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.