Thomas Kearns Publishes Article in NYREJ on LLC’s Manager’s Liability to Members

New York Real Estate Journal recently published an article authored by Co-Chair of Olshan’s Real Estate Law practice Thomas Kearns entitled “LLC’s Manager’s Liability to Members.” (The article is also available on our blog.) In the article, Tom explores the confusion surrounding the liability of the person appointed manager of a New York limited liability company. He explains that LLC managers are liable to an LLC’s members for: 1) their fraud, 2) a breach of any express provisions of the LLC agreement, and, even if not expressly stated in the LLC agreement, 3) any self-dealing wherein the manager receives inequitable payments that should have been distributed to the LLC’s members as profits. “Generally,” Tom writes, “LLC managers are entitled to exercise their business judgment in the management of the LLC’s business. A major disagreement with the members, even a majority of the members, is typically not a breach of any duty by the manager unless the manager’s decision violates an express provision of the LLC agreement.” He goes on to explain that generally, the manager is not liable for mere mistakes in the operation of the business. He cites re Transfix Prods. LLC, a recent bankruptcy case, to illustrate this point. The case concerns the manager of an LLC that filed for bankruptcy who was sued by the court-appointed bankruptcy trustee for gross negligence and breach of duty to the members and the LLC’s creditors. The manager created the LLC and raised capital from investors to put on an art exhibition that eventually underperformed. However, unable to prove any fraud or bad faith by the manager, the court held that he was protected by the exculpation and indemnity clauses in the LLC agreement. “In other words,” Tom writes, “even where the business was a disastrous failure, the manager is not liable unless he did something fraudulent or in bad faith.” He concludes that, “Court decisions are mixed in terms of analyzing the allegations given the specific terms of the LLC agreement and the facts of the case giving judges wide leeway to view the equities of the situation. But the Transfix decision cited above is a recent example which confirms that mere business judgement mistakes are not actionable absent any breach of an express provision in the LLC agreement.”