It may have once been thought that officers constituted as being fiduciaries in a manager-managed LLC setting. Who or what are fiduciaries? Fiduciaries are individuals in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit. Typically, it has been those members who operated the business that owed fiduciary duties of loyalty and reasonable care to non-managing LLC owners. They normally uphold legal positions of trust with one or more parties and take care of money or assets for another person. Now, a managing member of an LLC is an individual who holds an ownership interest in the company, participates in its day-to-day management and has authority to contract on behalf of the company. So are managing members fiduciaries? Since most states have codified the fiduciary duties owed by officers and directors, a recent First District Court has affirmed a trial court finding that this is NOT the case.
In the case of 800 South Wells Commercial LLC v. Cadden, 2018 IL App (1st) 162882 (May 9, 2018) Cook Co., 3rd Div, (FITZGERALD SMITH), the courts looked at these issues in greater depth and length and gave more definitive answers in terms of scopes and duties of member-managed LLCs. It looked at a situation that involved a manager-managed Illinois LLC which was formed to obtain a leasehold interest in River City Complex’s commercial space and parking garage and the manager and member appointed Cadden to be the LLC’s vice president. Within four years, the LLC defaulted on both its mortgages. The LLC claimed that fiduciary duties were owed only because he held the title of vice president. The Court was quick to grant summary judgment which went further to say that there was no evidentiary basis to demonstrate that any fiduciary duty was owed to the LLC. Consequently, there was no breach.
The only person in such a setting that would owe any such duty would be the manager of the LLC. The basis for this ruling was LLCs and their scope is defined clearly by statute. The statute does not extend to apply the common law duties that have been in place. This means that members who are not managers do not owe fiduciary duties to the LLC or other members of the corporation.
The argument that the defendant could be found to have fiduciary duties under the Act which says that members who exercise some or all of the managerial authority can be found to owe fiduciary duties because the operating agreement made it clear that the managerial authority rested with the manager. This sort of a case has a huge impact upon future cases and the way in which the pendulum swings. Rights that were blurred by common law are now clearly defined by case law and statute.
http://www.illinoiscourts.gov/Opinions/AppellateCourt/2018/1stDistrict/1162882.pdfSuper Lawyers named Illinois commercial law trial attorney Peter Lubin a Super Lawyers and Illinois business dispute attorneys Patrick Austermuehle and Andrew Murphy Rising Stars in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Lubin Austermuehle’s Illinois business trial lawyers have over thirty years of experience in litigating complex class action, copyright, noncompete agreement, trademark and libel suits, consumer rights and many different types of business and commercial litigation disputes. Our Hinsdale and Glen Ellyn business dispute lawyers, civil litigation lawyers and copyright attorneys handle emergency business lawsuits involving copyrights, trademarks, injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud. You can contact us by calling at 630-333-0333 or locally at (630) 333-0333. You can also contact us online here.