Revised 01/05/2009
The recent opinion in Faulkner v. Kornman (In re The Heritage Organization, L.L.C.), Adv. Proc. No. 06-3377-BJH (Banker. N.D. Tex. Dec. 12, 2008), raises an interesting question. The underlying Operating Agreement provided that Heritage’s Manager owed no fiduciary duties of any sort to it or to its members. Slip Op., at 29. The trustee of the bankruptcy estate of Heritage asserted breach of fiduciary duties against the officers of Heritage’s Manager (also an LLC). Although those officers may also have been officers of Heritage, this post will focus only the duties that they might have owed when acting as officers of the Manager.
Begin with two central principles. First, an organization is separate from the persons that act on its behalf ("agents"). Although owners of the organization may not be liable for its obligations (assuming a limited liability form was used), the same is not true for its agents. Agents can avoid liability on contracts entered into by them of behalf of the organization, but only if they fully disclose the the other party the identity of the organization, and that they are acting for it. Agents remain fully responsible for any torts or crimes in which they participate. The Nuremberg defense–I was just following orders (or acting for my organization)–does not wash.
The second principle is that organizations act only through human agents. Those agents owe fiduciary duties to the organization, but generally owe only the usual duties to other persons–the duty to operate a car carefully, the duty not to defraud, or the duty not to murder (although Hollywood seems to think that duty is customary in large corporations!).
As I argued in Car gill & Statutory Preemption, the fiduciary obligations of persons that control a fiduciary derive from the fiduciary obligations of the controlled fiduciary. To the extent that the controlled fiduciary (the manager of The Heritage Organization, L.L.C.) has procured a waiver of its fiduciary obligations (as in Section 6.03(A) of Heritage’s Operating Agreement), it should follow that the controlling fiduciary’s (the defendant’s in Faulkner) duties should follow that of the controlled fiduciary. Thus, in Faulkner, a waiver of fiduciary duties of Heritage’s Manager should also extend to the managers and officers of that Manager.
Of course, it would be better to address that question in the Operating Agreement itself. But then litigators would have less to do!
posted by Gary Rosin
Derivative Fiduciary Duties and Fiduciary Waivers (Faulkner)
Friday, January 2nd, 2009Revised 01/05/2009
The recent opinion in Faulkner v. Kornman (In re The Heritage Organization, L.L.C.), Adv. Proc. No. 06-3377-BJH (Banker. N.D. Tex. Dec. 12, 2008), raises an interesting question. The underlying Operating Agreement provided that Heritage’s Manager owed no fiduciary duties of any sort to it or to its members. Slip Op., at 29. The trustee of the bankruptcy estate of Heritage asserted breach of fiduciary duties against the officers of Heritage’s Manager (also an LLC). Although those officers may also have been officers of Heritage, this post will focus only the duties that they might have owed when acting as officers of the Manager.
Begin with two central principles. First, an organization is separate from the persons that act on its behalf ("agents"). Although owners of the organization may not be liable for its obligations (assuming a limited liability form was used), the same is not true for its agents. Agents can avoid liability on contracts entered into by them of behalf of the organization, but only if they fully disclose the the other party the identity of the organization, and that they are acting for it. Agents remain fully responsible for any torts or crimes in which they participate. The Nuremberg defense–I was just following orders (or acting for my organization)–does not wash.
The second principle is that organizations act only through human agents. Those agents owe fiduciary duties to the organization, but generally owe only the usual duties to other persons–the duty to operate a car carefully, the duty not to defraud, or the duty not to murder (although Hollywood seems to think that duty is customary in large corporations!).
As I argued in Car gill & Statutory Preemption, the fiduciary obligations of persons that control a fiduciary derive from the fiduciary obligations of the controlled fiduciary. To the extent that the controlled fiduciary (the manager of The Heritage Organization, L.L.C.) has procured a waiver of its fiduciary obligations (as in Section 6.03(A) of Heritage’s Operating Agreement), it should follow that the controlling fiduciary’s (the defendant’s in Faulkner) duties should follow that of the controlled fiduciary. Thus, in Faulkner, a waiver of fiduciary duties of Heritage’s Manager should also extend to the managers and officers of that Manager.
Of course, it would be better to address that question in the Operating Agreement itself. But then litigators would have less to do!
posted by Gary Rosin
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