A Client-Focused Approach to Business and Real Estate Law

When might I sue for breach of fiduciary duty?

In the world of business, shareholders of closely held corporations, or members of limited liability companies, owe what is called a fiduciary dutiy both to their respective company and to each other.

In other words, no matter what their agreements say, each member must be willing to put the interests of the company and the other members at least on par with, or even ahead of, her own.

Under California law, members of a limited liability company have three specific duties to other members and to the company.

First, the member has a duty of loyalty. This means that the person cannot operate an enterprise that competes with his firm and also cannot act adversely to the interests of the firm.

This does not mean, however, that the member cannot demand to receive his rightful share of the firm’s income and assets.

Second, the member owes a duty of care. The law gives a member some leeway to make business decisions, even if those decisions turn out to be wrong or even careless. However, a member who breaks the law or acts recklessly can be liable for breach of fiduciary duty.

Finally, when it comes to one member interpreting an operating agreement with the other members, she must do so in good faith.

Among other things, this means that if a dispute about the agreement arises, each member must be careful to avoid taking overly aggressive legal positions, even if the literal language of the agreement allows him to do so.

When things go sour between business associates in the Irvine area, it too frequently is because one of them has put their own financial interests ahead of what is best for the company. In these circumstances, the aggrieved member may be able to initiate business litigation in order to get compensation.