It is not often that I write what I have somewhat snidely termed a “Green vs. Brown” blog entry that focuses on case law. My primary reasoning is that lawyers and academics often care far more about the latest precedent than do (or should) businesspeople.
Such is not the case with Wasserman v. Kay. Decided in 2011 by the Court of Special Appeals, Wasserman v. Kay addressed the default fiduciary duties of limited liability company Managing Members in Maryland. Most Operating Agreements and the Maryland Limited Liability Company Act are silent as to what duties managers and Managing Agents owe their LLC’s. The topic, however, is important and can have a personal, bottom line significance to anyone who serves as a manager or managing member.
It is easy, and calming, to think of the LLC as a shield against personal liability, much like a corporation. To be sure corporate officers and directors have the duty, imposed by statute, to act in good faith, with a reasonable belief that the action is in the best interests of the corporation. Corps. & Ass’ns §2-405(a). Breach of this duty can result in personal liability.
But the duty is hardly expansive…and the standard is rarely difficult to meet. Wasserman may have dramatically expanded those duties – and the potential personal liability that goes with them – where LLC’s are concerned.
The Wasserman court analogized the duties of a manager or managing member of an LLC to those imposed under common law (non-statutory law based on a lineage of case law) to agents. These duties can expand well beyond good faith and candor. Instead, agents under Maryland common law have an affirmative duty to inform their principals of issues and improprieties. Other lines of precedent hold agents liable for ordinary negligence.
Why do you care?
If you are the Managing Member of an LLC, you care because you may find yourself held personally liable to the other members for decisions which, with the benefit of hindsight, turned out to have been made in error. You care because Wasserman may have removed managing members from the protection of the business judgment rule which has long protected corporate officers and directors. You care because you can do something about it.
What should you do?
While potentially expanding the personal liability which may be visited upon managers and Managing Members, Wasserman also points to a way out. The duties which may be imposed by common law can be contractually limited or eliminated. The Court noted that members of LLCs often modify their rights and duties contractually through the execution of an Operating Agreement. Although the Court did not provide specific guidelines or even rule on the enforceability of provision limiting these common law duties, the Court did nothing to limit the practice.
If you operate your business from a multi-member LLC, now is the time to dig your Operating Agreement out of the drawer, dust off the minute book, and take a real look at how it limits the liabilities of managers and Managing Members. If you’re not sure, send it to your lawyer.
You never know when you’ll be exceedingly glad you did.