A recent decision by the North Dakota Supreme Court may have implications for Iowa LLCs when the new Iowa LLC Act takes effect on January 1, 2009.
The holders of a majority of the limited partnership interests in two North Dakota limited partnerships decided they were not happy with the performance of the partnerships and through a written action without notice to the minority owners removed the general partner in both partners and appointed its replacement. The majority took a number of other actions in asserting control over the limited partnerships. Things went from bad to worse, naturally, and the minority owners sued the majority for, among other things, a breach of their fiduciary duties owed by the majority limited partners to the minority limited partners.
The majority limited partners argued that they could not be held liable for breach of fiduciary duties because the North Dakota limited partnership act declares that a "limited partner is not liable for the obligations of a limited partnership unless...the limited partner participates in the control of the business [and in such case]...the limited partner is liable only to persons who transact business with the limited partnership...."
The equivalent provision of the new Iowa LLC Act is 489.304 (2009) which states that the debts, obligations, or other liabilities of a limited liability company are solely the responsibility of the LLC and do not become the responsibility of a member solely by reason of the member acting as a manager.
The North Dakota Supreme Court held that the limited partnership act provision cited above did not address fiduciary duties owed to the other limited partners, but only those obligations of the limited partnership. Red River Wings, Inc. v. Hoot, Inc. et al, 751 NW 2d 206 (N.D. 2008).
The Court went on to hold that when the majority limited partners took control and dominated the partnerships for their own benefit they "violated the fiduciary duties of good faith, fair dealing, loyalty, and care...." The Court appears to have gone a little overboard in its enthusiasm for holding the majority liable to the minority and created two additional fiduciary duties in the bargain.
The Court also held that minority limited partners are entitled to bring a direct action against the majority for breach of these fiduciary duties. The equivalent new Iowa LLC Act provision that supports the concept of direct action for breach of fiduciary duties is 489.901 (2009). It provides that a member may maintain a direct action against another member to protect the member's interests under the operating agreement or the LLC Act or "arising independently of the membership relationship."
Red Wing is a warning to majority owners that taking control of an LLC without due regard to the operating agreement and the rights of the minority could lead to liability to the minority members for breach of fiduciary duties.
-Marc Ward
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