U.C.C. §8-403(c) (Am. Law Inst. & Unif. Law Comm’n 1997) (requiring alterations to the time necessary to notice a demand not to register a securities not be manifestly unreasonable); U.C.C. §9-603(a) (Am. Law Inst. & Unif. Law Comm’n 1997) (requiring alterations to the standards measuring the fulfillment of the rights of a debtor and secured party not be manifestly unreasonable).
57 RUPA §103.
58 The comment to U.C.C. §1-302 does say to look at the provision in light of the prior course of dealing and usage of trade to determine if it is manifestly unreasonable.
59 Mark J. Loewenstein, Fiduciary Duties and Unincorporated Business Entities: In Defense of the “Manifestly Unreasonable” Standard, 41 Tulsa L. Rev. 411, 431 (2006).
60 See, e.g., Badgett Constr. & Dev. Co. v. Kan-Build, Inc., 102 F. Supp. 2d 1098, 1104-06 (S.D. Iowa 2000) (apply the standard to a time limitation, but not explaining why such a provision met the standard); Q. Vandenberg & Sons, N. V. v. Siter, 204 A.2d 494, 498 (1964) (finding that the jury must make the determination of whether a term is manifestly unreasonable); Held v. Mitsubishi Aircraft Int’l, Inc., 672 F. Supp. 369, 383 (D. Minn. 1987) (describing the facts of several cases where a provision was found to be manifestly unreasonable and then declaring the provision in question manifestly unreasonable).
61 Baron v. Strawbridge & Clothier, 646 F. Supp. 690, 698 (E.D. Pa. 1986) (quoting Pennsylvania Business Corporation Law §613.1 C(4)).
62 See F.B.I. Farms, Inc. v. Moore, 798 N.E.2d 440, 447 (Ind. 2003).
63 See PPG Industries, Inc. v. Shell Oil Co., 919 F.2d 17, 19 (5th Cir. 1990).
64 See Rapp v. Dime Savings Bank of N.Y., 408 N.Y.S. 2d 540, 546 (N.Y. App. Div. 2d Dept. 1978) (examining general banking usage of time restrictions on deposits to determine whether the restriction in question was manifestly unreasonable); see also McCullough v. General Motors Corp., 577 F. Supp. 41, 47 (W.D. Tenn. 1982) (“Determination of these issues requires a careful consideration of the purpose and effect of the time limitation, the commercial setting in which the contract was executed, the reasonableness of the time limitation at the time of contracting.”).
65 Loewenstein, Fiduciary Duties and Unincorporated Business Entities: In Defense of the “Manifestly Unreasonable” Standard, 41 Tulsa L. Rev. at 432-33.
66 See Frances S. Fendler, A License to Lie, Cheat, and Steal? Restriction or Elimination of Fiduciary Duties in Arkansas Limited Liability Companies, 60 Ark. L. Rev. 643, 665 (2007) (lamenting the fact that “decades will probably pass before case law reliably defines the limits of what is a “manifestly unreasonable” exception to the duty of loyalty, what is an “unreasonable reduction” of the duty of care, and what standards are “manifestly unreasonable” when it comes to the duty of good faith and fair dealing”).
67 Del. Code Ann. Tit. 6, §18-1101 (West) (“The member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.”).
Louis T. M. Conti is a partner in the Tampa office of Holland & Knight, LLP, an adjunct professor of law at the University of Florida Levin College of Law, a former member of the Uniform Law Commission, and served as chair of the Florida Revised LLC Act Drafting Committee of The Florida Bar, which drafted the 2015 amendments thereto.
The author acknowledges with gratitude the significant contributions of George “Matt” Lastinger, who provided valuable research while a third-year student at the University of Florida Levin College of Law, and who is a first-year associate at Holland & Knight at the time of publication of this article.
This column is submitted on behalf of the Business Law Section, Melanie E. Damian, chair, and Stephanie C. Lieb, editor.