Do Non-Manager, Minority LLC Owners Owe Fiduciary Duties?
January 30, 2023
This important question of whether non-manager, minority limited liability company owners owe fiduciary duties continues to bedevil New York litigants and courts.
The prevailing state of the law remains unsettled, with no explicit appeals court guidance to be found. Peter Mahler has written about this unresolved legal question a number of times, with three articles on the subject available here.
Doeblin is one of two lawsuits between Christopher Doeblin and John MacArthur, the warring members of an LLC that operated a Manhattan bookstore, Book Culture on Columbus, LLC (the “Company”).
According to Article VII of the Company’s Amended and Restated Operating Agreement (the “OA”), Doeblin was the Company’s sole Manager with “full and complete discretion to manage and control the business and affairs of the Company.” Article VII further provided, “No other Member of the Company shall have any authority to act on behalf of or bind the Company.” According to the OA, Doeblin was a 45% member, MacArthur a 40% member. A third member held the remaining 14% interest.
The Complaint and Supplemental Affidavit
In his Amended Complaint, Doeblin alleged that the bookstore’s finances were troubled, leading him to crowdsource public loans to help keep the business afloat. According to Doeblin, MacArthur defamed him during the crowdfunding campaign. MacArthur allegedly stated in an article published in the West Side Rag that the Company did not need the money and that Doeblin was misleading contributors. Ultimately, the landlord closed the bookstore for non-payment of rent.
Separately, in the few stray allegations of the Amended Complaint that are the subject of this article, Doeblin alleged:
“During the period immediately after the landlord shuttered the bookstore . . ., and while Doeblin was attempting to renegotiate the lease and get the store reopened, MacArthur contacted the landlord and attempted to negotiate a new lease for a new bookstore.”
“Such self-dealing was entirely in MacArthur’s self-interest and was antagonistic to [the Company]’s interests.”
“As such, this activity was in absolute and flagrant breach of MacArthur’s fiduciary obligations to Doeblin and [the Company].”
“MacArthur’s self-interested meddling caused the landlord to cease negotiations with [the Company] and formally terminate the lease for non-payment which, as noted, led to the landlord filing suit against Doeblin.”
To bolster his allegations of MacArthur’s “managerial” duties, Doeblin supplemented his Amended Complaint with an affidavit alleging:
“At various times between 2014 and 2019, Mr. MacArthur would be involved in [Company] employment decisions, including the hiring of [the Company]’s accountant in or around 2016. He was also involved in other hiring, promotion, merchandising, event planning, and marketing decisions.”
MacArthur moved to dismiss the Amended Complaint, arguing that Doeblin’s allegations were insufficient to allege the existence of any fiduciary duty. You can read the parties’ briefs here, here, and here.
The Issue Presented
Justice Masley framed the legal question as follows:
While managing members of an LLC owe non-managing members a fiduciary duty, it is not entirely clear, in this jurisdiction, whether a non-managing member, like MacArthur, owes a fiduciary duty to Doeblin, the managing member, and to [the Company] where it is alleged that MacArthur acted in a ‘managerial capacity.’” (citation omitted).
In Verkhoglyad, Justice Masley wrote, the parties “were both managing members and equal owners of the LLC,” which “transformed the parties’ business relationship into a fiduciary one.”
In Cortazar, Justice Masley wrote, the parties “were each 50% members of the LLC,” and one member “locked” the other “out of the Company’s day-to-day operations,” the de facto expulsion of his co-member imposing upon him “a duty to manage the Company in a proper and responsible manner.”
The Court’s Summary of the Prevailing Law
“In view of the foregoing,” held the Court, “it appears that a fiduciary duty is imposed upon the non-managing member who shares management duties (Verkhoglyad, 57 Misc 3d 1201(A), at *5), or takes control of management duties where management duties are not shared (Cortazar, 64 Misc 3d 1204(A), at *9).”
The Insufficiency of Doeblin’s Allegations
Applying these principles, the Court held:
Here, the [Amended Complaint] and the facts in opposition are devoid of any allegations that MacArthur shared management duties with Doeblin or assumed any managerial duties at the time MacArthur allegedly spoke with the landlord. The [Amended Complaint] claims that MacArthur ‘went behind Doeblin’s back and commenced his own negotiations with the landlord in order to secure the retail space for a competing bookstore,’ and ‘was effectively negotiating against [the Amended Company]’s interest by trying to secure a lease at the Book Culture location for a competing company.’ However, Doeblin does not allege how MacArthur, as a non-managing member of [the Company], assumed fiduciary duties prior to his conversation with the landlord. It is only in the . . . supporting affidavit where Doeblin argues that ‘At various times between 2014 and 2019, Mr. MacArthur would be involved in [the Company]’s employment decisions, including the hiring of [the Company]’s accountant in or around 2016. He was also involved in other hiring, promotion, merchandising, event planning, and marketing suggestions.’ Yet, the affidavit, nor the [Amended Complaint], does not allege whether these activities are managerial duties and is insufficient to warrant the denial of the motion to dismiss (citations omitted).
Unless and until a New York appeals court answers the question to the contrary, it now appears fairly well accepted among New York’s trial-level courts that non-manager, co-equal or minority LLC owners do not owe fiduciary duties to the company’s other members or to the company itself, entitling the non-manager to pre-answer dismissal of a claim for breach of fiduciary duty.
Under Kalikow, Lester, and Doeblin, to avoid dismissal, a plaintiff must allege very specific facts tending to show that the non-managing member assumed specific managerial responsibilities or duties otherwise belonging to the manager, or in some way exceeded his or her authority as non-manager by assuming some degree of control of the LLC.
Though Doeblin alleged MacArthur’s participation in certain day-to-day business decisions, his allegations fell short of showing that MacArthur’s activities were “managerial” in nature sufficient to create a fiduciary duty.