MESSAGE FROM ASSOC. PROF. PAMELA S. EVERS, ATTORNEY AT LAW
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Articles posted may have been edited for clarity and format by Pamela S. Evers.
Posted on April 27, 2009 by Mack Sperling
The fiduciary duties owed by members and managers of limited liability companies are very different under North Carolina and
Delaware law. In a bit of judicial serendipity, the North Carolina
Court of Appeals and the Delaware Court of Chancery each issued opinions on those issues last week, just a day apart.
The North Carolina case is Kaplan v. O.K. Technologies, LLC
(April 21). the Delaware Court of Chancery case is Bay Center
Apartments Owner, LLC v. Emery Bay PKI, LLC (April 20). The two cases highlight the differences in the nature and scope of fiduciary duties in the LLC context.
The Delaware View
The Delaware view, crisply stated in the Emery Bay decision, was summed up by the Delaware
Corporate and Commercial Litigation Blog (which you should absolutely be reading) as follows:
On the point of the fiduciary duty of a manager to the members: 'in the absence of a contrary provision in the LLC Agreement, the manager of an LLC owes the traditional fiduciary duties of loyalty and care to the members of the LLC .'
On the point of the fiduciary duty of a member to other members: ' the LLC cases have generally , in the absence of provisions in the LLC Agreement explicitly disclaiming the applicability of default principles of fiduciary duty, treated LLC members as owing each other the traditional duties that directors owe a corporation .'
North Carolina on Fiduciary Duties of LLC Members
North Carolina goes off in a different direction entirely on the fiduciary duty of an LLC member to another member. There is none, though there can be exceptions. But the general rule, stated in the Kaplan case, is that:
The North Carolina Limited Liability Company Act, N.C. Gen. Stat. § 57C-1-01 et seq., does not create fiduciary duties among members. Members of a limited liability company are like

shareholders in a corporation in that members do not owe a fiduciary duty to each other or to the company .
The exception is when the member has majority control. Then, "a controlling shareholder owes a fiduciary duty to minority shareholders," and an LLC member with control would owe a fiduciary duty to the minority members.
North Carolina on Fiduciary Duty of LLC Managers
A manager of a North Carolina LLC does owe a fiduciary duty, as does a manager of a
Delaware LLC. But in North Carolina, the fiduciary duty is not owed directly to other members, as it is in Delaware. It is instead owed to the LLC:
Managers of limited liability companies are similar to directors of a corporation in that '[u]nder
North Carolina law, directors of a corporation generally owe a fiduciary duty to the corporation , and where it is alleged that directors have breached this duty, the action is properly maintained by the corporation rather than any individual creditor or stockholder.' Thus, like directors, managers of a limited liability company also owe a fiduciary duty to the company, and not to individual members .
The principles described above are default rules, applied by the North Carolina and Delaware courts in the absence of provisions in the LLC Operating Agreement as to the duties of members and managers. The members are free to provide for the imposition of fiduciary duties (which the
Court found they had in the Emery Bay case); or to provide for no or limited fiduciary duties (as they did in the Kaplan case).
It's pretty common for North Carolina attorneys to be advising clients regarding Delaware LLC issues, because so many corporate attorneys opt for formation under Delaware law. There were
111,820 LLCs formed in Delaware in 2007, and 81,923 in 2008. The North Carolina numbers show significantly fewer LLC formations here: there were 33,212 LLCs formed in NC in 2007 and 29,384 formed in 2008. These numbers were provided by the Division of Corporations at the Delaware Secretary of State and by the Director of Corporations at the North Carolina
Secretary of State.
I originally wrote about the Kaplan case when it was decided by the Business Court in June
2008. You can find that post here .
Posted on August 4, 2008 by Mack Sperling
The United States District Court for the Middle District of North
Carolina dismissed an LLC member's fiduciary duty claims against a

manager based on grounds of standing in Morris v. Hennon & Brown Properties, LLC .
The Defendant LLC was an investor and member of three limited liability companies. It alleged in a counterclaim that the Plaintiff, the manager of three of the LLCs, owed it a direct fiduciary duty, and that Plaintiff had violated that duty by comingling funds of the LLCs and using them for his personal benefit.
Plaintiff pitched its Motion to Dismiss on the argument that a co-manager of the LLC does not have a fiduciary duty to its members under N.C. Gen. Stat. Sec. 57C-3-22 , which sets out the duties of LLC managers. The Court declined to decide the case on this basis, noting that there was no North Carolina state court authority on the point and stating that it had an obligation to approach an issue of first impression cautiously, and to avoid it if possible.
The Court instead framed the issue as follows: "the more important question in this case is to whom is that duty owed-to the LLCs or to the member individually." The Court found that the breaches of duty alleged by the Defendant would have affected all of the members of the LLC, not just the Defendant, and that the Defendant therefore was not entitled to assert a direct claim for breach of fiduciary duty.
The Court concluded as follows in granting the Motion:
In the instant case, Defendant fails to make any allegations of a special duty owed only to it and not the other members of the LLCs, nor has it shown that it suffered a special loss, separate and distinct from the harm to the LLCs and other members of the LLCs. Consequently, Defendant has no standing to bring a direct or individual action against a member-manager of the LLCs. For this reason, Defendant's claims alleging breach of fiduciary duty should be dismissed.
This case was decided about a month ago, I picked it up from this week's North Carolina
Lawyers Weekly .
Posted on June 30, 2008 by Mack Sperling
Today, the Business Court entered an Order granting summary judgment against members of a limited liability company who contended that an investor who was the principal source of funding to the LLC had a fiduciary duty to the LLC and its members.
The case, Kaplan v. O.K. Technologies , arose following the dissolution of a company formed to commercialize a

process for filtering hog waste. Kaplan, a minority member of the LLC, was its only source of funds and controlled the LLC's checkbook. Over time, he lent the LLC nearly $2 million, which the company used to pay salaries and legal expenses, among other things.
When the company's prospects faded, Kaplan stopped funding the company and asked for repayment of his loans. The other members responded by voting to dissolve the LLC, which was placed in receivership. Kaplan sued to collect his substantial debt.
The other members of the LLC claimed that because Kaplan had "complete control over all expenditures," and because he knew that the LLC was completely reliant on his contributions, he had an "enhanced fiduciary duty" to the LLC and the other members.
Judge Tennille held:
Being an investor in a company does not create a fiduciary relationship. . . . Kaplan, as a minority shareholder, had no fiduciary duty to the other shareholders even though he was the sole financial contributor to O.K. Like an investor in a corporation, Kaplan's position as the holder of the purse strings did not create a fiduciary duty. At all pertinent times, Kaplan was a minority shareholder without dominance or control over either O.K. or any of the other shareholders and therefore without a fiduciary duty.
Op. at 5-6. Judge Tennille stated that, in any event, it was "unclear what Defendants believe
Kaplan's fiduciary duty required him to do." (Op. at 9). The Court held that Kaplan was not required to provide "limitless funding" and he was entitled to seek to collect the debt owed to him.
The LLC members also contended that Kaplan had not followed the procedures set forth in the
LLC's Operating Agreement in making his loans. The Court ruled, however, that these claims were barred by ratification and estoppel. It held "Defendants are estopped from objecting to the loans by their continued acceptance of reimbursement and salary made possible by the loans, as well as their inaction when O.K. creditors were paid with the loaned money." (Op. at 8).
Two other claims made by the Defendants, for negligent misrepresentation and unfair and deceptive practices, are worth mentioning.
Summary judgment was granted on Defendant's claim of negligent misrepresentation, because the Court found that Defendants, as majority shareholders of the LLC, could have investigated any questions of the validity of the representations made by Kaplan. As members of the majority, the Defendants had "the opportunity to question and determine for themselves whether any documentation provided was inaccurate." (Op. at 14).
Last, the Court granted summary judgment on Defendant's unfair and deceptive practices claim.
The Court held that "the dispute here arises from an internal dispute over the direction of O.K. by its shareholders. Commerce is not affected by the parties' inability to work together as an LLC."
(Op. at 14).