Fiduciary Duties in a Minnesota Limited Liability Company

The Statute That Governs Minnesota LLCs

Minnesota limited liability companies are governed by the Minnesota Revised Uniform Limited Liability Company Act, Minnesota Statutes chapter 322C. That act has governed every Minnesota LLC since January 1, 2018 (Minn. Stat. § 322C.1204, subd. 2), and it replaced the older LLC Act (chapter 322B), which the Legislature repealed effective that same date (2014 Minn. Laws ch. 157, art. 1, § 91). Under chapter 322C, the duties in an LLC are set out in Minn. Stat. § 322C.0409: the fiduciary duties of loyalty and care, together with the separate contractual obligation of good faith and fair dealing.

Who Owes Fiduciary Duties

Who owes these duties turns on how the company is managed. Chapter 322C recognizes three management structures: except as section 322C.1101, subdivision 5, provides for nonprofit LLCs, an LLC is member-managed unless its operating agreement makes it manager-managed or board-managed. See Minn. Stat. § 322C.0407, subd. 1. Under that exception, a nonprofit LLC must be board-managed. See Minn. Stat. § 322C.1101, subd. 5(a). A nonprofit LLC’s governors are instead held to the standard of conduct for nonprofit-corporation directors in Minn. Stat. § 317A.251, and section 322C.0409 does not apply. See Minn. Stat. § 322C.1101, subd. 5(c). The rest of this article describes LLCs other than nonprofit LLCs. Section 322C.0409 assigns the duties of loyalty and care to the members of a member-managed LLC, the managers of a manager-managed LLC, and the governors of a board-managed LLC. See Minn. Stat. § 322C.0409, subds. 1, 7, and 8.

• In a member-managed LLC, each member owes the company, and, subject to section 322C.0901, subdivision 2, the other members, the fiduciary duties of loyalty and care described below. See Minn. Stat. § 322C.0409, subd. 1. Under section 322C.0901, subdivision 2, a member suing another member directly must plead and prove an injury that is not solely the result of an injury to the company.
• In a manager-managed LLC, those duties fall on the managers rather than on the members. A member of a manager-managed LLC does not owe any fiduciary duty to the company or to the other members solely by reason of being a member. See Minn. Stat. § 322C.0409, subd. 7.
• In a board-managed LLC, those duties fall on the governors rather than on the members, and a member likewise owes no fiduciary duty solely by reason of being a member. See Minn. Stat. § 322C.0409, subd. 8.

I recommend reading section 322C.0409, which sets out the duties, alongside the company’s operating agreement, because the operating agreement may shape those duties within statutory limits (see Minn. Stat. § 322C.0110, subds. 3, 4). Under Minn. Stat. § 322C.0110, subd. 2, to the extent the operating agreement does not otherwise provide for a matter described in subdivision 1 of that section, chapter 322C governs the matter, and subdivisions 3 to 8 of that section set the limits on how the agreement may shape the duties.

If a term is not manifestly unreasonable, the operating agreement may restrict or eliminate specific parts of the duty of loyalty, alter the duty of care (but not to authorize intentional misconduct or a knowing violation of law), and set the standards for measuring good faith and fair dealing. See Minn. Stat. § 322C.0110, subd. 4. Beyond the terms subdivisions 4 to 7 authorize, it may not eliminate the duty of loyalty, the duty of care, or the obligation of good faith and fair dealing. See Minn. Stat. § 322C.0110, subd. 3(4), (5).

In a member-managed LLC, if the operating agreement expressly relieves a member of a responsibility and imposes it on one or more other members, the agreement may also eliminate or limit, for the relieved member, any fiduciary duty that would have pertained to that responsibility. See Minn. Stat. § 322C.0110, subd. 6. The operating agreement may also eliminate or limit a member’s, manager’s, or governor’s liability to the company and the members for money damages, except for a breach of the duty of loyalty, a financial benefit received by a member or manager to which that member or manager is not entitled, a breach of a duty under section 322C.0406, intentional infliction of harm on the company or a member, or an intentional violation of criminal law. See Minn. Stat. § 322C.0110, subd. 7.

Duty of Loyalty

Under Minn. Stat. § 322C.0409, subd. 2, the duty of loyalty in a member-managed LLC includes three obligations:

• To account to the company, and to hold as trustee for it, any property, profit, or benefit derived by the member (i) in the conduct or winding up of the company’s activities, (ii) from a use by the member of the company’s property, or (iii) from the appropriation of a limited liability company opportunity.
• To refrain from dealing with the company, in the conduct or winding up of its activities, as or on behalf of a person having an interest adverse to the company.
• To refrain from competing with the company in the conduct of its activities before the company is dissolved.

For managers of a manager-managed LLC and governors of a board-managed LLC, the duty not to compete continues until winding up is completed, not just until dissolution. See Minn. Stat. § 322C.0409, subds. 7(2), 8(2).

It is a defense to a claim under the second loyalty duty (dealing with the company on behalf of an adverse interest) that the transaction was fair to the company. See Minn. Stat. § 322C.0409, subd. 5.

All of the members of a member-managed or manager-managed LLC may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that would otherwise violate the duty of loyalty. In a manager-managed or board-managed LLC, that power belongs only to the members. See Minn. Stat. § 322C.0409, subds. 6, 7(4), 8(4).

Minnesota case law interpreting the LLC duty of loyalty specifically remains limited, so the statutory language in section 322C.0409 is the primary guide.

Duty of Care

Under Minn. Stat. § 322C.0409, subd. 3, and subject to the business judgment rule, the duty of care is to act with “the care that a person in a like position would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the company.” In discharging this duty, a member may rely in good faith on opinions, reports, statements, or other information provided by another person that the member reasonably believes is a competent and reliable source for the information.

In a manager-managed LLC this same standard applies to the managers, and in a board-managed LLC to the governors. See Minn. Stat. § 322C.0409, subds. 3, 7(1), 8(1).

Good Faith and Fair Dealing

Minn. Stat. § 322C.0409 also imposes a contractual obligation of good faith and fair dealing, separate from the fiduciary duties of loyalty and care. A member must discharge the member’s duties and exercise any rights under chapter 322C or under the operating agreement “consistently with the contractual obligation of good faith and fair dealing, including acting in a manner, in light of the operating agreement, that is honest, fair, and reasonable.” See Minn. Stat. § 322C.0409, subd. 4.

This obligation binds the members in every structure: in a manager-managed LLC it applies to both the members and the managers, and in a board-managed LLC to both the members and the governors, even though a member there owes no fiduciary duty solely by reason of being a member. See Minn. Stat. § 322C.0409, subds. 4, 7(3), 7(5), 8(3), 8(5).

Limited Liability Is Not Lost by These Duties

Owing fiduciary duties does not, by itself, expose a member, manager, or governor to personal liability for the company’s debts. Under Minn. Stat. § 322C.0304, subd. 1, the debts, obligations, and other liabilities of an LLC, whether arising in contract, tort, or otherwise, do not become those of a member, manager, or governor solely because the person acts in that role. Under subdivision 2 of the same section, the company’s failure to observe formalities relating exclusively to the management of its internal affairs is not a ground for holding members, managers, or governors liable for the company’s debts, obligations, or other liabilities. Subdivision 3 applies Minnesota’s corporate veil-piercing case law to LLCs, except that skipped internal-affairs formalities cannot support piercing. Veil piercing is a separate question from the fiduciary duties described above.