Even If That is the Law for Corporations (Which it is Not), That is not the Rule for LLCs

Even If That is the Law for Corporations (Which it is Not), That is not the Rule for LLCs

      A recent decision from the Ohio Court of Appeals may be cited for two important principles. First, even if the officers and directors of a corporation owe fiduciary duties to the corporation’s creditors, that rule does not apply in the case of LLCs and, second, in corporations, fiduciary duties are not owed to the creditors. Custom Associates, L. P. v. VSM Logistics, LLC, No. 2019-P-0104, 2020 Ohio 2994, 2020 WL 2521261 (Ohio Ct. App. 11^th Dist. May 18, 2020).

      VSM leased property from Custom Associates. When it fell behind on lease and utility payments, Custom Associates filed suit against VSM and then, in an amended complaint, added Maurice Vaughn and William Niegsch as defendants, asserting that they, the President/CEO and CFO of VSM, owed “a fiduciary duty to VSM and VSM’s creditors not to waste corporate assets which could otherwise be used to pay corporate debts.” They alleged as well that Vaughn and Niegsch violated this fiduciary duty “by transferring assets of VSM to other business entities and individuals who are not creditors of VSM … to the detriment of VSM, *** leaving VSM with insufficient funds to pay its creditors.” Vaughn and Niegsch filed a motion to dismiss on the basis that they were not parties to the lease contract with Custom Associates and that it lacked standing to assert a breach of fiduciary duty claim in that those duties do not run to creditors. The trial court dismissed of Vaughn and Niegsch from the suit. Conversely, VSM never answered, and a default judgment was entered against it. In this appeal, Custom Associates asserted that Vaughn and Niegsch should not have been dismissed (presumably, it was unable to collect its judgment against VSM).

     On appeal, the plaintiffs relied upon a series of decisions involving business corporations for the proposition that the officers and directors of an insolvent company owe a fiduciary duty to the creditors “not to waste corporate assets that could be used to pay those creditors.” It argued as well that those same principles should be applied in the context of LLCs. These arguments were rejected on a pair of bases.

     First, in reviewing the prior law on business corporations, it was held that it did not stand for a fiduciary duty owed to (and enforceable by) creditors of a corporation, even in insolvency.

      Second, in turning to the language of the LLC Act, it was held that the language employed creates duties to the LLC, but “does not codify a fiduciary duty of members or officers to creditors of the LLC.”

      On that basis, the order dismissing Vaughn and Niegsch pursuant to the motion to dismiss was affirmed.