Breach of Fiduciary Duty in an LLC

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In lawsuits between business owners, a common allegation is “breach of fiduciary duty”.  But, what exactly does breach of fiduciary duty mean?  And, when does this claim arise? 

Georgia law provides guidance on this issue. A Limited Liability Company  “ member or manager shall act in a manner he or she believes in good faith to be in the best interest of the limited liability company and with the care any ordinarily prudent person in a like position would exercise under certain circumstances.” Similar Georgia laws govern the relationships between shareholders in a corporation and partners in a partnership.  Where a breach of fiduciary duty can be established, and if it can be shown that damages actually flowed from the breach, a plaintiff-member may succeed on this claim.

In a 2011 Court of Appeals’ decision, Moses v. Pennebaker, one member of an LLC, Moses, petitioned for dissolution of the LLC and brought other claims against a member, Pennebaker.  In turn, Pennebaker brought counterclaims, including one for breach of fiduciary duty.  Pennebaker alleged that Moses unilaterally took control of the LLC and managed it without authority and then set up a competing company, which Moses actually operated out of the LLC’s office, using the same equipment and employees. 

The court awarded Pennebaker only nominal damages on the breach of fiduciary duty claim.  However, the same conduct that authorized the damages for Moses’ breach of fiduciary duty also led the court to award Pennebaker his attorneys’ fees and punitive damages against Moses.   This case illustrates that, even if the actual damages flowing from a business partner’s breach of fiduciary duty may be difficult to prove, being able to establish a claim of breach of fiduciary duty is crucial because it may still lead to a significant award of damages.