What Duties Do Members Of An LLC Owe Each Other?

Difference Between Partnership & LLC Member Duties

Until this year, California law applied partnership duties to LLC members. Effective January 1, 2014, Corporations Code section 17704.09 expressly defined the duties owed by LLC members to each other.

Section 17704.09 provides that the fiduciary duties owed by LLC members

to each are the duties of loyalty and care, as defined by this statute. The statute defines the duty of loyalty as follows:

  1. To account to a limited liability company and hold as trustee for it any property, profit, or benefit derived by the member in the conduct and winding up of the activities of a limited liability company or derived from a use by the member of a limited liability company property, including the appropriation of a limited liability company opportunity.
  2. To refrain from dealing with a limited liability company in the conduct or winding up of the activities of a limited liability company as or on behalf of a party having an interest adverse to a limited liability company.
  3. To refrain from competing with a limited liability company in the conduct or winding up of the activities of the limited liability company.

These duties are consistent with those already in place under long-standing case law. The legislature does not seem to have expanded or limited the fiduciary duties of members of an LLC. However, important questions are raised by this statute.

Observing the “New” Duties of LLC members

New Duties of LLC Members vs Partnership DutiesFirst, Section 17704.09 states an important qualification: “Except as otherwise provided, a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member.” Though no reported cases have addressed this point, it appears that these statutory fiduciary duties apply only to “member-managed” LLCs, as stated in subdivision (a).

Second, this standard appears to apply to all LLCs after January 1, 2014: “Except as otherwise specified in this title, this title shall apply to all domestic limited liability companies existing on or after January 1, 2014.” § 17713.04(a). Thus, the “old” duties under the former Beverly-Killea Limited Liability Company Act govern acts or transactions by an LLC or its members or managers occurring, or contracts entered into by the LLC or its members, prior to January 1, 2014. § 17713.04(b).

Obviously, the legislature enacted this statute to change or clarify existing law. The ensuing litigation will surely bring interesting interpretations of the “new” duties of LLC members.