Until very recently, Illinois law imposed no fiduciary duties on a member of a manager-managed limited liability company ("LLC") unless the company's operating agreement specifically gave managerial authority to that member. That has changed. An amendment to Section 15-3 of the Illinois LLC Act (the "Act"), enacted August 11, 2009, provides that any member who exercises managerial authority over company affairs now owes the same fiduciary duties as a manager of the LLC.
Care and Loyalty in Management
In Illinois, as in most states, a limited liability company may be managed by its members or by managers, and certain statutory duties are imposed upon the members and managers according to who manages the LLC. Members of a member-managed Illinois LLC owe fiduciary duties of loyalty and care to the company and to fellow members, and breaching those duties can expose members to personal liability. Managers of manager-managed LLCs are held to the same standard of conduct.
The nonmanagerial members of manager-managed LLCs, however, owe no such duties solely by being members of the LLC. And until the recent amendment to Section 15-3, a member owed no fiduciary duties even when performing managerial functions, unless he was managing company affairs "pursuant to the operating agreement." The 2009 amendment strikes that phrase from the Act.
Closing a Loophole
This change comes in response to a 2005 case, Katris v. Carroll. In Katris , a member of a manager-managed LLC was appointed the company's "director of technology" and given responsibility for developing the company's sole product, a software program called Viper. While still acting in that capacity, the member was hired away by another company to develop similar software, and a manager of the LLC sued him for breach of fiduciary duty and his new employer for collusion in that breach. After the member settled, the Illinois appellate court dismissed the collusion claim because the LLC's operating agreement gave no managerial authority to the member, so he had no fiduciary duty that could have been breached. Under the court's strict reading of the Act as effective prior to the 2009 amendment, only action "pursuant to the operating agreement" could impose such a duty. Even though the member in Katris served as the LLC's director of technology with management-like responsibilities, no duties applied to his conduct, because his title and authority were given to him merely by a resolution of the managers, not by the operating agreement.
Katris might well be decided differently today. Under the Act as amended, fiduciary duties are owed by members who exercise "managerial authority" regardless of whether they are so authorized by the operating agreement or by some other process or instrument. The Act vests managers with the authority to decide any matter related to the business of the company (with certain limited exceptions), so if a member is authorized by any means to act in that capacity, he will be legally bound to observe the duties of loyalty and care applicable to managers under the Act.
Another Limit on Flexibility
With this change, Illinois has moved further away from Delaware's liberal contractarian approach to limited liability companies. In Delaware, the fiduciary duties of LLC members and managers are unspecified by statute and left to development by the common law and even then are explicitly subject to expansion, contraction and elimination (except as to good faith and fair dealing) by a company's operating agreement.
Illinois, on the other hand, establishes a statutory baseline of fiduciary responsibility that an operating agreement may not contract or eliminate. Prior to the 2009 amendment, the default level of duty for all nonmanagerial members was zero, unless the operating agreement specifically imposed such duties by granting them managerial authority. Now, the default duty of each nonmanagerial member depends on whether that member exercises any management authority, howsoever authorized. If he does, fiduciary duties apply to that action as if he were a manager.