Question

Green Properties Group owns, manages, and develops real property. Jones Group, Inc. also develops real property. Green entered into agreements with Jones concerning a large tract of property in Georgia. The parties formed NewGroup, LLC, to develop various parcels of the tract for residential purposes. The operating agreement of NewGroup indicated that “no Member shall be accountable to the LLC or to any other Member with respect to any other business or activity even if the business activity competes with the LLC’s business.” Later, when Green contracted with other parties to develop parcels within the tract in competition with NewGroup, LLC, Jones sued, alleging breach of fiduciary duty. Please address the following:

• Outline the fiduciary duties that the members of an LLC owe to each other.
• Can the terms of the NewGroup, LLC operating agreement alter these fiduciary duties? Explain why or why not.
• In whose favor should the court rule in the above scenario? Why?

Answer 1

The fiduciary duties that the members of an LLC owe each other are the duty of care and the duty of loyalty. Duty of care is “grossly negligent of reckless conduct, intentional misconduct, or a knowing violation of law.” (Miller, 2014) In other words this requires that members/owners act in good faith and exercise reasonable care in carrying out their obligations. Duty of loyalty “partners are accounted for the partnership of any property, profit or benefit.” (Miller, 2014) So the member or the manager is supposed to put the success of and the benefits to the LLC above any individual or personal advantages.

Yes the terms of the NewGroup LLC operating agreement can be altered, because they came together and decided that members would not be held accountable for going to another company even if that member was helping another company. If it is agreed by everyone and it is in writing then it is a contact which cannot be broken.

The court should favor with Green, for the simple fact that they had put this agreement in, “no Member shall be accountable to the LLC or to any other Member with respect to any other business or activity even if the business activity competes with the LLC’s business.” You cannot go back on your word when you and the other members of NewGroup LLC came up with this agreement. That would be like a contractor going back on the quote that he had given you to fix your roof after he had written up the contact with you that told you exactly what was going to be done and what exactly it was going to charge you to get it fixed.