Anderson v. Wilder

Brief Fact Summary.

Minority members of FuturePoint Administrative Services, LLC, a closely held, member-managed LLC, alleged that the majority members of the LLC (Defendant) breached their fiduciary duties to the minority members (Plaintiff) when they expelled the minority members (Plaintiff) and, not long after that, sold the former minority members’ (Plaintiff) units for a price way above the buyout price.

Synopsis of Rule of Law.

The majority members of a member-managed, closely held LLC owe the minority members a fiduciary duty of fair dealing and good faith.

Facts.

The minority members (Plaintiff) of FuturePoint Administrative Services, LLC (the “LLCâ€), a closely held member-managed LLC, were expelled by the vote of the majority shareholders (Defendant), who together held 53 percent of the LLC.  According to the operating agreement, the company was allowed to expel a member with or without cause upon a vote or consent of the members who held a majority of the units, and this is what the majority members (Defendant) purported to do.  Before the expulsion, the members had met to discuss the purchase of ownership units by third parties at $250 per unit.  The Plaintiffs received $150.00 per ownership unit in the LLC after they were expelled, pursuant to the LLC’s operating agreement.  Not long after the expulsions, the Defendants sold 499 ownership units, amounting to a 49.9 percent interest in the LLC, to a third party at a price of $250.00 per ownership unit.  The minority members filed suit, alleging inter alia, that the Defendants’ actions violated their fiduciary duty and duty of good faith and fair dealing to the Plaintiffs.  One reason they provided for the expulsion was that the Plaintiffs on the management committee had planned to distribute the company’s cash, approximately $60,000, to all the members, which would jeopardize payroll and operations.  The Plaintiffs strongly denied that allegation and claimed it was just a pretext for buying their units cheap and selling the units for a sizeable profit.  The trial court granted summary judgment in favor of the Defendants, and the state’s intermediate appellate court granted review.

Issue.

Do the majority members of a member-managed closely held LLC owe the minority members a fiduciary duty of fair dealing and good faith?

Held.

(Goddard, J.)  Yes.  The majority members of a member-managed closely held LLC owe the minority members a fiduciary duty of fair dealing and good faith.  Members of a closely held member-managed LLC owe each other a fiduciary duty similar to that of partners in partnerships and shareholders in closely-held corporations.  This duty is not inconsistent with the state’s LLC statute, which, although it does not expressly prescribe a fiduciary duty of majority members to the minority members, requires that each member discharge his or her duties in good faith.  Therefore, the Defendants here owed the Plaintiffs the fiduciary duty to act with honesty and good faith toward them.  The evidence presented, in the form of conflicting testimony as to why the Defendants expelled the Plaintiffs raises a genuine issue of material fact as to whether the Defendants were properly motivated or acted in good faith in accordance with their fiduciary duty toward the Plaintiffs.  Therefore, summary judgment was in error.  Vacated and remanded.

Discussion.

The holding in this case, so as to avoid minority oppression, is an exception to the general rule regarding duties owed by majority members to minority members.  This is arguably inconsistent with the view that the statute at issue defines the fiduciary duty of members of a closely held member-managed LLC as one owing to the LLC, not to the individual members.  Anyhow, on remand, the majority members (Defendant) were found to have breached their fiduciary duties to the minority members (Plaintiff) (see Anderson v. Wilder, 2007 Tenn. App LEXIS 582).