The Operating Agreement Is the Thing,
or “Except as Otherwise Provided”
A decision from earlier this year applied the rule that the LLC act is largely a series of default rules that may as to any particular LLC be modified in the applicable operating agreement. In this case the sanction of certain conduct by a written operating agreement was held to have limited the possibility of a fiduciary breach for engaging in just that conduct. Svestka v. Oakes, 2025 WL 1415813 (Ky. App. May 16, 2025).
Sisters Ruth Svestka, Carolyn Steger, Marguarite Oakes and Mary Cherry were each 25% members in Vance Springs Farm, LLC, it organized in Kentucky. Vance Springs was manager-managed and governed by a written operating agreement. Pursuant to that agreement Marguerite was the LLC's manager. The agreement also (i) provided a right of first refusal in the case of a member wanted to sell her interest in the company and (ii) provided that the ROFR did not apply as to a purchase / sale among the four members.
In June, 2022, Margaurite purchased Mary Cherry’s 25% interest in Vance Spring, Thereafter Ruth and Carolyn called a special meeting of the members to assess whether Margaurite should be removed as the LLC’s manager, removal requiring “cause.” The operating agreement precluded the member-manager from participation on a vote as to her removal as manager, so Ruth and Carolyn held between themselves 100% of the voting rights as to whether or not Margaurite should be removed for cause. And she was.
FYI, a point not addressed in the opinion was whether Margaurite believed that in buying Mary Cherry’s 25% interest she as well succeeded to that 25% voting interest. Ruth and Carolyn seem to have believed that to be the case, but the point was not pursued.
In response to her removal Margaurite and Mary filed an action for a declaration of rights including that the purchase / sale of Mary Cherry’s interest in Vance Farms was valid and that Marguarite’s alleged removal as manager was invalid. In their answer Ruth and Carlyn asserted Margaurite, in purchasing Mary’s interest in the LLC, had violated her fiduciary obligations. Marguarite and Mary sought and received from the circuit court a temporary injunction reinstating Margaurite to the position of manager. While that matter was being appealed on an interlocutory basis Marguarite bought out the interests of Ruth and Carolyn pursuant to the ROFR when they sought to sell to a third party. There then followed additional motion practice and final judgments in favor of Marguarite.
On appeal, the first complaint was that the trial court should not have relied upon the terms of the LLC's operating agreement to determine the scope of Marguerite's fiduciary duties, it being asserted that doing so “improperly ignored KRS 275.170 and the common law.” As further characterized by the Court of Appeals:
appellants maintained that Marguerites June 4, 2022, ”purchase of Mary’s shares created a clear conflict of interest because it gave Marguerite a 50% ownership interest in the LLC. They argue this would effectively allow Marguerite to deadlock the LLC's strategic business operations, as well as some day-to-day operations. …. They argue that this imbalance of power would have been avoided if the Circuit Court had properly applied the statutory law and case law to determine the proper scope of Marguerite's fiduciary duties to Ruth and Carolyn. 2025 WL 1415813, *3.
The Court of Appeals, adopting the reasoning of a prior motions panel and its reliance upon KRS 275.170 and its provision “unless otherwise provided in a written operating agreement,” wrote that:
Marguerite cannot breach fiduciary duties by completing a purchase that the parties specifically contemplated in their Operating Agreement. Common law fiduciary duties are intended to be imposed “in the absence of contrary provisions in the limited liability company operating agreement”, Patman v Hobbs, 280 S.W.3d 589, 594 (Ky. App. 2009 ). 2025 WL 1415813, *5.
I would note in passing that this author disagrees that there are “common law” fiduciary duties in LLCs, they being a statutory construct, but that is a discussion for another day.
The opinion goes on to reject the notion that Marguarite’s purchase violated “her duties of loyalty, fair dealing, and good faith when she purchased Mary Cherry’s interest in the LLC without first notifying the other members to give them the opportunity to purchase the shares.” 2025 WL 1415813, *6. As to that argument I would note only that it is common to in ROFR agreements provide that the persons desiring to purchase may do so pari-passu; apparently this agreement did not, and that “good faith and fair dealing” (see KRS 275.003) will not create such a provision.
That said, I think there is a further step to consider as to these facts, namely whether in the absence of the ROFR here at issue Margaurite’s actions in acquiring for herself Mary’s 25% interest in Vance Springs would have been a legitimate. Lets assume an operating agreement that is silent as to transfers of LLC interests, that LLC owned by four equal 25% members. Those LLC interests are personal property, and there is nothing in the LLC Act that prohibits the unilateral transfer of those right whether to another member or to a third party. Yes, the LLC Act affirmatively strips the conveyed interests of the right to participate in the LLC’s management (i.e., an assignee does not by reason of the assignment succeed to the management rights of a member), but that goes to the nature of the LLC interests in the hands of the assignee and not the propriety of the purchase / sale transaction.
At that point, the question becomes whether a member has an obligation to share with the other members an opportunity to acquire outstanding LLC interest from a member who wants to sell. Another way to look at the question is to ask whether a member has a fiduciary obligation to at least afford the other members the opportunity to maintain a particular pari pasu interest in the company. For purposes of this thought experiment, let’s assume the LLC is member managed and that each of the members is bound by the default fiduciary obligations set forth in the LLC Act, specifically KRS 275.170, and that their conduct is as well informed by the obligation of good faith and fair dealing that exist in every contract and which is specifically adopted in Kentucky law at KRS 275.003.
On those assumptions, I don’t believe there is an obligation. While a member of an LLC subject to the default fiduciary obligations of the LLC Act is precluded, without disinterested prior approval, from using company assets for a personal profit or benefit, the LLC interests in the company are not company assets. Rather, they are the personal property of each individual member. I cannot see a basis on which an individual member, desiring to sell, has an obligation to offer that sale to all other, rather than a select group, of the incumbent members, and in parallel I cannot see a basis for holding that a member violates a fiduciary or other obligation when electing to purchase from another member LLC interests for their own account without offering an equal right to participate to the other members. Again, the LLC interests are not a company asset, and the company is not a party to the transaction.
