Law in the Marketplace: Concerning duty-of-care specific issues

For the Monitor
Published: 12/4/2021 7:29:47 PM

Section 108 of the New Hampshire LLC Act (NHA) provides effectively that unless an LLC’s operating agreement provides otherwise, LLC managers have a duty of care to the LLC and to its members; this means that they must manage their LLC with ordinary competence. LLC managers generally include everyone who can sign contracts for the relevant LLC or make decisions about the LLC’s operations. However, unless the operating agreement provides otherwise, all of the members of a NH member-managed LLC have full management authority even though they don’t have the title of manager.

If you are an LLC member, I suggest there are seven key things you should think about with regard to the LLC duty of care.

1. The section 108 standard of ordinary competence is a decent general standard, but it’s also very vague. In planning a multi-member LLC operating agreement, the members should consider whether to make the standard of care under the operating agreement more specific. For example, they may want to provide quantified targets for manager productivity or for a higher-than-“ordinary” standard — e.g., by requiring that managers perform their responsibilities “as carefully as reasonably possible.” And highly specialized businesses may need highly specific standards of care.

2. As I wrote last week, the duty of care is not just a basis for negligence claims; it’s also central to the ethics and team spirit of any multi-member LLC. Furthermore, if, as is often the case in NH, the members of a multi-member LLC are also family members or good friends, it’s also demanded by family loyalty and by loyalty among friends. Friends and family members may want to offer one another a higher standard than mere ordinary care precisely because of this interpersonal closeness. But such a standard should be drafted to apply only internally, not vis a vis third parties.

3. If you’re a member of a member-managed LLC, then, if any of the other members makes a bad decision, not only he or she but also you yourself may be liable for claims arising from his or her decision, since, after all, you’re presumably a member of the management team. So, to protect yourself from these claims, be sure to monitor carefully and continuously the other members’ decisions and the LLC’s operations.

4. As I wrote last week, to prevent judges from second-guessing difficult management decisions, NHA Section 109 provides, in effect, that unless the operating agreement provides otherwise, managers can’t be held to be negligent to LLCs, their members or third parties unless, in effect, they manage recklessly. This means that if you want to maximize the carefulness of the managers of your LLC, you should seek to expressly override Section 109 in your operating agreement.

5. By contrast, if you will be a manager of a manager-managed multi-member LLC or the member of a member-managed multi-member LLC, you should resist any overriding of Section 109, and you should seek to minimize your duty of care by reducing or even eliminating it. NHA Section 107 will let you do this by, for example, providing in your operating agreement that your standard of care is “gross negligence.” Under this standard, you won’t be liable for mismanagement unless other members can prove you’ve acted with outright recklessness.

6. But the duty of care can be a particularly sensitive issue in an LLC in which the parents are the managers but in which their children are members in order to learn the family business. Sadly, family businesses often end up in family battles. So, though it may sound a bit unloving, the operating agreements of family LLC should often entirely eliminate parents’ duty of care toward their kids.

7. Finally, if your LLC is a single-member LLC, its operating agreement should contain a provision appointing a non-member assistant manager to manage your LLC if, because of illness or otherwise, you’re unable to manage it. However, under section 107, your operating agreement should also provide that your assistant manager will not be liable for breaching any of his or her fiduciary or other duties.

John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.




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