As you had better know in 8 days, Iowa Code Section 489.110(4) permits an operating agreement, so long as it is not manifestly unreasonable, to restrict or eliminate the duty of loyalty and "alter" the duty of care or any other fiduciary duty. "Alter" means to make different, to change or modify, but implicitly not to eliminate. Section 489.110(7) permits an operating agreement to eliminate a manager's liability to the LLC and the members for a breach of the duty of care (with certain exceptions).
The Delaware LLC law (18-1101(e)), similarly, also permits an operating agreement to eliminate any and all liability for a breach of any fiduciary duty of a member, manager or other person.
This provision was put to the test recently in In re Heritage Organization, L.L.C., 2008 Bankr. LEXIS 3230 (N.D. Tex December 12, 2008). The bankruptcy trustee attempted to hold two officers of the debtor liable for breach of their fiduciary duties to the company. However, taking its cue from 18-1101(e), the Delaware LLC's operating agreement contained a shield from liability for its manager which said "The Manager shall not be required to exercise any particular standard of care, nor shall he owe any fiduciary duties to the Company or the other Members." Several fiduciary duties were identified in a non-exhaustive list including the duty of care and the duty of loyalty.
The officers argued that because they acted as agents of the Manager (a corporation), the exculpatory language applied to them. The trustee, naturally, argued that the exculpatory clause only applied to the manager, not the officers. The court noted that it found the officers' agency theory "unpersuasive at this juncture" because from the record it was not clear if the individuals acted as agents of the manager "and thus protected pursuant to the terms of the exculpation clause itself" or as officers.
The court then went on to exam the operating agreement in terms of the duties owed by officers of the LLC. The operating agreement permitted the Manager to appoint a president, one or more vice presidents, etc., and such "officers shall have such authority and perform such duties" as provided in the operating agreement. Later, the operating agreement described the president to be "subject to the same duties and powers granted to the Manager." The manager was also empowered to delegate any duties or powers upon such terms as may be designated in a written instrument."
As the court saw it, any duties imposed on the officers had to pass down from the manager. Because there was no evidence that the manager had granted, prescribed or delegated any duties to the officers, the court was left with the provisions of the operating agreement. The court concluded that the Heritage operating agreement "clearly contemplates that Heritage officers only owed those duties to Heritage that were either delegated or prescribed by Heritage's Manager or president." Since no such delegation existed, there was no duty to breach.
It is also important to point out that the court dismissed the trustee's argument that there were common law fiduciary duties owed by the officers. As "a creature of contract" the court noted, the operating agreement was controlling.
The lesson here is to consider officers when contemplating whether or not to impose fiduciary duties, including liability for breach, on the management of LLCs.