Member of a LLC May Not Pursue Individual Claims Against Fellow Members or Managers of the LLC for Breach of Fiduciary Duty

(Last Updated On: January 24, 2017)

Remora Investments, L.L.C., 277 Va. 316, 319, 673 S.E.2d 845, 845 (2009)- The Supreme Court of Virginia recently decided that a member of a limited liability company (“LLC”) cannot pursue an individual claim against a fellow member and manager of the LLC unless the manager’s duties are imposed by contract or the operating agreement of the LLC.

Remora and Orr were the only members of O.A.L.L.C. (“OA”). Orr was also the manager. Remora sought a distribution to himself and Orr in proportion to their membership interests of approximately $1.4 million held in an investment account of OA. When Orr refused, Remora filed an action against O.A. and Orr seeking (1) dissolution of OA and an accounting of its assets and (2) judgment against Orr seeking damages for breach of fiduciary duties in refusing to distribute the funds. The trial court ruled that Remora did not have standing to bring an individual action against Orr. Remora appealed the trial court’s rulings that a manager of aLLC owes no fiduciary duties to individual members; that a member has no direct right of action against a member of a manager for breach of such duties; and that a member may only pursue a derivative action on behalf of the LLC. A derivative action involves claims by the LLC as an entity; Remora was asserting a claim as an individual.

The Supreme Court affirmed the trial court. In doing so, it adhered to prior rulings recognizing similarities between a corporation and a LLC. Each type of entity shields its respective shareholders/members from personal liability for actions of the entity. It also recognized that the fiduciary duties of corporate directors and LLC managers were analogous. Nothing in the Virginia statute imposes duties between members of an LLC, or between members and managers of an LLC; just as shareholders of a corporation, claims against individual shareholders, officers, or directors of a corporation. The absence of such statutory provisions for LLC and corporations was in contrast to the partnership statutes which explicitly provide remedies for partners against the partnership and other partners.

The decision in Remora follows the Court’s decision that corporate shareholders cannot bring an individual, direct action against corporate officers or directors but instead may only claim on behalf of the corporation. Simmons v. Miller, 261 Va. 561 (2001). However, the Court noted, as it did in Simmons, that members of an LLC are free to “vary commercial rules by contract” should they desire to establish fiduciary duties between members or between a member and a manager.

The LLC is a very popular choice of entity for many business ventures. The wisdom of including provisions establishing fiduciary duties between members or members and managers should be considered when organizing the LLC.