LLC FIDUCIARY LAW

By , August 9, 2018 11:53 am

Published in the Marquette Law Review is a lengthy, scholarly but also practical article about LLC fiduciary law under the Wisconsin LLC Act.  It will, of course, be of particular relevance to Wisconsin lawyer, but also to LLC lawyers nationally.  Below are the title, table of contents and first paragraph of the article.

101 Marq. L. Rev. 863
Marquette Law Review
Spring, 2018
Comment
Collin D. Brunk
Copyright © 2018 by the Marquette Law Review; Collin D. Brunk
POLISHING UP WISCONSIN’S FIDUCIARY DUTIES IN LLC LAW TO ATTRACT NEW SUITORS

I. INTRODUCTION
II. EXPLORING THE HISTORY OF LLCS AND FIDUCIARY DUTIES
A. Formation and Structures of LLCs
B. Overview of Fiduciary Duties
III. APPLICABLE LLC METHODS
A. Revised Uniform Limited Liability Company Act
B. Delaware LLC Method
1. Delaware’s contractual waiver of duties
2. Delaware’s ambiguous default duties
C. Wisconsin’s Adoption of LLCs
1. Waiver of fiduciary duties
2. Default common law fiduciary duties in Wisconsin
IV. INCREASING THE ATTRACTIVENESS OF WISCONSIN LLCS
V. CONCLUSION

INTRODUCTION

Should individuals be allowed to waive fiduciary duties in a limited liability company (LLC)? Why do these fiduciary duties matter? These questions pervade scholar’s discussions when looking to improve a state’s LLC provisions. Many states permit the contractual alteration and elimination of fiduciary duties in an LLC through waiver. However, many states fail to provide clear default fiduciary duties owed by members or managers of the LLC, nor do they provide a clear upholding of waived duties. Without a clearly articulated waiver policy and list of default duties, members and potential investors may experience higher transaction costs upon LLC formation and shy away from forming an LLC in that state. Allowing such issues to persist directly contradicts the policy behind LLC formation. As one scholar stated, “[T]he overall social policy goal of business entity governance [is] to foster investor confidence while keeping transaction costs at a minimum.” Thus, a state’s LLC statute and related provisions should reflect this sentiment.

Since Wisconsin’s adoption of the LLC in 1994 little discussion has occurred regarding the default fiduciary duties members owe to the LLC and each other. Such lack of discussion leaves Wisconsin courts, attorneys, members of the LLC, and third parties to guess at the baseline fiduciary duties owed by members and managers. This topic must be tackled because the Wisconsin LLC statute ambiguously lists the default duties. The ambiguity in the current statute and lack of discussion leaves scholars debating whether common law fiduciary duties are owed if not contractually altered in the operating agreement.

Wisconsin courts waver on their implementation of the “common law” fiduciary duties to members of an LLC, creating great uncertainty for members, managers, and investors in LLCs. The only certainty that parties in Wisconsin rely on is that fiduciary duties may be altered or waived by the contractual language of the operating agreement. However, this waiver of fiduciary duties has not yet been upheld by Wisconsin courts, creating many issues as parties are uncertain if their waiver will be enforced.

Part II of this Comment examines the national rise of LLCs. Additionally, it explores the purpose of fiduciary duties as well as why they apply to certain individuals. This discussion puts into perspective the need to revise Wisconsin’s current LLC Act or enact a new LLC statute. Part III looks at the two most popular LLC regulatory methods, the Revised Uniform Limited Liability Company Act (RULLCA) and the Delaware method. Critiquing and examining these methods allows one to find the best practices to apply in Wisconsin. In addition, this part examines Wisconsin’s current LLC Act and the surrounding provisions, noting significant gaps in the current provisions. Part IV provides how Wisconsin can fill the gaps in its LLC provisions by enacting a new LLC statute that explicitly creates the default fiduciary duties of loyalty and care, but allows for the contractual waiver of these duties. The benefits derived from enacting this statute will increase investment in LLCs or promote additional LLC formations by fostering member and investor confidence.

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