Bankruptcy Court Discussed The Fiduciary Duties Owed To A Limited Liability Company And Its Creditors By Its Manager
In In re Silver State Holdings, in a bankruptcy proceeding a trustee of a limited liability company sued its former manager for breach of fiduciary duty and another entity for conspiracy to breach fiduciary duty arising out of a sale of property owned by the company. No. 19-41579-MXM 26 LLC, ADVERSARY NO. 19-4043-MXM 7901, 2020 Bankr. LEXIS 3531 (N.D. Tex. Bankr. December 17, 2020). The court first found that the manager owed fiduciary duties to the company:
The Texas Business Organizations Code does not directly address the duties a manager or member owes to an LLC, but duty-of-loyalty concerns appear to underlie statutory provisions addressing transactions with governing persons and renunciation of business opportunities. Provisions of the Business Organizations Code permitting governing persons (including managers and managing members of an LLC) to rely on various types of information in discharging a duty implicitly recognize that such persons are charged with a duty of care in their decision making. Finally, the Business Organizations Code provides that, to the extent managers or members are subject to duties and liabilities, including fiduciary duties, the company agreement may expand or restrict the duties and liabilities. Based on these statutory provisions, Morash’s status as an agent of 7901, and the particular facts of this case, the Court finds and concludes that he owed fiduciary duties to the company.
Id. The court then discussed what those fiduciary duties entailed:
The duty of loyalty holds officers and directors to an “extreme measure of candor, unselfishness and good faith,” particularly where there is an interested transaction. Interested transactions include those in which officers or directors derive personal profit as well as those which deprive the corporation of an opportunity to profit. A transaction between a fiduciary’s company and another company in which the fiduciary has a significant financial interest is also an interested transaction. In such a situation, an officer or director must not allow his personal interests to prevail over the interests of the corporation. “A director who diverts profits from the corporation in violation of his fiduciary relationship is personally liable even though the profits are acquired by an agency controlled by the director.” The burden is on the officer or director to establish the fairness of the transaction.
Id. The court held that the manager breached his fiduciary duties by allowing a foreclosure to occur and a sale to a third party because the company had equity in the property and the sale was not for a fair value. The court also held that the buyer was liable for conspiring with the manager and was jointly liable for the damages. However, the court held that the manager did not owe fiduciary duties to the company’s creditors: “Officers and directors of [an operating corporate debtor] have fiduciary duties to the corporation – not the corporation’s creditors” under Texas law. The Court is aware of no reason the same rule would not apply to managers of LLCs in Texas. Even though 7901 faced financial difficulties, it was not yet a defunct company. Morash, therefore, owed duties to 7901 but not to 7901’s creditors.” Id.