As you may know, Iowa Code 489.409(2) identifies three duties that constitute the duty of loyalty. It is not an exhaustive list so there may be more, but for now let's leave it at three. Section 489.110(4) says that so long as it is not "manifestly unreasonable" the duty of loyalty can be eliminated in an operating agreement. I discussed somewhat tongue in cheek what that means a few months ago.
In a seeming contradiction, Section 489.110(7) prohibits an operating agreement from eliminating a manager's liability for monetary damages for the breach of the duty of loyalty. But it is no contradiction at all because 110(4) deals with what constitutes a breach of the duty of loyalty and 110(7) concerns the consequences for breaching that which has been defined as a breach of the duty.
When is it "reasonable" to eliminate the duty of loyalty? Although it is a Delaware corporate law case and not directly on point for LLCs, Sutherland v. Sutherland, 2009 Del. Chancery 46 (March 23, 2009) is instructive. Sutherland involved a family corporation, a sister sued her two brothers and a cousin who were directors of the family corporation for using corporate funds for personal benefit. ( I once represented two brothers in defense of breach of duty claims brought by their mother and sister, a very awkward role to play, but I digress).
The directors sought dismissal of the claims because the certificate of incorporation contained a clause they claimed eliminated the duty of loyalty in toto for the directors. The court rejected that argument because it would "effectively eviscerate the duty of loyalty for corporate directors as it is generally understood under Delaware law." The court then cited a Delaware corporate law provision very similar to 489.110(7). But as I said, this type of provision is concerned with the consequences of a breach, not what constitutes a breach.
But the broader point is this, a blanket elimination of the duty of loyalty didn't work in the context of a Delaware corporation and probably won't work with an Iowa LLC even when that possibility hangs tantalizingly within the framework of 489.110(4). So don't use a meat cleaver when a scalpel is more effective. Precise exclusions from the duty of loyalty are more likely to be upheld.
-Marc Ward
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