In Fiduciary Duty Cases, the Language of the Statute Matters

In Fiduciary Duty Cases, the Language of the Statute Matters

 

            Not 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.

 

            Amazingly, 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.

 

            Fortuately 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:

 

The LLCA’s 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.

 

This determination is in accord with that of the Virginia Supreme Court in Remora Investments, LLC v. Orr, 673 S.E.2d 845 (Va. 2009).

 

The 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).

 

In LLCs 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). 

 

The words of the statute matter, both for defining what is the duty owed and just as importantly to whom it is owed.