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Fiduciary Duties in LLCs and Limited Partnerships

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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.

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LLC and Limited Partnership Dissolution: When is it “not reasonably practicable to carry on the business in conformity with the [entity agreement]”?

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The New York and Delaware LLC and Limited Partnership Acts both provide that an LLC or limited partnership may be dissolved “whenever it is not reasonably practicable to carry on the business in conformity with the [LLC articles of organization, operating agreement or limited partnership agreement].” [1] This is the standard, but what does it mean?

When can an LLC member or limited partner seek dissolution, with some reasonable basis to believe that he will be successful?  These situations arise fairly frequently and there are no clear-cut rules.  Many courts have noted the dearth of case law which explicitly define the standard of what it means for it not to be “reasonably practicable” to carry on the business in conformity with the entity’s governing documents.[2]

The starting point for a “reasonably practicable” analysis is always what these documents say.  The documents take on great significance and small differences in their language can be decisive.  For example, entity documents with broad “purpose” clauses are likely to give the managers much greater latitude as to what they can do and make them more impervious to efforts to cause dissolution.  On the other hand, if the entitiy’s stated purpose  includes generating “cash flow” or “profits,” a failure to do so is much more likely to lead to dissolution that if the documents are silent on this point.

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New Decision Confirms There is No Oppression Cause of Action Applicable to New Jersey LLC’s

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In a recent decision, the New Jersey Appellate Division confirmed that the New Jersey Oppressed Shareholder Statute, N.J.S.A. 14A:12-7(1)(c) does not apply to limited liability companies.[1]

Hopkins v. Duckett (N.J. App. Div. January 17, 2012) involved a long-running dispute between members of an LLC over, among other things, whether the founder could be expelled after he changed his mind on a promise to retire.  The founder sued claiming that his ouster constituted “oppression.” 

The Court held that the founder could not assert an oppression claim because the LLC, Nightingale & Associates, L.L.C. (N&A) was a Delaware LLC and Delaware did not recognize a claim for oppression (more on this below).

However the Court also ruled that even if N&A had been governed by New Jersey law, the founder’s claim would fail because New Jersey’s oppression cause of action applies only to corporations, and not to LLC’s.  The Court was very clear and concise on this point in its January 17, 2012 decision:

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LLC Withdrawal and Dissolution: Why Explicit Provisions in the Operating Agreement are Necessary

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Over the past decade, the Limited Liability Company (“LLC”) has become one of the most favored forms of a closely held business organization in New York.  As an unincorporated business entity, the LLC is favored because of its pass-through tax treatment coupled with maximum operating flexibility.  However, an LLC also demands a well-written and comprehensive operation agreement - especially with regard to withdrawal and dissolution - because it may create the only chance for a member to exit the company.

Under Limited Liability Company Law (“LLCL”) §606, for example, unless the operating agreement specifically provides for the right of withdrawal, a member is not allowed to withdraw prior to dissolution of the LLC.  Thus, where there is no such provision, if a member wants to withdraw, he must try to force a dissolution under LLCL §702, which provides: