2020 Georgia Code
Title 14 - Corporations, Partnerships, and Associations
Chapter 11 - Limited Liability Companies
Article 3 - Agency; Management; Duties; Liability
§ 14-11-305. Duties

In managing the business or affairs of a limited liability company:

1. A member or manager shall act in a manner he or she believes in good faith to be in the best interests of the limited liability company and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. A member or manager is not liable to the limited liability company, its members, or its managers for any action taken in managing the business or affairs of the limited liability company if he or she performs the duties of his or her office in compliance with this Code section. Except as otherwise provided in the articles of organization or a written operating agreement, a person who is a member of a limited liability company in which management is vested in one or more managers, and who is not a manager, shall have no duties to the limited liability company or to the other members solely by reason of acting in his or her capacity as a member;
2. A member or manager, as the case may be, is entitled to rely on information, opinions, reports, or statements, including but not limited to financial statements or other financial data, if prepared or presented by:
   1. One or more members, managers, or employees of the limited liability company whom the member or manager reasonably believes to be reliable and competent in the matter presented;
   2. Legal counsel, public accountants, or other persons as to matters the member or manager reasonably believes are within the person's professional or expert competence; or
   3. A committee of members or managers of which he or she is not a member if the manager reasonably believes the committee merits confidence;
3. In the instances described in paragraph (2) of this Code section, a member or manager is not entitled to rely if he or she has knowledge concerning the matter in question that makes reliance otherwise permitted by paragraph (2) of this Code section unwarranted; and
4. To the extent that, pursuant to paragraph (1) of this Code section or otherwise at law or in equity, a member or manager has duties (including fiduciary duties) and liabilities relating thereto to a limited liability company or to another member or manager:
   1. The member's or manager's duties and liabilities may be expanded, restricted, or eliminated by provisions in the articles of organization or a written operating agreement; provided, however, that no such provision shall eliminate or limit the liability of a member or manager:
      1. For intentional misconduct or a knowing violation of law; or
      2. For any transaction for which the person received a personal benefit in violation or breach of any provision of a written operating agreement; and
   2. The member or manager shall have no liability to the limited liability company or to any other member or manager for his or her good faith reliance on the provisions of a written operating agreement, including, without limitation, provisions thereof that relate to the scope of duties (including fiduciary duties) of members and managers.

(Code 1981, §14-11-305, enacted by Ga. L. 1993, p. 123, § 1; Ga. L. 1995, p. 470, § 17.)

- For annual survey on business associations, see 61 Mercer L. Rev. 45 (2009). For article, "2008 Annual Review of Case Law Development," see 14 (No. 6) Ga. St. B. J. 28 (2009). For annual survey of law on business associations, see 62 Mercer L. Rev. 41 (2010).

ANALYSIS

• General Consideration
• Construction with Other Law
• Breach of Duty Shown
• Breach of Duty Not Shown

General Consideration

Summary judgment for a corporation was proper.

- Pursuant to O.C.G.A. § 14-11-305, any fiduciary duties that a member of a limited liability company has may be modified or eliminated (with a few exceptions) by an operating agreement. Ledford v. Smith, 274 Ga. App. 714, 618 S.E.2d 627 (2005).

Contractual flexibility provided in O.C.G.A. § 14-11-305 is consistent with O.C.G.A. § 14-11-1107(b) of the Georgia Limited Liability Company Act, O.C.G.A. § 14-11-100 et seq., which provides that it is the policy of Georgia with respect to limited liability companies to give maximum effect to the principle of freedom of contract and to the enforceability of operating agreements. Ledford v. Smith, 274 Ga. App. 714, 618 S.E.2d 627 (2005).

Trial court properly granted summary judgment to a corporation on a limited liability company's fraud claim as: (1) the contract contained an integration clause and other representations could not be used to vary the contract; (2) the contract was more specific than the Georgia Limited Liability Partnership Act, specifically O.C.G.A. § 14-11-305(1), and the contract prevailed; (3) the contract provided that any member could engage in conflict of interest transactions, that the corporation could compete directly with the joint venture, and that the corporation had complete control of the joint venture's business; and (4) the corporation held 51 percent of the membership and could consent to a change in the joint venture's purpose or scope. Alimenta (USA), Inc. v. Oil Seed South, LLC, 276 Ga. App. 62, 622 S.E.2d 363 (2005).

- Trial court properly denied dismissing the direct claim because the plaintiffs sufficiently pled special injuries permitting the plaintiffs to pursue the plaintiffs' claims in a direct action rather than a derivative action based on the plaintiffs' loss of control resulting from the alleged breach of fiduciary duties and fraud specifically targeted at the plaintiffs by the limited liability company manager, which harm to the plaintiffs was different from that experienced by the minority members. TMX Finance, LLC v. Goldsmith, 352 Ga. App. 190, 833 S.E.2d 317 (2019), cert. denied, No. S20C0427, 2020 Ga. LEXIS 405 (Ga. 2020); cert. denied, No. S20C0415, 2020 Ga. LEXIS 414 (Ga. 2020).

- In a suit alleging fraud, conspiracy, and conversion filed by a group of investors, as some evidence existed that a company's fundraiser misrepresented or omitted material facts concerning the benefit of a patent that the investors were requested to fund, a charge as to the law on the effect of a confidential relationship was appropriate. Argentum Int'l, LLC v. Woods, 280 Ga. App. 440, 634 S.E.2d 195 (2006).

Creditors failed to prove the existence of a technical trust, either by contract or by O.C.G.A. §§ 14-11-301(1),14-11-305(1), or23-2-58, and, as a consequence, could not prove a fiduciary defalcation by the debtors. Thus, any debt arising from the debtors' management of a limited liability company was dischargeable under 11 U.S.C. § 523(a)(4). Tarpon Point, LLC v. Wheelus (In re Wheelus), Bankr. (Bankr. M.D. Ga. Feb. 11, 2008).

- Court found it inappropriate to allow the member to proceed directly against the managing member for breach of duties under O.C.G.A. § 14-11-305. The member had not established any of the basis that would have allowed the member to proceed directly against the managing member for any violation of the managing member's duties to the limited liability company; inter alia, the member did not present any evidence of compliance with O.C.G.A. § 14-11-801. Pollitt v. McClelland (In re McClelland), Bankr. (Bankr. N.D. Ga. June 8, 2011).

- Suit by former controlling shareholders of an LLC alleging that an investor/lender had wrestled control from the shareholders and delayed a pending sale of the LLC to obtain a greater personal financial benefit adequately alleged a special injury, allowing a direct rather than derivative claim, and stated a claim for fraud and breach of fiduciary duty. TMX Finance, LLC v. Goldsmith, 352 Ga. App. 190, 833 S.E.2d 317 (2019), cert. denied, No. S20C0427, 2020 Ga. LEXIS 405 (Ga. 2020); cert. denied, No. S20C0415, 2020 Ga. LEXIS 414 (Ga. 2020).

- After plaintiff limited liability company (LLC1), who sold its interest in another limited liability company (LLC2) to the other members in LLC2 (buyers), and alleged that the buyers defrauded LLC1's members to sign a deed conveying real property from a related leasing company to LLC2 and that defendant financier, who financed the buyers, aided and abetted a breach of the buyers' fiduciary duty under O.C.G.A. § 14-11-305(1) in connection with that conveyance, the aiding and abetting claim failed because the conveyance had been required for LLC2 to obtain a loan from a bank, and absent the conveyance to enable LLC2 to secure the debt to the bank, the representations of the selling members in the loan application would have been false, subjecting the selling members to liability for bank fraud under 18 U.S.C. § 1344 or theft by deception under O.C.G.A. § 16-8-3. Ledford v. Peeples, 657 F.3d 1222 (11th Cir. 2011).

- Probate court order removing an executor for cause was affirmed because the executor violated their fiduciary duty in numerous ways by failing to dissolve the estate business, using estate property and funds for their own benefit and to pay personal bills, overpaid executor's fees, and had a conflict of interest by continuing to operate the business despite the estate losing money but personally benefitting by using the business property rent-free. Myers v. Myers, 297 Ga. 490, 775 S.E.2d 145 (2015).

- Defendant's ability to appoint four managers gave the defendant de facto control of a manufacturer's eight-member board of managers, which created a genuine fact dispute as to whether the defendant was a managing member of the manufacturer and therefore owed fiduciary duties to another member pursuant to O.C.G.A. § 14-11-305(1). Denim N. Am. Holdings, LLC v. Swift Textiles, LLC, 816 F. Supp. 2d 1308 (M.D. Ga. 2011).

In a dispute between a manager and a member of an LLC over the member's alleged failure to disclose a contractor's financial problems and failure to supervise the contractor in the contractor's site work, issues of fact remained regarding whether the member had a fiduciary duty to inform the manager of the problems. Inland Atl. Old Nat'l Phase I, LLC v. 6425 Old Nat'l, LLC, 329 Ga. App. 671, 766 S.E.2d 86 (2014), overruled on other grounds, 2019 Ga. LEXIS 137 (Ga. 2019).

- In a dispute between members of a car wash LLC, questions of fact remained as to whether the second manager violated a settlement agreement and/or breached fiduciary duties because the manager was not authorized to hire a spouse to work at the car wash, evidence showed that the couple diverted company income to their son, the manager claimed to be the sole owner in a sale of the assets, mismanaged the car wash, and obtained financing from family. McCabe v. Rainey, 343 Ga. App. 480, 806 S.E.2d 867 (2017).

- In a dispute between members of a limited liability company, in light of a stipulated accounting, which proved the defendant was improperly distributing company funds to the defendant and a brokerage firm, the trial court erred by failing to consider whether the plaintiff was entitled to recover damages for the defendant's breach of fiduciary duty. Niloy & Rohan, LLC v. Sechler, 335 Ga. App. 507, 782 S.E.2d 293 (2016).

Construction with Other Law

Precedence of operating agreement.

- Motion for a new trial by one member of limited liability company (LLC) in action among members for breach of contract, breach of fiduciary duty and other claims was properly denied, as resignation by another member from the LLC did not constitute a breach of fiduciary duty under the LLC's operating agreement or Georgia law; the remaining member failed to show that members who resigned from the LLC were prohibited from forming a competing business or soliciting customers of the LLC. James E. Warren, M.D., P.C. v. Weber & Warren Anesthesia Servs., 272 Ga. App. 232, 612 S.E.2d 17 (2005).

When owners of a limited liability company sued its co-owners for, inter alia, breach of fiduciary duty for negotiating with a third party for financing to buy out the owners' interest, the co-owners could not be held liable because O.C.G.A. § 14-11-305 provided that the company's operating agreement governed, notwithstanding O.C.G.A. § 14-11-307, on revealing conflicting interest transactions, and that operating agreement allowed the co-owners to engage in any non-competitive activity, including negotiating with the third party. Ledford v. Smith, 274 Ga. App. 714, 618 S.E.2d 627 (2005).

- Nothing in either Georgia's limited liability statute or the LLC's operating agreement established in debtors the type of fiduciary capacity necessary for a claim of nondischargeability as those were not the type of trust-like duties necessary to meet the strict standard for fiduciary capacity under the Bankruptcy Code. Hinton v. Blocker (In re Blocker), Bankr. (Bankr. N.D. Ga. Jan. 15, 2020).

Breach of Duty Shown

Evidence supported finding of breach of fiduciary duty.

- In a direct action brought by a medical practice limited liability company member against another, sufficient evidence supported the trial court's finding that the member who remained in possession of the business failed to act in the best interest of the business and failed to exercise ordinary care when that member made the decision not to take any steps to have the exiting member's super bills processed and collected after the exiting member's departure. Given the high level of hostility and the bad blood between the parties over the operation of business, the trial court was authorized to find that the possessing member's decision was made in bad faith in an effort to negatively impact the exiting member's ownership interest in the business; therefore, the trial court was authorized to find that the possessing member breached the fiduciary duty owed to the business and the exiting member. Internal Med. Alliance, LLC v. Budell, 290 Ga. App. 231, 659 S.E.2d 668 (2008).

Breach of Duty Not Shown

Evidence did not support finding of breach of fiduciary duty.

- As a limited liability company owed no fiduciary duty to the company's members, either directly or vicariously for actions taken by the company's manager pursuant to O.C.G.A. § 14-11-305, a company officer's claim that the company breached the company's fiduciary duty when the officer was terminated and forced to sell back the company ownership interest lacked merit, such that the company was entitled to summary judgment on that claim. ULQ, LLC v. Meder, 293 Ga. App. 176, 666 S.E.2d 713 (2008).

Financier who secretly supplied the purchase money for managing partners to buy out the corporate principals' half- interest in a carpet company did not aid and abet a breach of fiduciary duty under the Limited Liability Company Act, O.C.G.A. § 14-11-305(1), because, as a matter of law, no breach of the statute's obligations occurred. Ledford v. Peeples, 568 F.3d 1258 (11th Cir. 2009).

When plaintiffs, a corporation and the corporation's principals, alleged defendant, the financier for the managing partners of a company who bought out the corporation's interest in the company, asserted a claim that the financier aided and abetted the managing partners' breach of their duty of loyalty under O.C.G.A. § 14-11-305(1), in that the managing partners refused to convey property owned by the company to a leasing entity that was set up to hold the property and lease the property to the company, the claim failed because, as a matter of law, there was no breach of fiduciary duty: § 14-11-305 actually obligated the managing partners, as managers of the company, not to do that because if the partners had made the conveyance, the managing partners would, in effect, have given the leasing entity the part of a second bank's loan the company used to pay off the leasing entity's note to a first bank while gaining the company nothing in return, since it was contemplated that the property was to be used as collateral to secure the second bank's loan to the company. Ledford v. Peeples, 605 F.3d 871 (11th Cir. 2010).

As a denim seller was not a managing member of the parties' joint venture based on the terms of the operating agreement, the seller did not owe fiduciary duties to the manufacturer; therefore, a breach of fiduciary duty claim failed. Denim North Am. Holdings, LLC v. Swift Textiles, LLC, F.3d (11th Cir. Aug. 9, 2013)(Unpublished).

Doctor's breach of fiduciary duty claim against the managing members of the doctor's former LLCs was subject to summary judgment because under the operating agreements, the managing members were required to be acting in the management of the company to be subject to such a claim; their act of voting with the other members to terminate the doctor was not a management act. Colquitt v. Buckhead Surgical Associates, LLC, 351 Ga. App. 525, 831 S.E.2d 181 (2019), cert. denied, No. S20C0024, 2020 Ga. LEXIS 186 (Ga. 2020).

- Debtor was entitled to judgment on the pleadings as to the plaintiffs' claim under 11 U.S.C. § 523(a)(4) because the complaint failed to allege any facts showing fiduciary relationship owed to the plaintiffs, and fiduciary duties imposed by Georgia law on managers and members of LLCs were not the type of trust-like duties necessary to meet the strict standard for fiduciary capacity under § 523(a)(4). Nat'l Identity Solutions, LLC v. Logan (In re Logan), Bankr. (Bankr. N.D. Ga. July 1, 2015).

RESEARCH REFERENCES

ALR.

- Construction and application of limited liability company acts - issues relating to liability of limited liability company for acts of its members, managers, officers, and agents, 46 A.L.R.6th 1.

Construction and application of limited liability company acts - issues relating to derivative actions and actions between members of limited liability company, 48 A.L.R.6th 1.