Un-Cabined Fiduciary Duties in Florida LLCs: The Common Law and Equity Opens the Door to Expanded Liability and the Manifestly Unreasonable Standard.

• Author: Conti, Louis T.M.
• Position: Limited liability companies

Limited liability companies (LLCs) have become the predominant form of business entity for private companies in America. The question generally is not whether to use an LLC for most privately held businesses, but rather where to form the entity. The jurisdiction of formation choice is narrowed to either the "home state" where the principal office and activities of the business will be based, or Delaware, the most generally accepted foreign forum. Evaluating the jurisdiction of formation turns on several key concepts that are beyond the scope of this article, but the most important factors are the state LLC statute's fiduciary duty provisions and case-law addressing fiduciary duties.

This article describes the fiduciary duty law that applies to Florida LLCs, with a special focus on consequences of the "un-cabining of fiduciary duties" occasioned by the Florida Revised LLC Act, as amended in 2015.

History in Florida

Florida law on fiduciary duties in business entities, including LLCs, initially derived from common-law principles, which developed through trusts and then partnerships. The term "fiduciary" itself was adopted to apply to situations falling short of the trustee to trust beneficiary relationship, but in which one person was nonetheless obligated to act like a trustee, to accommodate the separation of ownership from control. These relationships typically included "agent to principal," "director to corporation," "partner to partner," "guardian to ward," and "lawyer to client."

The seminal case most often cited on fiduciary duties is Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928), when Judge Benjamin Cardozo compared Morton Meinhard and Walter Salmon's joint venture to both a partnership and a trust, and applied the duty of loyalty to the participants in the joint venture.

The Florida LLC Act's statutory fiduciary duty provisions were substantially modified in 2015 by "un-cabining" the statutory fiduciary duties and by expressly adopting common law principles of law and equity relating to fiduciary duties as an express part of the act. These changes gave greater importance to the application of the "manifestly unreasonable" standard of review to be considered by courts when evaluating operating agreement provisions that attempted to reduce or eliminate fiduciary duties. These changes to the act, along with recent caselaw, form the basis for this article.

Florida Changes Statutory Law on Fiduciary Duties in LLCs

When Florida initially adopted the Florida Revised LLC Act (Ch. 605) in 2013, the legislature followed prior Florida law, which "cabined-in" fiduciary duties, meaning courts looked only to the defined duties of care and loyalty as they were described in [section]605.04091 when evaluating whether a fiduciary breached the duty of care or duty of loyalty. When Florida revised Ch. 605 in 2015, it adopted the "un-cabined" fiduciary duty format found in the Revised Uniform Limited Liability Company Act (RULLCA), which meant the statutory definitions of the duties of care and loyalty described in RULLCA were not exclusive, and courts could consider broader interpretations of the fiduciary duties owed by those in control of the LLC, including common law duties beyond the language in the statute.

In essence, Florida intentionally changed its longstanding view of "cabined-in" fiduciary duties and adopted the "un-cabined" formulation in 2015, which it had eschewed in the initial 2013 drafting process. This was controversial within The Florida Bar Drafting Committee, which drafted Ch. 605, as some members of the committee were concerned that un-cabining fiduciary duties would lead to inconsistent judicial interpretations of the duties of care and loyalty and could open the door to imposition of new or additional fiduciary duties in Florida LLCs.

Florida also modified [section]605.0111(2) in 2015 to provide: "Unless displaced by a particular provision of this chapter, the principles of law and equity, including the common law principles relating to the duties of care and loyalty, supplement this chapter." (1) Consequently, these changes mean that courts can now consider fiduciary duty principles beyond the LLC act's stated description of the duties of care and loyalty.

Fiduciary Duties in Florida Limited Liability Companies

The early versions of LLC-enabling acts did not contain listed fiduciary duties for members or managers. (2) Instead, early statutes relied on case-law to govern the fiduciary duties of members and managers of LLCs. Dur ing the rapid expansion of LLC acts in the 1990s, state statutes reflected a wide variety of fiduciary standards for members and managers of LLCs. (3) Florida included statutory "standards of conduct" in its LLC act in 1997 and 1999, as well as throughout subsequent amendments to Ch. 608.

Today, [section]605.04091 continues to apply "the fiduciary duties of loyalty and care" to an LLC's members in a member-managed LLC and to managers in a manager-managed LLC, and it has also codified the obligation of good faith and fair dealing for those in control of a Florida LLC. In some instances, courts have also applied a "duty to disclose" information to members of the LLC, which is addressed in greater detail later in this article. (4)

The duty of care provisions in current LLC enabling acts can be broken down into five categories, (5) based on the standard of care required of members and managers: 1) ordinary care; (6) 2) gross negligence or willful misconduct; (7) 3) good-faith business judgment; (8) and 4) recklessness. (9) Delaware law makes up the fifth category, which imposes a duty on managers' reliance on information provided by others. (10) Delaware fails to statutorily state definitions of its fiduciary duties in its act, instead relying on case-law to define the fiduciary duties of members and managers in LLCs. (11) The Delaware Code specifically references this reliance on common law in [section]181104, which states: "In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern." (12)

Florida adopted an even more robust codification of the common law and equitable principles in revised [section]605.0111(2) when addressing fiduciary duties in a Florida LLC. Regardless of the standard of care applied, these duty-of-care provisions deal with a manager's actions or omissions in discharging his or her duties to the LLC and to its members. (13)

Florida's [section]605.04091(3) provides that the duty of care in the conduct or winding up of the company's activities and affairs "is to refrain from engaging in gross negligence or reckless conduct, willful or intentional misconduct, or a knowing violation of the law." RULLCA describes the duty of care in exactly the same language. Both Florida and RULLCA also codify the contractual obligation of good faith and fair dealing for fiduciaries in discharging their duties and obligations under the operating agreement and the act. (14)

Members in member-managed LLCs, and managers in manager-managed LLCs, also owe a duty of loyalty to the LLC and to the other members. (15) This duty of loyalty includes: accounting and holding as trustee any LLC property, profit, or benefit derived by the manager or member; refraining from acting adversely to the LLC's interest; and refraining from competing with the LLC prior to dissolution. (16) The duty of loyalty also protects the LLC from self-dealing transactions and conflict of interest transactions involving the manager or member in a fiduciary capacity. (17) The application of the business judgment rule as a defense to the duty of care in LLCs means that members and managers are more likely to face liability for violations of the duty of loyalty. (18)

Whether these duties run to both the LLC and the other members depends on the management structure of the LLC. (19) Members in a member-managed LLC owe fiduciary duties to the company and the other members; while members in a manager-managed LLC do not owe fiduciary duties solely because of their status as members. (20) Actions taken to further a member's own interests are not per se violations of the duty of loyalty for members in a member-managed LLC, nor for a manager in a manager-managed LLC. (21)

The un-cabining of fiduciary duties in Florida's LLC act, in concert with the changes to [section]605.0111, opens the door to courts interpreting and applying duties beyond the statutorily stated duties of loyalty and care to LLCs. (22) Parties often form LLCs without entering into formal operating agreements, or with operating agree ments that heavily rely on the default rules found in enabling statutes. (23) To date, courts in Florida have not added additional duties to LLC members or managers beyond those described in the Florida act.

The fiduciary duties that apply to LLCs were generally derived from trust, corporate, and/or partnership law. (24) These traditional sources could provide additional duties that have not yet been applied to Florida LLCs. Any additional duties applied to trusts, partnerships, or corporations could also find their way to LLCs eventually. Fiduciary duties applied to those in control of LLCs by Delaware or other state courts are also a source of adding new fiduciary duties for LLCs in Florida. (25) Finally, courts...