California LLC Member and Manager Duties to the LLC and to Each Other

California LLC Member and Manager Duties to the LLC and to Each Other

David Tate, Esq. (and inactive California CPA) – practicing in California only

In a member-managed LLC, each member owes a duty of loyalty and a duty of care to the LLC and to the other members.

In a manager-managed LLC, each manager owes a duty of loyalty and a duty of care to the LLC and to the members. Members who are not managers do not owe the duty of loyalty or the duty of care.

Note however that you also must read (and understand) the operating agreement to determine if any of these duties are expanded; to determine if any of these duties are reduced or purportedly eliminated (they cannot be eliminated); and, in a member-managed LLC, to determine if any of these duties are shifted from one member to one or more other members.

Issues, questions and disputes about legal responsibilities/duties and rights pursuant to these duties usually don’t arise or usually are relatively uncomplicated while the LLC members and managers are dealing with each other honestly, openly, and fully, as in most businesses and situations. In my practice I handle situations and represent clients where legal responsibilities and rights and the actions and inactions of the people who are involved are seriously at issue. And you can see from the wording and definitions in these materials that there can be significant uncertainty and vagueness about exactly what the responsibilities and rights are and can be in different situations.

Duty of Loyalty. The duty of loyalty is limited to the following unless the operating agreement provides otherwise (again, you must read and understand the operating agreement):

Account and Accounting. An LLC member in a member-managed LLC, or a manager in a manger-managed LLC must account to the LLC and hold as a trustee any property, profit, or benefit, that the member or manager, respectively, derives in the conduct of the LLC or in the winding up of the LLC’s activities, or from the use of the LLC’s property including but not limited to the appropriation of an LLC opportunity.  Also take note whether a specific member or a specific manager is tasked with the function of accounting for the LLC.

Adverse Interest. Each member (in a member-managed LLC) and each manager (in a manager-managed LLC) must not deal with the LLC, or on behalf of a person with respect to the LLC, as an interest adverse to the LLC.

Competing with the LLC. Each member (in a member-managed LLC) and each manager (in a manager-managed LLC) must not compete with the LLC in the conduct of the LLC or in the winding up of the LLC’s activities.

Duty of Care. The duty of care in the conduct of the LLC or in the winding up of the LLC’s activities is limited to not committing gross negligence or reckless conduct, intentional misconduct, or a knowing violation of law. However, you must read and understand the operating agreement as it is permissible for the agreement to expand the standard of culpability to ordinary or simple negligence.

Duty of Good Faith and Fair Dealing. In both a member-managed and in a manager-managed LLC, members and managers have a duty of good faith and fair dealing to the LLC and to the other members – for example, to not obtain an advantage or benefit by any misrepresentation or concealment or other means. And this is true whether the duties arise under the California Revised Uniform Limited Liability Company Act (CRULLCA) or the LLC’s operating agreement. A duty of good faith and fair dealing is a duty of care; however, you can also see that it is a duty of care that is separate from the culpability standards.

Thank you for reading this post. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Every case situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance, litigation, investigations, liability, and risk management http://auditcommitteeupdate.com

17 Questions to Facilitate Dispute Resolution

I have provided below a link to my 17 questions to facilitate dispute resolution. The perspective is litigation but the questions are useful for pre-litigation, and also for disputes and resolution regardless of litigation. Use it and pass it to other people who would be interested. I believe that you will find the questions useful to focus on the strengths and weakness of the dispute and options for resolution.

Here is the link to the 17 Questions to Facilitate Dispute Resolution: 17 Questions to Facilitate Dispute Resolution, David Tate, Esq. 03282019

Thank you for reading this post. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Every case situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance, litigation, investigations, liability, and risk management http://auditcommitteeupdate.com

 

 

 

 

Society of Professional Journalists – Code of Ethics – Good Standards for Media and Social Media

I have pasted below the Society of Professional Journalists Code of Ethics, which I found at https://www.spj.org/ethicscode.asp. The Code was news to me. The SPJ should publicly promote its Code offers some good guidance for media, and social media.

The Code is divided into four primary headings: Seek Trust and Report It; Minimize Harm; Act Independently; and Be Accountable and Transparent.”

I do have a few comments. The SPJ states that the Code is not a set of rules, but is a guide. Generally I tend to view a code of ethics as rules or standards that are to be followed, not simply guidance. I assume the response would not be favorable if a business defended questionable actions by taking the position that its code of ethics was just a guide.

One theme that the Code presents, with which I agree, is that the public is entitled to as much reliable, identified, source materials as possible so as to allow the members of the public the ability to determine for themselves:  “The public is entitled to as much information as possible to judge the reliability and motives of sources.” “Use original sources whenever possible.” “Provide access to source material when it is relevant and appropriate.” “Consider sources’ motives before promising anonymity. Reserve anonymity for sources who may face danger, retribution or other harm, and have information that cannot be obtained elsewhere. Explain why anonymity was granted.” I would add: as a general rule don’t use, cite or quote anonymous sources, and if you do use, cite or quote an anonymous source, provide as much information about that source as possible. For example, if you cannot provide the person’s name, provide how they obtained the information that they provided, and, as relevant, with what organization, party, group, or employer do they associate?

The heading “Act Independently” states in part that “Journalists should: – Avoid conflicts of interest, real or perceived. Disclose unavoidable conflicts.” I would add under that heading – Journalists should avoid journalist or reporter bias. And I would add, disclose bias, although I suspect that having to disclose bias would be viewed as difficult.

I like “Gather, update and correct information throughout the life of the news story,” and “Label advocacy and commentary.” I would add, report the evidence, and avoid journalist editorializing, opinions, viewpoints, conclusions, elaboration, adjectives, adverbs, and added “facts,”  unless it is labeled as such. Or the writer or speaker can say “I believe that . . . ” or “In my opinion . . . ” or “In my view . . . ” or “I have a different view . . . ” or “I don’t believe that . . . ” or something along those lines. I would also add, include a summary of relevant evidence, sources and information that are currently unknown, and, thus, not included.

I recommend most of the Code’s standards. Whether the standards are followed or not is a different question and different issue. You might want to keep the Code in mind as you read, evaluate, engage in, and comment about media and social media.

Here is a screenshot of the SPJ Code of Ethics:

Thank you for reading this post. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Every case situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance, litigation, investigations, liability, and risk management http://auditcommitteeupdate.com

 

 

Nonprofit Risks 2019 – From Protiviti Top Risks 2019

Below I have inserted a nonprofit and governmental organization focused chart from a Protiviti paper – Executive Perspectives on Top Risks 2019.

Of course every entity is different and has different risks. And I would list and evaluate nonprofit entities separate from governmental entities, but it is not a purpose of this post to question or criticize the chart format.

Instead, from a nonprofit perspective I found the first and fifth listed risks interesting, and the second through fourth listed risks not surprising. For example, I would expect privacy, security, and top talent retention risks to be listed.

But the first and fifth listed risks identify broad and important organization culture and governance wide risks which would really concern me if I was a nonprofit board member, including: that resistance to change may restrict the organization from making necessary adjustments to the business model and core operations; and that the organization’s culture may not sufficiently encourage the timely identification of risk issues that have the potential to significantly affect core operations and achieve strategic objectives. If I’m sitting on a board and I don’t feel comfortable that the entity can timely identify risks that have the potential to significantly affect core operations, or that the organization’s culture and governance will allow it to make necessary changes to the business model and core operations, I would be feeling pretty exposed to criticism that board efforts, including my efforts, to oversee the governance and risk management of the organization are lacking or are ineffective.

Two additional comments: (1) as the chart also applies to governmental entities, I have to add that my above-stated concerns in the context of a nonprofit definitely also apply equally for governmental entities, and (2) I was surprised to not see on the list for nonprofits the risk that the organization might not have, or be able to maintain, or be able to develop sufficient funding sources to meet operational needs or for sustainability, and that important current funding sources might be reduced or lost in the future.

Immediately below you will find the chart from Protiviti, and below the Protiviti chart you will find a summary risk management framework chart that I prepared and which you might find useful.

Thank you for reading this post. If you have found value in this post, I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Every case situation is different. You do need to consult with professionals about your particular situation. This post is not a solicitation for services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance and risk management http://auditcommitteeupdate.com

Confidential and Fiduciary Relationships – Overview

There are a lot of cases and statutes on these topics. However, in general, a confidential relationship is a relationship where one party has placed confidence in the integrity and fidelity of another person to act for the first party’s benefit, and the other party voluntarily accepts that role.

In this context, “confidential” doesn’t mean secrecy – it refers to the confidence that someone places in another person to take action for the first person’s benefit.

A confidential relationship can be founded on a moral, social, domestic, personal, or legal relationship or duty (including, for example, pursuant to statute, case law, or contractual agreement). See, for example, Richelle L. Roman Catholic Archbishop of San Francisco (2003).

Unfortunately, the above general definition is very broad and, thus, is not very helpful.

Whether or not a relationship is a confidential relationship is a question of fact. See, for example, O’Neil v. Spillane (1975). But a confidential relationship doesn’t necessarily create a fiduciary relationship and duty. See, City of Hope National Medical Center v. Genentech, Inc. (2008). A fiduciary duty is one of the highest duties established by law. In Richelle for example, in which the court denied the existence of a fiduciary relationship, the court held that in the circumstance of a confidential relationship, fiduciary duties nevertheless only arise when the following are present: (1) the vulnerability of one party to the other which (2) results in the empowerment of the stronger party by the weaker party which (3) empowerment has been solicited or accepted by the stronger party and (4) prevents the weaker party from protecting herself or himself. See also, for example, Marriage of Bonds (2000), holding that a confidential relationship can arise between family members and friends when substantive or procedural deficiencies in a transaction are combined with great age, weakness of mind, sickness or other incapacity of one party to the transaction.

In other words, confidential and fiduciary relationships require more than simply trust and confidence – they also require that the party who is claiming the confidential or fiduciary relationship to also prove not only trust and confidence, which exists in a lot of relationships and is relatively easy to simply claim, but also weakness of mind, or inability to take action and to protect oneself, and evidence of justifiable reliance.

You should note that the issue of whether or not there is a confidential or fiduciary relationship also can be, but is not necessarily, related to issues pertaining to possible fraud (intentional or negligent misrepresentation, concealment, or promise without intent to perform) or undue influence.

Thank you for reading this post. If you have found value in this post, I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Every case situation is different. You do need to consult with professionals about your particular situation. This post is not a solicitation for services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance and risk management http://auditcommitteeupdate.com

Forwarding a post by Eugene Fram – Nonprofit & Business Directors Must Be Vigilant – Board Liability Costs Could be $2.2 Million!

Below I have provided a link to a blog post by Eugene Fram. Eugene writes good materials for nonprofits. There have been rumblings for some time now about the possibility that a couple of states might start more actively overseeing nonprofits and their operations. And a few of the big players in the nonprofit community have suggested that more robust nonprofit governance might be beneficial. I ask that you click on the link below to Eugene’s post – although state action is unusual, the example situations that Eugene describes are less unusual. I am also updating my materials for nonprofit audit committees, which I will post soon.

Here is the link to Eugene’s post:  https://non-profit-management-dr-fram.com/2019/01/27/nonprofit-business-directors-must-be-vigilant-board-liability-costs-could-be-2-2-million-3/

Thanks for reading this post. If you have found value in this post, I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Every case situation is different. You do need to consult with professionals about your particular situation. This post is not a solicitation for services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance and risk management http://auditcommitteeupdate.com

Corporate, Business, Or Entity Culture – The Board’s Role And Knowledge About – From State Street

The following is a link to a January 2019, letter from State Street emphasizing and focusing on the business’s culture and how it adds value. The letter pertains to corporate culture because of the business in which State Street operates – but what we are really talking about is business or entity culture which includes public companies, private businesses, nonprofits, and governmental organizations and entities.

The letter is short and lacks detailed discussion about culture; however, I found interesting the attachment to the letter with possible questions that might be asked of the board members about the state of the business’s culture and the director’s knowledge thereof. I would assume that the majority of directors could not answer those questions with detail.

I also found interesting that the letter differentiates culture from values, and instead focus’ on culture’s impact on value. However, I would say that the business’s values drive and impact the business’s culture.

As culture has become a board topic (and apparently it might be here to stay), I would like to see additional, more specific discussions about how to evaluate and grade, and improve upon the organization or entity’s culture.

This definitely is a topic for the full board, but as it also falls into the category of risk management or ERM, this might also be on the plate of the risk management committee, if there is one, or on the plate of the audit committee to which risk management is often delegated (but let me also add, in my view, risk management is a topic for the entire board – if risk management is delegated to a committee, that committee should, nevertheless, report on risk management to the full board, for the full board’s consideration).

Here is the link to the State Street letter – be sure to read the attachment https://www.ssga.com/investment-topics/environmental-social-governance/2019/01/2019%20Proxy%20Letter-Aligning%20Corporate%20Culture%20with%20Long-Term%20Strategy.pdf

Best to you, David Tate, Esq. (and inactive California CPA)

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance and risk management http://auditcommitteeupdate.com

If you have found value in this post, I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see above), and connect with me on LinkedIn or Twitter.

The following are a few additional materials for your consideration.