More On Why LLCs Are Not Corporations

More On Why LLCs Are Not Corporations

      I have just finished reading Wang v. Xinyi Liu, No. 16-CV-12581, 2018 WL 132074 (D. Mass. March 13, 2018) and was preparing to do a report on this decision. However, right then I found out that Joshua Fershee at West Virginia, on the Business Law Prof Blog, had already reviewed the case. He has already said everything I would have said. HERE is a link to his discussion. Repeating his commentary:

Tuesday, March 20, 2018

At Least Mass. Court Knows LLCs Are Not Partnerships

By Joshua Fershee

 

 

My goodness. In a recent case, a Massachusetts court deals with issues related to Bling Entertainment, LLC, which is, as you would expect, a limited liability company.  It is NOT a partnership (as the court correctly notes), but ...

Yiming alleges Bling Defendants—as “managers, controlling members, and fellow members of Bling”—owed a duty of utmost good faith and loyalty to Yiming that they breached through their actions of fraud, self-dealing, embezzlement, and mismanagement. D. 16 ¶¶ 70-71. “It is well settled that partners owe each other a fiduciary duty of the utmost good faith and loyalty.” Karter v. Pleasant View Gardens, Inc., No. 16-11080-RWZ, 2017 U.S. Dist. LEXIS 50462, at *13 (D. Mass. Mar. 31, 2017) (quoting Meehan v. Shaughnessy, 404 Mass. 419, 433 (1989)). Bling is not a partnership, however, but is rather a limited liability corporation. D. 16 ¶ 10.

YIMING WANG, Plaintiff, v. XINYI LIU, YUANLONG HUANG, ZHAONAN WANG, BLING ENTERTAINMENT, LLC, SHENGXI TINA TIAN & MT LAW, LLC, Defendants., No. 16-CV-12581, 2018 WL 1320704, at *6 (D. Mass. Mar. 13, 2018).

Negative. Well, the first part is right.  Bling is an LLC, not a partnership. But it is not a corporation.  This is where some readers are probably thinking, "there he goes again being overly formalistic."  I am, of course, but here, it at least matters a little. Or could, and that's all that concerns me.  The court continued: 

Nevertheless, Yiming argues the same duty applies, which is correct if Bling were a closely held corporation. See, e.g., Demoulas v. Demoulas Super Mkts., 424 Mass. 501, 528-29 (1997) (explaining that in Massachusetts, close corporations shareholders owe one another the duty of utmost good faith and loyalty); Zimmerman v. Bogoff, 402 Mass. 650, 657 (1988). In Massachusetts, a closely held corporation is “typified by: (1) a small number of stockholders; (2) no ready market for corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.”Demoulas, 424 Mass. at 529 n.34 (quoting Donahue v. Rodd Electrotype Co. of New Eng., Inc., 367 Mass. 578, 586 (1975)).

Id. You know what an LLC doesn't have?  Stockholders.  Or corporate stock. Or any stock for the matter.  The court had more to say: 

In this context, the duty of “utmost good faith and loyalty” applies to majority and minority shareholders alike. See Zimmerman, 402 Mass. at 657-58. Although Yiming did not affirmatively plead that Bling is a close corporation, he did plead that this duty applied to Bling Defendants. D. 16 ¶ 70. Bling Defendants did not contest that they owed a fiduciary duty to Yiming. See D. 26 at 8-9. Accordingly, the Court declines to dismiss this claim.

Id. But we have never established that an LLC owes fiduciary duties to anyone.  In Massachusetts, fiduciary duties apply for LLCs as we expect in all states, and the ability to modify or abrogate those duties are, unlike Delaware, limited (and perhaps very limited).  Nonetheless, it would be worth exploring that and explain the source of the duty.  The court never explores whether such duties apply to LLCs, and apparently the plaintiffs never even asserted that was the case.  

A quick look at Massachusetts law suggests the outcome here would likely be the same for LLCs, but still, can we please establish that?  If an issue warrants two paragraphs about partnerships and closely held corporations, one can spend a little time on the entity actually involved in the case.  I really don't feel like that's too much to expect. And yet my blog history very much suggests otherwise.  More work to do.