Are you a Member of a limited liability company but do not manage the day to day operations of the company? You should be cautious of how “active” you are as a Member.
In Strong v. Cochran 2017 U.S. Dist. LEXIS 170073, a California real estate investment limited liability company filed for liquidation. The trustee sued the Members of the limited liability company for breach of fiduciary duty. The Members demurred to the Complaint claiming that since they were not Managers of the limited liability company they could not be held liable for breach of fiduciary duty as they did not control the LLC.
Judge Tena Campbell ruled that the Members could be sued for breach of fiduciary duty under a “fiduciary duty in fact” theory. Under this legal theory, an individual, regardless of title, owes a fiduciary duty to a company when the individual “participates in management of the corporation” and “exercis[es] some discretionary authority”. This legal theory works similarly to how liability may be imposed on limited partners in a limited partnership. Therefore, if the Member, or limited partner, participates in the management of the entity, that participant no longer is shielded from liability for acts undertaken by the entity. The realities of how a company is operated govern rather than its formal structure.
Before you decide to become involved in the operation of companies in which you are a passive investor, seek legal counsel. The last thing a passive investor wants is to be liable to the acts and omissions of the company in which he or she passively invested.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
Leave a Reply