Fiduciary Duties in LLCs and Limited Partnerships

It has long been a truism that partners in joint endeavors owe each other certain responsibilities to look out for one another. Justice Benjamin N. Cardozo stated the proposition as follows:

Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.

Meinhard v Salmon, 249 NY 458 (1928). Although Justice Cardozo elucidated this rule over 90 years ago, it still rings true today. In Birnbaum v Birnbaum, the court reaffirmed this strong duty stating:

This is a sensitive and ‘inflexible’ rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary's personal interest possibly conflicts with the interest of those owed a fiduciary duty (Matter of Ryan, 291 N.Y. 376, 407). Included within this rule's broad scope is every situation in which a fiduciary, who is bound to single-mindedly pursue the interests of those to whom a duty of loyalty is owed, deals with a person "in such close relation [to the fiduciary] * * * that possible advantage to such other person might * * * consciously or unconsciously" influence the fiduciary's judgment.

Birnbaum v Birnbaum, 73 NY 2d 461, 466 (1989).

These fiduciary duties apply to all business entities, including Limited Partnerships and Limited Liability Companies (“LLC”).  As stated by the New York Court of Appeals:

There is no basis or warrant for distinguishing the fiduciary relationship of corporate director and shareholder from that of general partner and limited partner. The principle is the same — those in control of a business must deal fairly with the interests of the other investors and this is so regardless of whether the business is in corporate or partnership form.

Lichtyger v. Franchard Corp., 18 NY 2d 528 (1966). The Second Circuit explained it this way:

New York makes no distinction between the fiduciary duty owed by a general partner and that owed by a corporate director. One is not greater, and the other lesser. Both are bound by the same rule of fair-dealing with limited partners or shareholders who rely on the integrity of the general partner and corporate directors who are empowered under N.Y. Partnership Law § 98 (McKinney 1988) and N.Y.Bus.Corp.Law § 701 (McKinney 1988), respectively, to manage the business into which those passive investors have placed their funds.

Tucker Anthony Realty Corp. v. Schlesinger, 888 F. 2d 969 (2d Cir. 1989).

The same applies to LLC’s. “LLC members owe each other ‘the traditional fiduciary duties that directors owe a corporation. . . . [including] the traditional fiduciary duties of loyalty and care to the members of the LLC.” DirecTV Latin America, LLC v. Park 610, LLC, 691 F. Supp. 2d 405 (SDNY 2010). See also William Penn Partnership v. Saliba, 13 A.3d 749 (Del 2011) (“[M]anagers of a Delaware limited liability company owe traditional fiduciary duties of loyalty and care to the members of the LLC . . .”).