Thursday, May 15, 2008

Indiana Limited Liability Companies and Fiduciary Duties

Reading Chancery Gives Victory to "Freedom of Contract" and Refuses to "Find" Fiduciary Duties in LLC Agreement When Not Clearly Stated from Delaware Corporate and Commericial Litigation Blog gave me a reason to tout Indiana as a place for forming a limited liability company. The Delaware Chancery Court decided that Delaware law imposes no fidicuiary duty other than what is specifiied in the LLC's operating agreement.

Importantly, the court found no provision in the LLC Agreement at issue that: "create[d] a code of conduct for all members; on the contrary, most of those sections expressly claim to limit or waive liability."

Here is the money quote:

"There is no basis in the language of the LLC Agreement for Segal's contention that all members were bound by a code of conduct, but, even if there were, this Court could not enforce such a code because there is no limit whatsoever to its applicability".

The "implied covenant of good faith and fair dealing" claim was carefully examined and dispatched with one of the more lucid and cogent treatments I can recall of this amorphous cause of action.

Finally, the breach of fiduciary duty claim was confronted by first reciting the provisions of the Delaware LLC Act at Section 18-1101(c) that allow for complete elimination of all fiduciary duties as part of an LLC Agreement. The court read the parties' LLC Agreement in this case to eliminate fiduciary duties because it flatly stated that:

"...members have no duties other than those expressly articulated in the Agreement. Because the Agreement does not expressly articulate fiduciary obligations, they are eliminated."

Indiana's Court of Appeals decided in Purcell v. Southern Hills Investments, LLC (pdf format) that an implied fiduciary duty existed for Indiana LLC's. The Court of Appeals relied upon Credentials Plus LLC v. Calderone, 230 F. Supp.2d 890 (N.D. Ind. 2002) (see Purcell at page 9 -10).

The Delaware blog finds no problem with this situation while I have serious qualms. My qualms fall into two categories. First, having been involved in cases where the mistreatment of an LLC's minority members amounted to a breach of fiduciary duty and with an implied fiduciary duty there was no protection for the minority. Secondly, I see too many people relying on do-it-yourself sites to create their operating agreements and those can lead them into the first category.

All of which means one thing for the non-lawyer: get a lawyer to draft or review your LLC agreement.