In 800 South Wells Commercial LLC v. Cadden, 2018 IL App (1st) 162882, the First District held that officers of limited liability companies (LLCs) who are not also managers of those LLCs do not owe fiduciary duties to those LLCs.
Plaintiff 800 South Wells Commercial, LLC (“800 South”), was a manager-managed Illinois limited liability company. Its members were a third party, Nicholas Gouletas, and another LLC. Pursuant to its Operating Agreement, 800 South was formed to obtain a leasehold in certain commercial space and a parking garage. The Operating Agreement named Gouletas as 800 South’s managing member and permitted him to appoint officers to assist in plaintiff’s operations. Gouletas appointed John Cadden 800 South’s vice president.
After the real estate deal did not proceed as 800 South anticipated, it filed a complaint against Cadden, Gouletas, its own attorneys and others. 800 South alleged Cadden breached his fiduciary duties in various respects, contending that Cadden owed it fiduciary duties by virtue of his title of vice president and, failing that, because he exercised managerial control.
The court held that Cadden did not owe fiduciary duties. 800 South was a manager-managed limited liability company. Section 15-1 of the Illinois LLC Act provides that in manager-managed LLCs, “the manager, alone, is responsible for the ‘management and conduct of the company’s business,’ and he, ‘exclusively,’ decides any matter relating to the company’s business.” Id. at ¶ 32 (quoting 805 ILCS 180/15-1(c)). Thus, the manager owes fiduciary duties to the company. Gouletas was the sole manager of 800 South. Accordingly, he owed fiduciary duties to 800 South, and Cadden did not because he was not a manager of 800 South, but rather its vice president.
The Operating Agreement of 800 South was consistent with Section 15-1 of the Act. Gouletas, as manager, had “the sole and exclusive right to manage” plaintiff. Id. at ¶ 5. Gouletas had the power to appoint officers responsible for the day-to-day operations of 800 South, but they were subject to his supervision. In a certificate of managing member authority (“Certificate”), Gouletas appointed John Cadden 800 South’s vice president with responsibility for the contemplated real estate transaction “in accordance with the provisions of Section 5.9 of the Operating Agreement.” Id. at ¶ 6.
800 South argued that Cadden nonetheless owed it fiduciary duties because he was its vice president, and thus its officer, citing the principle that officers of a corporation owe fiduciary duties to that corporation. The court rejected this argument. It held, “While an officer of a corporation may well be tagged with fiduciary duties, our legislature has created limited liability companies and given them the power, through the Act and in conjunction with an operating agreement and other documents, to direct themselves as they see fit.” Id. at ¶ 37. Since the Operating Agreement placed all power and duties owed in Gouletas, Cadden’s title of vice president was irrelevant.
800 South also argued Cadden owed it fiduciary duties because he exercised managerial control. In support, plaintiff pointed to section 15-3(g)(3) of the Act, which provides “that ‘a member who exercises some or all of the authority of a manager’ may be held to owe a fiduciary duty to that company.” Id. at ¶ 46 (quoting 805 ILCS 180/15-3(g)(3)). While the court acknowledged that subsection “allows, for lack of a better term, an exception to the rules that in a manager-managed limited liability company, only the manager owes fiduciary duties,” that person “must, first, be a member and, second, exercise the same control and authority as the manager.” Id. at ¶ 47. Cadden did not fit the bill because he was not a member of 800 South, nor did 800 South raise a genuine issue of material fact demonstrating that he exercised the required managerial control.
800 South highlights an important limitation on LLCs. Their officers, as a matter of common law and of statute, do not have fiduciary duties to the entity unless they are also managers. This has important implications and must be considered by all LLCs and others seeking to hold LLC officers accountable for their actions.