Fiduciary Duties Not Limited to Members In An LLC

Fiduciary Duties Not Limited to Members In An LLC

In a recent decision from Illinois, there applying Delaware law, the court considered and rejected the suggestion that not being a member in an LLC precludes fiduciary duties. Rather, the court found that the defendant, who had been an employee of the plaintiff LLC, may have violated fiduciary obligations arising consequent to the employment relationship. Act II Jewelry, LLC v. Elizabeth Ann Wooten, Case No. 15 C 6950, 2018 WL 1316715 (N.D. Ill. March 14, 2018).

The defendant Wooten was the Vice President of Product Development for Act II Jewelry, LLC, a company that marketed and sold jewelry through a sales representative network who held parties in customer homes. At the end of 2014, Act II determined that it was going to wind down its business model. Before that announcement, however, Wooten had organized a new LLC with the intention that it engage in the jewelry business through the direct sale model.

After addressing and resolving the question as to whether Illinois, where Wooten was located, or Delaware, where Act II was organized, law should apply, ultimately determining that it should be Delaware, the question became whether Wooten’s conduct, in setting up a new venture while still an employee of Act II violated her fiduciary obligations. Wooten defended on the basis that “only controlling members and managers of an LLC who are named as such in the LLC’s operating agreement owe fiduciary duties to the company.” 2018 WL 1316715,*7. Having never been a member or manager in Act II, she continued, no fiduciary duties could arise. The Court rejected this argument, holding rather that the allocation of fiduciary obligations among the members and the managers of an LLC pursuant to the Delaware LLC Act “does not govern the duties owed by employees who are not parties to the LLC’s operating agreement (or even those addressed within it).” Id. Rather:

Employees are not governed by an LLC’s operating agreement, but rather by employment contracts and traditional rules of agency. Many employees never read the operating agreement of the LLC and certainly have nothing to do with ownership decisions, even if the role they play in the business is vital. The LLC’s operating agreement may modify fiduciary duties imposed by the parties to that agreement, but to widen its control beyond what is specifically contemplated - especially to completely eradicate the entire doctrine of agency - goes too far.

Id. The court reviewed a variety of decisions which stand for the proposition that employees may owe fiduciary obligations to the employer, those obligations arising out of the law of agency. On that basis, rejecting Wooten’s motion for summary judgment seeking the dismissal of the fiduciary duty claims, the court wrote:

Thus, Wooten, may owe fiduciary duties to Act II if the plaintiff established that she was a key managerial employee and/or an agent of Act II. Whether those duties were breached we leave for another day.

Id., *8