Wisconsin District Court Finds LLC Minority Owners Owe No Common Law Duties to Majority Members
Jeff Storch | 08.20.19
In April 2019, the Wisconsin Supreme Court held in Marx v. Morris that Chapter 183 of the Wisconsin Statutes, governing limited liability companies (the “Act”), did not abrogate common law duties between the members of an LLC. See our articles on Marx here and here. However, the Wisconsin Supreme Court did not define the scope of the applicable common law duties. A U.S. District Court started to define that scope in a July 2019 case.
In Raab v. Wendel, the U.S. District Court for the Eastern District of Wisconsin, in reconsidering its earlier decision issued the month before Marx, held that even after Marx, a majority member of an LLC does not have a common law breach of fiduciary duty claim against a minority member. In other words, minority owners of an LLC do not owe a common law fiduciary duty to LLC majority owners.
In Raab, the court indicated that the Wisconsin Supreme Court concluded that common law breach of fiduciary duty claims are not categorically precluded by Section 183.0402 of the Act. However, the Raab court continued that merely because those claims are not categorically precluded does not mean that such a claim exists in all cases, and the Wisconsin Supreme Court left it to lower courts to sort out whether the facts of any particular case supported a breach of fiduciary duty claim.
The Raab court found that although the court in Marx did not distinguish between minority and majority members, the court’s silence in Marx should not be understood as suggesting minority or majority member status is irrelevant. The Raab court discussed that in determining if a fiduciary relationship exists between parties, “whether a party stands in a position of ‘dependence and inequality’ as to another is relevant.” The court stated that “a party’s status as a minority member obviously would be a relevant fact.”
The court then analogized LLC member claims to corporation shareholder claims, where minority shareholders do not owe fiduciary duties to majority shareholders. The court consequently held that an LLC majority member does not have a common law breach of fiduciary duty claim against an LLC minority member.
Although as a federal case Raab is not binding on Wisconsin courts, it provides a prediction for how the Wisconsin Supreme Court may rule on this matter in the future. If LLC members want more certainty, they should state in the LLC’s operating agreement what, if any, duties apply to LLC members. While Section 183.0402 of the Act provides default rules (which under Marx include common law fiduciary claims), that section also states that those rules apply only “[u]nless provided in an operating agreement.” So, for example, if members do want minority members to have fiduciary duties to majority members, they can so specify in the operating agreement. In light of Raab¸ those LLCs who want minority members to have fiduciary duties to majority members should consider amending their operating agreements.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.