Bankruptcy

Member/Manager of Georgia Limited Liability Company Not Necessarily A Fiduciary For § 523(a)(4) Purposes.

By Scott Riddle

Tarpon Point, LLC v. Wheelus, Adv. No. 07-3022, 2008 WL 372470 (Bankr. M.D. Ga. Feb 11, 2008) (Walker).  Plaintiffs alleged that the debt owed by Debtors was nondischargeable pursuant to § 523(a)(4), defalcation while acting as a fiduciary.  The issue was whether the Debtors had a fiduciary duty sufficient to invoke this section merely because there were members and managers of a Georgia limited liability company.   The Court held that this was insufficient to come within the definition of fiduciary in § 523(a)(4). 

Plaintiffs offered no evidence of a contractual trust, but instead pointed to O.C.G.A. §§ 14-11-301 and 23-2-58 as the basis for Debtors' fiduciary capacity. Section 14-11-301(a) provides that “every member is an agent of the limited liability company for the purpose of its business and affairs[.]” The statute makes no mention of a trust res or any fiduciary obligations. It may establish a commercial relationship, but it does not establish a fiduciary relationship for purposes of § 523(a)(4). In fact, the only duties imposed on managers of an LLC by Georgia law are set forth in § 14-11-305, which provides in relevant part: “A member or manager shall act in a manner he or she believes in good faith to be in the best interests of the limited liability company and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” O.C.G.A. § 14-11-305(1) (emphasis added). This variation of the business judgment rule imposes nothing in the way of fiduciary obligations and cannot be the basis for a fiduciary defalcation claim.
Section 23-2-58, the second statute cited by Plaintiffs, provides:

Any relationship shall be deemed confidential, whether arising from nature, created by law, or resulting from contracts, where one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or where, from a similar relationship of mutual confidence, the law requires the utmost good faith, such as the relationship between partners, principal and agent, etc.

Any relationship shall be deemed confidential, whether arising from nature, created by law, or resulting from contracts, where one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or where, from a similar relationship of mutual confidence, the law requires the utmost good faith, such as the relationship between partners, principal and agent, etc.

This is the sort of broad definition of fiduciary duties that is outside the scope of § 523(a)(4). Young, 91 F.3d at 1372. Considering this statute for purposes of fiduciary defalcation, the court in Blashke v. Standard (In re Standard), 123 B.R. 444 (Bankr.N.D.Ga.1991), noted it “generally describes certain relationships as confidential, the result of which is that parties in those relationships have greater reason to rely on representations of the other party. Nothing in this statute creates a technical or express trust or imposes trust-like duties....” Id. at 455. As a result, Plaintiffs cannot rely on this statute to prove fiduciary capacity.
For the foregoing reasons, the Court concludes Plaintiffs have failed to prove the existence of a technical trust-either by contract or statute-and, as a consequence, cannot prove fiduciary defalcation by Debtors. Therefore the Court will enter judgment for Debtors.

Full post as published by Georgia Bankruptcy Blog on February 14, 2008 (boomark / email).