Fiduciary Duties And Your Washington LLC: You May Have Heard About Them But What Are They?
Virtually every lawsuit involving disputes among owners of closely held or family-owned businesses includes a claim for “breach of fiduciary duty”. You may have heard of a fiduciary duty, but would you know one if you saw it? In this week’s post, let us discuss fiduciary duties in the context of Washington LLCs.
Loyalty, Care, and Good Faith and Fair Dealing
In general, fiduciary duties help ensure that authority figures for an entity act in the interest of said entity and its members, rather than in their own interest (see Ribstein and Keating on Limited Liability Companies, Section 12:1.). Each state has an LLC Act that offers some sort of identification of fiduciary duties. In Washington, the duties designated are loyalty, care, and good faith and fair dealing.
Notably, there is a difference between a member-managed and manager-managed LLC. In a member-managed LLC, members and managers owe duties to the company and its members. In a manager-managed LLC, members owe no such duties.
The duty of loyalty is limited to three parts:
- Account to and hold as trustee for the LLC any property, profit, or benefit derived in the conduct of the LLC’s activities that is derived from use of LLC property
- Refrain from dealing with the LLC “as or on behalf of” a party having an interest adverse to the LLC
- Refrain from competing with the LLC
Speaking from experience, most LLC disputes involve conflicts within the duty of loyalty.
The duty of care is difficult to violate. The Act limits violation of the duty of care to grossly negligent, reckless, or intentional misconduct. Unless a person completely ignores their obligations to the entity for an extended period, such conduct is rare.
Implied Contractual Duty of Good Faith and Fair Dealing 25.15.038(6)(b)
Although not technically a fiduciary duty, the implied contractual duty of good faith and fair dealing provides ample room for courts to find a violation of a duty not expressly contained in the duties of loyalty and care. Though there have been a few recent cases out of Delaware discussing and limiting the implied covenant, it is unclear whether those limits will apply to Washington LLCs.
The fiduciary duties can be modified by an LLC Agreement but may not be eliminated. Proper planning must consider the fiduciary duties identified in the statute to bring clarity to each situation. You can be sure that any dispute between the members will include a breach of fiduciary duty claim. Plan for it!
To learn more about fiduciary duties and LLCs, please contact Beresford Booth at firstname.lastname@example.org or by phone at (425) 776-4100.