Managers of LLCs Must Act in the Best Interests of the Company
A limited liability company (or LLC) can be a great way for small- and mid-size companies to structure their business. It provides asset-protection benefits like those of a corporation, but also allows the owners of the company to elect to structure the LLC as a pass-through entity for taxation purposes. Unfortunately, problems can arise when the manager of a limited liability company puts his or her own interests above the interests of the company – or acts in a way inconsistent with obligations owed to other owners of the company.
The Maryland Limited Liability Company Act doesn’t expressly describe the fiduciary duties that are owed by managers to the limited liability company that they manage – or the duties owed by each owner of an LLC to co-owners. Over the years, Maryland appellate court decisions have instead established a body of law on the fiduciary duties owed by members and managers to their companies and to fellow owners. Beyond abiding by these common law fiduciary duties, managers and members of a Maryland limited liability company also must adhere to the terms of the company’s Operating Agreement.
Maryland law recognizes different types of fiduciary duties. For example, there are fiduciary duties between trustees and beneficiaries of a trust, between corporate directors and corporations, between lawyers and clients, between guardians and wards, between agents and principals, and among partners in a partnership or members in a limited liability company. When it comes to business entities such as corporations, partnerships and LLCs, the basic obligations revolve around ensuring that corporate officers, managers of limited liability companies, and partners, act only in ways that advance the interests of the company, and not the individual interests of the corporate officer, LLC manager, or partner. Officers and managers can’t take actions that conflict with, or are adverse to, the best interests of their company.
For many years, there was uncertainty in Maryland law on whether a distinct legal cause of action was available to sue for a breach of fiduciary duty. In 2020, however, the Maryland Court of Appeals clarified the law in this area and expressly held that that a member or a manager of a Maryland LLC can be sued by other members of the company for breach of fiduciary duty, as an independent and free-standing cause of action. To sue for an alleged breach of fiduciary duty in Maryland, the complaining party must be able to demonstrate:
- that there is a fiduciary relationship between the person bringing the claim and the defendant;
- that this fiduciary duty has been breached; and
- that the complaining party was harmed by this breach.
Not every breach of a fiduciary duty is legally actionable, and not every breach of a fiduciary duty gives someone a right to sue for monetary damages. Some breaches of fiduciary duties can only be remedied by using a court’s equitable powers, such as through the issuance of an injunction by the court ordering the offending party to do something, or to cease doing something.
It’s common for clients to come to me describing situations that call into question whether the manager of a limited liability company may be breaching the fiduciary duties that he or she owes to the other owners of the company. From the company’s perspective, it’s important to ensure that decisions by company leaders are directed toward the interests of the company, and not solely to protecting the interests of individual members or officers. From the perspective of members in limited liability companies, I often hear from so-called “minority” members of LLCs – that is, members that do not control the company because they own less than half the ownership interests in the company – that the people controlling the company are acting for their own benefit, and not in the best interests of the company as a whole. The same complaint can arise in business partnerships. If you are facing a situation like this, I encourage you to consult with an attorney who is knowledgeable about the law in this area. There may be time limitations on asserting any claim, and it can be critical in some situations that injunctive relief be sought without delay.
Our firm has the depth of experience to provide detailed guidance in this area. If you have questions or concerns about the fiduciary duties owed by manages or officers of a Maryland limited liability company, I would welcome the opportunity to answer your questions and provide legal advice on these matters. Please contact me at firstname.lastname@example.org or (410) 489-1996.