Full question:
I am the managing member of an LLC that was formed to develop a real estate project with the land owner. After 5 years of seeking the approval from planning, because of the project size, we finally received the go ahead to move forward. I contacted the owner and his son told me that his father was away at a health resort losing weight. After the third contact the son told me that his father was in Federal Prison for stealing $12 million from a patent scam and that they had to pay back $ 4 million and in order to do that they had to borrow $ 4 million on the land site and by doing so, they were not able to deposit the land into the LLC free and clear. He was supposed to also sign and gaurantee the loan and no lender would finance this loan under the situation. The remaining members have brought suit against them for our lost development costs, time, and lost income from the future business. Because of the loan they can not deliver the site and we are suing under the breach of contract. They are also counter suing under breach of contract as well as my fiduciary duty to act on their best interest. Because of his second case of fraud with his same co-conspirators my attorney advised me not to have contact with them and to only work with the attorneys. My question is do you think that I broke my fiduciary duty to them or that I breached the contract to move this project forward?
- Category: Fiduciary Duty
- Date:
- State: California
Answer:
In a LLC, the manager owes to the members of the company the duty of care, loyalty, and disclosure, and the members may owe a similar duty to the manager. Each party is expected to always act in the best interest of the company as a whole and avoid any potential conflicts of interest with the company.
It will be a matter of subjective determination for the court to determine whether there was a breach of fiduciary duty, based on all the facts and circumstances involved. Some of the factors that may be considered include, among others, whether the fiduciary personally benefitted at the expense of the LLC, or failed to disclose information to the LLC's detriment. For example, were funds diverted to personal use? Was there knowledge of financial misdealings or risk factors that weren't disclosed by the fiduciary? In applying the statutory standards for the duty of care owed by a managing member of a LLC, the court will need to determine whether there was gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law. The standards of care are measured against the subjective interpretation of how a "reasonable" person would act in similar circumstances.
Whether there was a breach of contract will depend on the terms of the contracts involved. An unjustifiable failure to perform all or some part of a contractual duty is a breach of contract. A legal action for breach of contract arises when at least one party's performance does not live up to the terms of the contract and causes the other party to suffer economic damage or other types of measurable injury. A lawsuit for breach of contract is a civil action and the remedies awarded are designed to place the injured party in the position they would be in if not for the breach. Remedies for contractual breaches are not designed to punish the breaching party. The five basic remedies for breach of contract include the following: money damages, restitution, rescission, reformation, and specific performance. A money damage award includes a sum of money that is given as compensation for financial losses caused by a breach of contract. Parties injured by a breach are entitled to the benefit of the bargain they entered, or the net gain that would have accrued but for the breach. The type of breach governs the extent of damages that may be recovered.
I am prohibited from giving a legal opinion, as this service provides information of a general legal nature. I suggest you discuss the matter with your attorney, who can review all the facts and documents involved.
The following are CA statutes:
17153.
The fiduciary duties a manager owes to the limited liability
company and to its members are those of a partner to a partnership
and to the partners of the partnership.
16404.
(a) The fiduciary duties a partner owes to the partnership
and the other partners are the duty of loyalty and the duty of care
set forth in subdivisions (b) and (c).
(b) A partner's duty of loyalty to the partnership and the other
partners includes all of the following:
(1) To account to the partnership and hold as trustee for it any
property, profit, or benefit derived by the partner in the conduct
and winding up of the partnership business or derived from a use by
the partner of partnership property or information, including the
appropriation of a partnership opportunity.
(2) To refrain from dealing with the partnership in the conduct or
winding up of the partnership business as or on behalf of a party
having an interest adverse to the partnership.
(3) To refrain from competing with the partnership in the conduct
of the partnership business before the dissolution of the
partnership.
(c) A partner's duty of care to the partnership and the other
partners in the conduct and winding up of the partnership business is
limited to refraining from engaging in grossly negligent or reckless
conduct, intentional misconduct, or a knowing violation of law.
(d) A partner shall discharge the duties to the partnership and
the other partners under this chapter or under the partnership
agreement and exercise any rights consistently with the obligation of
good faith and fair dealing.
(e) A partner does not violate a duty or obligation under this
chapter or under the partnership agreement merely because the partner'
s conduct furthers the partner's own interest.
(f) A partner may lend money to and transact other business with
the partnership, and as to each loan or transaction, the rights and
obligations of the partner regarding performance or enforcement are
the same as those of a person who is not a partner, subject to other
applicable law.
(g) This section applies to a person winding up the partnership
business as the personal or legal representative of the last
surviving partner as if the person were a partner.
This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.
