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Question of Fact About Whether Managing Member Breached Fiduciary Duty Owed to Nonmanaging Member with Respect to Managing Member’s Alleged Reliance Upon an Outside Professional

The First Department determined the defendant (Gary) was not entitled to summary judgment.  Gary was the managing member of a Limited Liability Company (LLC) and was sued by a nonmanaging member. Gary argued that, under the Limited Liability Company Law (section 409), he was entitled to rely on the advice of an accountant, and that the cause of action based upon Gary’s acting in accordance with the accountant’s advice should be dismissed. The court described the fiduciary duty owed by Gary to the plaintiff and the criteria for the managing member’s reliance on an outside professional:

As the managing member of the LLCs, Gary owed plaintiff — a nonmanaging member — a fiduciary duty … . “[I]t is elemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and inflexible rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty” … .Reliance on outside professionals under Limited Liability Company Law § 409(b)(2) must be in good faith (see Limited Liability Company Law § 409[a]…).  As described here, Gary does not meet his initial burden of showing that he acted in good faith and undivided loyalty to plaintiff so as to rely on Limited Liability Company Law § 409 or the business judgment rule. Pokoik v Pokoik, 2014 NY Slip Op 01502,, 1st Dept 5-6-14

 

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