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COA Outlines Duties Members Of An LLC Owe To the LLC And Its Other Members

By Sean E. Andrussier

Today the COA held that members of an LLC, in general, only owe duties to the corporation and not its members. The case is Kaplan v. O.K. Technologies.

This case involved a corporate dissolution of a closely-held LLC, O.K. O.K. One of the disputes in dissolution was how the LLC should pay back loans made by one of the members (Kaplan). The primary issue was whether Kaplan violated his fiduciary duties to the other members by taking out the loans. The two other members argued that Kaplan's fiduciary duties to them arose from the following: (1) Kaplan's role as a member-manager of O.K.; (2) Kaplan's control over the company's finances and operations; and (3) Kaplan's role as a member in a closely-held LLC.

The COA first held that Kaplan only owed a fiduciary duty to the LLC and not to the individual members because managing members only owe a duty to the corporation. (O.K.'s operating agreement said all members were also managers.)

The COA also held that Kaplan's financing of the LLC did not rise to the level of dominion and control over the other members required to establish a fiduciary duty. The other members accepted Kaplan's loans and used them to discharge O.K.'s costs and obligations, including payment of their salaries and reimbursement of their expenses. Further, O.K.'s operating agreement provided that the vote of the majority controlled management decisions, and the other members exerted their power in this regard by voting on a repayment plan for the loans.

Finally, the COA held that Kaplan did not owe the other members a fiduciary duty based on the sole fact that O.K. was a closely-held LLC, rejecting the other members' argument that the relationship between members of a closely-held LLC is like the fiduciary relationship between partners in a partnership. The COA noted that O.K.'s operating agreement provided that no member would be liable to another for any damage stemming from breach of duty, negligence, or error judgment. The COA held that even if Kaplan had breached his duties under the operating agreement, his liability would extend only to the company, not to the other members.

Full post as published by North Carolina Appellate Blog on April 21, 2009 (boomark / email).