Do LLC Members Owe Fiduciary Duties? Yes And No
Does a member of a limited liability company owe a fiduciary duty to the company and the other members? Section 17704.09(a) of the California Corporations Code states that a member owes a duty of loyalty and a duty of care. Thus, the answer would seem to be yes. The statute, however, applies to manager-managed LLCs. If the LLC is manager-managed, Section 17704.09(f)(1) provides that these fiduciary duties apply to the managers and not to the members.
In a recent ruling, U.S. District Court Judge Todd W. Robinson, citing Section 17704.09, ruled that a member owed no fiduciary duty to the plaintiff because the operating agreement made it clear that the LLC was manager-managed. Hammett v. Sherman, 2021 U.S. Dist. LEXIS 193434. While the ruling is correct, the rationale is not quite right. The operative document for determining whether an LLC is manager-managed is the articles of organization. Cal. Corp. Code § 17702.01(b)(5).
The plaintiff argued that the defendant members owed fiduciary duties because the operating agreement required that "Major Decisions" must be "determined, made, approved or authorized by the consent of Members holding at least 51% of the Percentage Interests." Judge Robinson rejected this contention finding that this provision "does not suggest that Silver Strand is a member-managed corporation [sic]; rather, it sets forth procedures for making significant decisions for the corporation [sic]".