This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Tuesday, November 25, 2014
In Fiduciary Duty Cases, the Language of the Statute Matters
Fiduciary Duty Cases, the Language of the Statute Matters
everyone owes everyone fiduciary duties.Rather, fiduciary duties are the exception to the usual rules of caveat
emptor that apply throughout commercial, arms-length relationship.
often courts, in assessing fiduciary duties in business entities, entirely
ignore the statutory language as to the nature of the duties.For example, in Mason v. Underhill, No. 2006-CA-002144-MR, 2008 WL 1917179 (Ky.
App. May 2, 2008), notwithstanding that Kentucky had adopted both the Uniform
Partnership Act (1914) and the Revised Uniform Limited Partnership Act (1985),
neither of those statutes was actually mentioned, the Court quoted the New York
case of Meinhard v. Salmon at length
in describing what are the fiduciary duties of the general partner of a limited
partnership; the fact that the statutes actually defined those duties was
somehow entirely ignored.
that error was not repeated by the Michigan Court of Appeals in BSA Mull, LLC v. Garfield Investment Company,
2014 WL 4854306, *6 (Mich App. Sept. 30, 2014).Therein it was asserted that a duty of loyalty owed among the members
was violated.Upholding the rejection of
that violation, the Court of Appeals wrote:
requirement that a manager discharge duties “in the best interest of the
[LLC],” MCL 450.4404(1), indicates that a manager’s fiduciary duties are owed
to the company, and not the individual members.
In that no duty was owed the
individual member, the claim failed.
determination is in accord with that of the Virginia Supreme Court in Remora Investments, LLC v. Orr, 673
S.E.2d 845 (Va. 2009).
Kentucky Supreme Court, in Ballard v.
1400 Willow Council of Co–Owners, Inc., 430 S.W.3d 229 (Ky.2013), held that
the statutory duty owed by non-profit directors is owed solely to the
corporation on the basis that the statute requires directors to act “in the
best interests of the corporation.”See also Baptist Physicians Lexington, Inc.
v. New Lexington Clinic, P.S.C., 436 S.W.3d 189, note 4 (Ky. 2014).
organized in Kentucky, the duty of loyalty which binds members in a
member-managed LLC and managers in a manager-managed LLC is by statute “to
account to the LLC and hold as trustee for it …”KRS § 275.170(2).
of the statute matter, both for defining what is the duty owed and just as
importantly to whom it is owed.