• Illinois Expands Scope of Fiduciary Duties for Members of Certain LLCs
  • September 22, 2009
  • Law Firm: Much Shelist Denenberg Ament & Rubenstein, P.C. - Chicago Office
  • A limited liability company (LLC) is a business entity that offers its owners (also known as members) exactly what the name implies: limited liability. In Illinois, as in many other U.S. jurisdictions, an LLC may be either member-managed (i.e., the actual owners manage the company) or manager-managed (i.e., a manager or board of managers, who may include some or all of the members, manages the company). Within this context, the Illinois LLC Act has recently been amended to provide that a person who is merely a member of an Illinois manager-managed LLC owes fiduciary duties to that entity and to the other members of the LLC if the member exercises managerial authority, even if he or she is not provided with any such authority under the company's operating agreement.

    As a result of this statutory change, a member who takes managerial actions (e.g., having a say in decisions regarding a company's policies, products, employees or business) or otherwise exercises managerial authority that is vested in the managers under the Illinois LLC Act is subject to the fiduciary duties set forth in Section 15-3 of the statute. These include a duty of loyalty, a duty to act fairly in dealing with the company, a duty to refrain from competing with the company and a duty of care in conducting the company's business, among others.

    The amended Illinois LLC Act represents an important change in state law that broadens the scope of duties owed by members of manager-managed LLCs further than ever before. Even prior to the amendment, members of a member-managed LLC owed these statutory fiduciary duties to the company and to the other members because the LLC, when filing its articles of organization, elected to have its members/owners manage the company. However, a member of a manager-managed Illinois LLC owed no statutory fiduciary duties unless that member was also designated as a manager or exercised some of the authority of a manager pursuant to the company's operating agreement.

    In other words, if a person was simply a member of an Illinois manager-managed LLC and was not provided with any managerial authority under that company's operating agreement then, under the previous form of the Illinois LLC Act, the member had the peace of mind of knowing that he or she could have no liability for failure to comply with any of the fiduciary duties that are set forth in the statute. This is true even if the member performed some managerial acts for the company.

    This fact was made clear by the Illinois Appellate Court in Katris v. Carroll. In that case, decided in 2005, a member of an Illinois manager-managed LLC was found to owe no fiduciary duties to the LLC, even though he had been appointed by the managers to be the company's Director of Technical Services and was alleged to have been developing a competing software program and to have usurped a corporate opportunity of the LLC. The case also involved claims that were brought against other employees alleging collusion with the member in the breach of his fiduciary duties.

    The court in the Katris case strictly interpreted former Section 15-3 of the Illinois LLC Act, ruling that there could be no liability imposed on the member because any exercise of managerial authority was not "pursuant to the company's operating agreement." Therefore, the court concluded that the member did not owe any fiduciary duties to the company and summarily dismissed the case against him and all of the other defendants.

    As a result of the recent Illinois amendment, the rules of the game have now changed and the Katris case would probably be decided differently today. In its amendment to Section 15-3 of the Illinois LLC Act, the state legislature deleted the wording that required managerial acts to be exercised "pursuant to the company's operating agreement." As a result, members of manager-managed LLCs now have fiduciary duties to the company upon exercising the power or authority of a manager, regardless of what is stated in the company's operating agreement.

    As a practical matter, it is important to understand that acts of a managerial nature taken by a member of an Illinois manager-managed LLC could result in substantial personal liability to the member if he or she does not fulfill the statutory fiduciary duties that now apply. Therefore, members of Illinois manager-managed LLCs should be very careful when considering taking any actions relating to the business or management of an LLC, and should seek advice from an attorney if they have questions or concerns regarding such actions.