How do Courts Handle Fiduciary Duty Disputes of LLCs?

LLC is usually consisted with managers and members. General managers manage the daily operation of the LLC. Members are usually silent investors. Managers in an LLC are subject to duty of loyalty, including duty to avoid conducting personal business with the LLC under some circumstances, duty not to take LLC opportunities for his own personal interest and duty not to compete with the LLC. In addition, managers must disclose information relating to the business of LLCs to other managers and members upon their request.
Many disputes have been brought by limited members against general managers for breaching specific provisions in the operating agreements, or breaching implied contractual covenant of good faith and fair dealing. The arguments often centered whether the general partner exercised fiduciary duties when conducting “internal affairs” or transacting business deals with a third party that allegedly interfered with limited members’ statutory or contractual rights.
Get a well drafted operating agreement among members and managers are essential to avoid potential disputes. Some courts have been reluctant to hold general manager liable to limited members when the language of the operating agreement relating to a specific fiduciary duty is somewhat ambiguous. However, some courts invalidate clauses that give general partners too much discretion to make business decisions, rather, supplement “fair and reasonable clauses”. In some instances, court didn’t consider members are injured by general partner’s conduct because members should have used common sense and conduct due diligence, and should have known the higher probability of bad things happening.