Commercial Division Blog
Managing Member of LLC Has Fiduciary Duty to Both LLC and Other Members
On October 11, 2016, Justice Friedman of the New York County Commercial Division issued a decision in Zacharias v. Wassef, 2016 NY Slip Op. 31897(U), holding that the managing member of an LLC had fiduciary duties to both the LLC and the other members, explaining:
[A]s a member who exercised managerial control over Mechanical, Wassef owed fiduciary duties to both Mechanical and Zacharias. The fiduciary duties owed by a managing member include a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and inflexible rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary's personal interest possibly conflicts with the interest of those owed a fiduciary duty.
The Second Department's decision in Out of the Box Promotions, is particularly instructive, as it involves nearly identical facts. There, as here, the complaint alleged that the individual plaintiff and the individual defendant were each a 50% member of the plaintiff LLC. The complaint alleged that the defendant member had formed a separate LLC doing business under the name Out of the Box Group, without his co-member's knowledge, to misappropriate orders from current customers of the plaintiff LLC, the similarly named Out of the Box Promotions, LLC. The Court held that the complaint pleaded the defendant member's breach of a fiduciary duty to both the plaintiff LLC and to his co-member.
(Internal quotations and citations omitted).