WHEN CAN YOU SUE YOUR BUSINESS PARTNER FOR HARMING YOUR BUSINESS – 3 ILLUSTRATIVE EXAMPLES.
Fox & Moghul receives many queries every day regarding disputes between business partners. In a Limited Liability Company (LLC) in Virginia, each member and manager owes fiduciary duties to the entity to further its best interests. These duties include the duty of loyalty and the duty of care. In simple terms, fiduciary duties require business partners to act in the best interest of the LLC and its members. This blog post will explain with examples when a business partner in an LLC has breached their fiduciary duty under Virginia law, and it will provide specific case law and statutory citations for a better understanding of the concept.
Example 1: Misappropriation of LLC funds or assets
Under Virginia law, a member or manager of an LLC owes the duty of loyalty to the entity (Virginia Code § 13.1-1024.1). This duty requires the partner to act in the best interest of the LLC and not to use the LLC’s funds or assets for their personal gain. If a partner misappropriates LLC funds or assets for personal use, they have breached their fiduciary duty of loyalty. In Remora Investments, LLC v. Orr, 277 Va. 255 (2009), the Virginia Supreme Court held that a member who had diverted LLC funds for personal use had breached their fiduciary duty.
Example 2: Engaging in self-dealing or entering into transactions with conflicts of interest
A business partner breaches their fiduciary duty of loyalty if they engage in self-dealing or enter into transactions that present a conflict of interest without disclosing the conflict and obtaining the informed consent of the other members. For instance, if a partner uses their position in the LLC to secure a contract for their separate business at the expense of the LLC, they have breached their fiduciary duty. In Banks v. Mario Industries of Virginia, Inc., 274 Va. 438 (2007), the court found that the fiduciary duty of loyalty was breached when a majority shareholder, who was also the CEO, entered into a lease agreement with the corporation that was favorable to him and detrimental to the company without proper disclosure and approval.
Example 3: Failure to exercise the duty of care
Virginia Code § 13.1-1024.1 also imposes a duty of care on LLC members and managers. This duty requires partners to act in good faith and with the care that an ordinarily prudent person in a similar position would exercise under similar circumstances. If a partner fails to exercise this duty, they have breached their fiduciary duty. An example of a breach of the duty of care is when a partner negligently mismanages the LLC’s operations or finances, causing harm to the LLC and its members. In Simmons v. Miller, 261 Va. 561 (2001), the court found that a director had breached his fiduciary duty of care by negligently allowing the corporation’s financial status to deteriorate.
Understanding and recognizing breaches of fiduciary duty in an LLC is crucial for maintaining a successful business relationship among partners. If you believe a business partner has breached their fiduciary duty in your Virginia LLC, it’s essential to consult with an experienced attorney who can help you navigate the complexities of the law and protect your interests. In conclusion, a business partner in an LLC may breach their fiduciary duty by misappropriating funds, engaging in self-dealing, or failing to exercise the duty of care. By being aware of these duties and ensuring they are upheld, LLC members can help maintain a successful and harmonious business partnership.
For more information, please read our publications here on direct vs derivative lawsuits, and call or email us to schedule a consult.
