"Miller and Rutledge are right"

 “Miller and Rutledge are right.”

In 2025 Professor Beth Miller and I wrote an article on whether and how the business judgment rule (the “BJR”) applies in the context of LLC, namely: Elizabeth S. Miller and Thomas E. Rutledge, The Duty of Finest Loyalty and Reasonable Decisions: The Business Judgment Rule in Unincorporated Business Organizations, 30 Delaware Journal of Corporate Law 343 (2005). Recently that article was cited by Judge Gall of the Nevada District Court (Clark County) in her July 3, 2025, decision in Silva v. Clay, Case No. A-25-909767-B, (District Ct. Clark Cnty. Nev., July 3, 2025) At this time it does not appear the decision is available on any of Westlaw, Lexis or Google Scholar.

The dispute is a classic falling out between the members following allegations of diversion of company funds with the typical panoply of allegations of breach of the duties of care and loyalty, the obligation of good fait and fair dealing (which in this operating agreement is set forth as a fiduciary duty), conversion, oppression, deceptive trade practices, etc. See Slip op at 3-4.

The point at issue in this aspect of the decision is whether the presumption of the BJR applies in the context of an LLC. In Nevada the BJR has been reduced to statute in the business corporation act (NV Stat. § 78.138(3)) but there is no similar provision in the LLC Act. In this instance the operating agreement detailed what were the fiduciary duties in this LLC (formulae different than those in the LLC Act itself) but without referencing the BJR. So did it apply (as the defendants asserted) or not (as the plaintiff asserted)?  The answer to that question would in turn inform whether Silva had plead his various allegations with sufficient specificity to clear the bar of the motion to dismiss filed by the defendants. Cutting to the chase, Judge Gall wrote:

The court has reviewed the Operating Agreement.  While the court agrees with Silva that the Operating Agreement does not expressly set forth a business judgment rule or similar presumption, the court finds that by adopting fiduciary duties at Articles 6.1, 6.2, and 6.3, the members incorporated the business judgment rule to assess whether they breached those duties. Slip op. at 5.

In our article we argued that the BJR is a rule of corporate law that does not carry over to the highly contractual realm of LLCs; if you want that rule as part of your fiduciary provisions then write it into the operating agreement. However, we stipulated an exception to that “four corners” analysis when:

[I]f the agreement in question incorporates a corporate standard of care (either by reciting the corporate formulation in the document or by a statement to the effect that those in control of the unincorporated business are subject to the standards of a corporate director), and the state law applies the business judgment rule, it would be appropriate to apply the rule to the actions of those acting on behalf of the unincorporated association. While doing so involves an assumption that the drafter meant to incorporate the business judgment rule, it has a greater assumption to determine that the drafters sought to reject the standard of review applied to that standard of care.  Slip op. at 6, quoting 30 Del. J.  Corp. L at 384.

There then followed my favorite phrase from this decision, namely “Miller and Rutledge are right.” Slip op. at 6.  Judge Gall went on to observe:

It makes no sense to incorporate a duty of care without applying the business judgment rule to determine whether that duty has been breached - at least not without leading to an absurd result. With the fiduciary standard in one hand but without the business judgment rule in the other, the fact Finder is left to determine whether the complaint of transaction could have gone better period this is what the business judgment rule is meant to stop; otherwise, business will simply stop as disgruntled stockholders and members repeatedly asked the court to step in the place of business fiduciaries and second-guess decisions made by those who are better positioned to act on behalf of the company.

she then going on to quote Wynn Resorts, Ltd. V. Eighth Jud. Dist. In & for Cnty of Clark, 133 Nev. 369, 378, 399 P.3d 334, 344 (2017):

Accordingly, we reiterate that the business judgment rule goes beyond shielding directors from personal liability in decision-making. Rather, it also ensures that courts defer to the business judgment of corporate executives and prevents courts from substituting their own notions of what is or is not sound business judgment if the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.

Reiterating her conclusion as to the application of the BJR, Judge Gall wrote “Thus, the business judgment rule applies in assessing the sufficiency of Silva’s pleading breach of fiduciary duty claims.”  Slip op. at 8.

As to the substantive review of the claim for breach of the duty of care, the opinion (Slip op. at 10-11) provides:

Article 6.2 of the Operating Agreement sets forth a member’s duty of care as follows: 

In carrying out his duties and exercising his powers hereunder, each Member shall act in a manner he believes in good faith to be in the best interests of the Company and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Subject to the preceding sentence, no Member shall be liable, responsible, or accountable in damages or otherwise to the Company or the other Members for any acts performed or omitted by him in good faith and within the scope of this Agreement.

Silva alleges that the Member Defendants breached their duty of care “both with respect to CPI and to Silva, by acting to improperly enrich themselves.” This allegation, however, invokes the duty of loyalty, not the duty of care [case citation omitted].

In Silva's opposition, he argues that his duty of care claims against the Member Defendants go beyond mere improper enrichment, to include: (1) ignoring distribution requirements to enrich themselves by diverting funds to other entities; (2) terminating Silva from his officer position and then terminating Silva’s membership interest and pocketing compensation tied to that interest; and (3) something about Freeman, although it is not incredibly clear whether that something has to do with hiring Freeman in the first instance or mow seeking to dismiss the derivative claims Plaintiff makes against her.  

Again, Sylva's allegations concerning the diversion of funds sound in breach of the duty of loyalty, not duty of care.  Also, it is entirely unclear to the court what duty of care allegations Silva makes about Freeman. Regardless, Silva is not alleging particularized facts to show that the Member Defendants’ decisions about Freeman - whatever they are may be - are grossly negligent or uninformed. Silva has also failed to allege particularized facts, or any facts, that show the Member Defendants terminated him from his office or position or terminated his membership interests on a uninformed or grossly negligent basis. [citation omitted] Instead, Silva merely alleges that the Member Defendants undertook actions inconsistent with the Operating Agreement. His claim is better suited as one for breach of the Operating Agreement. 

Thus, Silva's duty of care claim does not survive the motion to dismiss.

The opinion goes on to provide a useful review of the direct versus derivative distinction, the treatment of “good faith and fair dealing” as a contractual versus a fiduciary claim, and the categorization of certain claims as implicating either the duty of loyalty or the duty of care.