The duty of loyalty under the new LLC Act

You can’t really understand the duty of loyalty unless you’re aware of the eight subsidiary duties hidden in it


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Attorney John Cunningham, of counsel to the Manchester-based law firm of McLane, Graf, Raulerson & Middleton, is author of "John Cunningham on New Hampshire's New LLC Act," available at cunninghamonnhllcs.com.

The biggest single risk to the success of New Hampshire LLCs isn’t business risks, it’s the risk of bitter and destructive disputes among LLC members. And at least half of all New Hampshire LLC disputes are about fiduciary matters -- that is, they involve claims by members that other members have managed the LLC poorly or have been disloyal to it.

Believe it or not, the old New Hampshire LLC law is totally unclear about LLC fiduciary duties. In the revised act, which became effective on Jan. 1, the BIA LLC drafting committee solved that problem.

Our particular focus in drafting the fiduciary provisions of the revised act was the duty of loyalty.

In general, the duty of loyalty of LLC members and managers is a duty to put the needs of the LLC first and their own needs second. But that definition is vague. You don’t really understand the duty of loyalty unless you’re aware of the eight subsidiary duties that are hidden in it.

In Section 110 of the revised act, our committee addressed all eight. No other U.S. LLC act has done so.

I’m not going to tell you in this article what these eight duties are. That would provide, at most, an opportunity for merely passive learning. Instead, I’d like to try an experiment in learning that is active. I’ll give you a hypothetical example and eight questions based on it, all of which address duty-of-loyalty questions. To answer these questions, you’ll have to visit cunninghamonnhllcs.com and click on Link 6. This will give you online access to the text of the revised act. Then scroll down through that act to Section 110, III. (A hint: The answers to the eight questions will follow the order of the section.)

Here’s the hypothetical example:

Amy Andrews and Betty Brown are licensed New Hampshire plumbers. Each has worked on her own as a plumber for 10 years. But Amy and Betty are friends, and they each want professional backup. So, on Jan., 1, 2013, they form AB Plumbing LLC, a New Hampshire LLC in which each is an equal member. On Jan. 2, 2014, Amy gets eight voicemail messages. How should she handle each of them?

1. The first message is from Joe Jones, an old customer of Amy’s. “Hi Amy. I owe you a favor. I’ve got a $20,000 job for you, but I don’t want your LLC to handle it. I want you to handle it yourself. Give me a call.”

2. The second is from ABC Plumbing Supplies, a long-term supplier of Amy before AB was formed. “Hi Amy. I’d like to get your LLC’s business. On any AB purchases from ABC, I’ll give you a check for 5 percent of the purchase price. But don’t tell Betty.”

3. The third is from Mary Morgan, a commercial broker. “Hi Amy. I’ve discovered a property that will be perfect as a regional warehouse for plumbing supplies. As you know, New Hampshire needs such a warehouse. I can get the warehouse for you at a great price. But don’t tell Betty.”

4. A reporter calls Amy. “Hi Amy, I’m doing a story about the plumbing industry. Are you free to tell me AB’s gross and net income for 2013? I need that kind of real-world information for my story.”

5. John Doe, a business consultant who is a friend of Amy’s, gives her a call. “Hi Amy, this is confidential, but I thought you should know that a major national plumbing company is planning to start a branch office in your town. They might want to hire you as their manager.”

6. Amy’s husband calls her. “Hi honey, I’m helping set up the annual picnic for my company’s employees. Can I borrow one of AB’s trucks tomorrow evening to haul rental furniture to the picnic site?”

7. Another AB supplier calls Amy. “Hi Amy, we really appreciate AB’s business, and we’re giving you two tickets to the Patriots’ Super Bowl game — one for you and one for your husband.”

8. A competitor calls Amy. “Amy, we’re desperate to get the state to award us the Somersworth contract. If AB doesn’t compete for it and we get it, I’ll send you a check for $5,000. But don’t tell anyone.”

Once again, the answers to these duty-of-loyalty questions can be found by visiting cunninghamonnhllcs.com and clicking on Link 6.

Attorney John Cunningham, of counsel to the Manchester-based law firm of McLane, Graf, Raulerson & Middleton, is author of "John Cunningham on New Hampshire's New LLC Act," available at cunninghamonnhllcs.com.

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