Section 409. General Standards of
Member's and Manager's Conduct

(a) The only fiduciary duties a member owes to a member-managed company and its other members are the duty of loyalty and the duty of care imposed by subsections (b) and (c).

(b) A member's duty of loyalty to a member-managed company and its other members is limited to the following:

(1) to account to the company and to hold as trustee for it any property, profit, or benefit derived by the member in the conduct or winding up of the company's business or derived from a use by the member of the company's property, including the appropriation of a company's opportunity;

(2) to refrain from dealing with the company in the conduct or winding up of the company's business as or on behalf of a party having an interest adverse to the company; and

(3) to refrain from competing with the company in the conduct of the company's business before the dissolution of the company.

(c) A member's duty of care to a member-managed company and its other members in the conduct of and winding up of the company's business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

(d) A member shall discharge the duties to a member-managed company and its other members under this [Act] or under the operating agreement and exercise any rights consistently with the obligation of good faith and fair dealing.

(e) A member of a member-managed company does not violate a duty or obligation under this [Act] or under the operating agreement merely because the member's conduct furthers the member's own interest.

(f) A member of a member-managed company may lend money to and transact other business with the company. As to each loan or transaction, the rights and obligations of the member are the same as those of a person who is not a member, subject to other applicable law.

(g) This section applies to a person winding up the limited liability company's business as the personal or legal representative of the last surviving member as if the person were a member.

(h) In a manager-managed company:

(1) a member who is not also a manager owes no duties to the company or to the other members solely by reason of being a member;

(2) a manager is held to the same standards of conduct prescribed for members in subsections (b) through (f);

(3) a member who pursuant to the operating agreement exercises some or all of the rights of a manager in the management and conduct of the company's business is held to the standards of conduct in subsections (b) through (f) to the extent that the member exercises the managerial authority vested in a manager by this [Act]; and

(4) a manager is relieved of liability imposed by law for violation of the standards prescribed by subsections (b) through (f) to the extent of the managerial authority delegated to the members by the operating agreement.

Comment

Under subsections (a), (c), and (h), members and managers, and their delegatees, owe to the company and to the other members and managers only the fiduciary duties of loyalty and care set forth in subsections (b) and (c) and the obligation of good faith and fair dealing set forth in subsection (d). An operating agreement may not waive or eliminate the duties or obligation, but may, if not manifestly unreasonable, identify activities and determine standards for measuring the performance of them. See Section 103(b)(2) to (4).

Upon a member's dissociation, the duty to account for personal profits under subsection (b)(1), the duty to refrain from acting as or representing adverse interests under subsection (b)(2), and the duty of care under subsection (c) are limited to those derived from matters arising or events occurring before the dissociation unless the member participates in winding up the company's business. Also, the duty not to compete terminates upon dissociation. See Section 603(b)(3) and (b)(2). However, a dissociated member is not free to use confidential company information after dissociation. For example, a dissociated member of a company may immediately compete with the company for new clients but must exercise care in completing on-going client transactions and must account to the company for any fees from the old clients on account of those transactions. Subsection (c) adopts a gross negligence standard for the duty of care, the standard actually used in most partnerships and corporations.

Subsection (b)(2) prohibits a member from acting adversely or representing an adverse party to the company. The rule is based on agency principles and seeks to avoid the conflict of opposing interests in the mind of the member agent whose duty is to act for the benefit of the principal company. As reflected in subsection (f), the rule does not prohibit the member from dealing with the company other than as an adversary. A member may generally deal with the company under subsection (f) when the transaction is approved by the company.

Subsection (e) makes clear that a member does not violate the obligation of good faith under subsection (d) merely because the member's conduct furthers that member's own interest. For example, a member's refusal to vote for an interim distribution because of negative tax implications to that member does not violate that member's obligation of good faith to the other members. Likewise, a member may vote against a proposal by the company to open a shopping center that would directly compete with another shopping center in which the member owns an interest.