In my last post, I wrote about fiduciary duties of LLC members and corporate directors toward their business entities in general terms. In this post, I will discuss the statutory basis for the duties of loyalty and care for LLC managers and member-managers. RCW 25.15.038 specifies that the only fiduciary duties a member-manager or a manager of a LLC has toward the company’s members are the duty of loyalty and duty of care.
RCW 25.15.038(2) defines the duty of loyalty as follows:
The duty of loyalty is limited to the following:
(a) To account to the limited liability company and hold as trustee for it any property, profit, or benefit derived by such manager or member in the conduct and winding up of the limited liability company’s activities or derived from a use by such manager or member of limited liability company property, including the appropriation of a limited liability company opportunity;
(b) To refrain from dealing with the limited liability company as or on behalf of a party having an interest adverse to the limited liability company; and
(c) To refrain from competing with the limited liability company in the conduct or winding up of the limited liability company’s activities
RCW 25.15.038(3) defines the duty of care as follows:
(a) The duty of care is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law in the conduct and winding up of the limited liability company’s activities.
(b) A member or manager is not in violation of the duty of care as set forth in (a) of this subsection if, in discharging such duty, the member or manager relies in good faith upon the records of the limited liability company and upon such opinions, reports, or statements presented to the limited liability company by any person, including any manager, member, officer, or employee of the limited liability company, as to matters which the member or manager reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the limited liability company, including opinions, reports, or statements as to the value and amount of the assets, liabilities, profits, or losses of the limited liability company or any other facts pertinent to the existence and amount of assets from which distributions to members might properly be paid.
Washington’s Uniform Partnership Act imposes similar duties of loyalty and care on business partnerships. RCW 25.05.165. Until the 2016 revisions to Washington’s LLC Act, these fiduciary duties were imposed on LLC managers and member-managers not by statute, but rather through the application of partnership law to LLCs by analogy.[1]
If a member-manager or manager acts in his or her own interest, that’s not in and of itself determinative of whether the duty of care has been breached. RCW 25.15.038(4). In addition, fiduciary duties can be modified, expanded, restricted, or eliminated by a limited liability company agreement. However, the agreement cannot limit: (1) the duty of a member or manager to avoid intentional misconduct or knowing violations of law; or (2) the implied contractual duty of good faith and fair dealing. RCW 25.15.038(6).
[1] For example, Division II of Washington’s Court of Appeals held that a LLC manager acting to protect its own interests did not breach its fiduciary duties to the LLC when the LLC itself had lost all ability to profit from an investment. Bishop of Victoria Corporation Sole v. Corporation Business Park, LLC, 138 Wash.App 443, 460 (Div. II 2007). This decision overturned a jury verdict, where the jury had found the LLC member breached its fiduciary duty to the LLC. However, the Court of Appeals determined that the jury’s verdict lacked a “legally sufficient evidentiary basis.” Id.
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