Harbison v. Strickland - 900 So. 2d 385 (Ala. 2004)

Rule:

The plain language of Ala. Code § 10-12-21(l) does not allow an operating agreement for a limited liability company to unreasonably restrict a member's right to information, to eliminate a manager's duty of loyalty, or to unreasonably reduce the duty of care as defined in Ala. Code § 10-12-36. Operating agreements of limited liability companies, like those of corporations and limited partnerships, incorporate the provisions of the statutes that allow for the creation of such agreements. According to the Reporter's Comments, as amended by 1997 Ala. Acts 920 following Ala. Code § 10-12-21(l), an operating agreement may not waive or eliminate the duties or obligation, but may, if not manifestly unreasonable, identify activities and determine standards for measuring the performance of them.

Facts:

Bonnie Sue Strickland and Jake Strickland, formed the Strickland Family Limited Liability Company ("the LLC") as part of their estate plan, under the Alabama Limited Liability Company Act, § 10-12-1 et seq., Ala. Code 1975 ("ALLCA"). In accordance with their estate plan, the Stricklands, on December 24, 2000, transferred 83% of the equity shares of the LLC to their daughter Suzy Strickland Harbison. The Stricklands retained a 17% interest in the LLC and acted as co-managers of the LLC for the next two years. In 2002, Jake Strickland died. Under the operating agreement for the LLC, Bonnie Sue Strickland became the sole manager of the LLC and retained the 17% equity in the LLC she had held in common with Jake. Subsequently, Bonnie conveyed three parcels of real property belonging to the LLC to her son who was not a member of the LLC. Believing that Bonnie transferred the parcels of real property for an amount less than the fair market value, Harbison sued Bonnie. According to Harbison, Bonnie had breached her fiduciary duty to the LLC under the ALLCA and that she had violated the terms of the operating agreement when she failed to make managerial decisions based on the best interests of the LLC and the equity owners. Bonnie moved for summary judgment, which the trial court granted. The trial court held that the governing document in the present case was the operating agreement, and that since the LLC was created for a nonprofit purpose, there was no obligation on the part of Bonnie to maximize financial gain or to make any or all of the Company Property productive. On appeal, Harbison argued that the trial court erred in interpreting the operating agreement. She further contended that the trial court erred by failing to incorporate the fiduciary duties mandated by the ALLCA into the operating agreement.

Issue:

Did the trial court err in failing to incorporate the fiduciary duties mandated by the ALLCA into the operating agreement?

Answer:

Yes.

Conclusion:

The appeals court first held that Ala. Code § 10-12-21(l) did not allow an operating agreement for an LLC to unreasonably restrict a member's right to information, to eliminate a manager's duty of loyalty, or to unreasonably reduce the duty of care as defined in Ala. Code § 10-12-36. Second, the trial court erred in failing to look past the four corners of the document to determine Bonnie’s fiduciary obligations. Third, the trial court's conclusion that it was within Bonnie’s authority under the operating agreement to dispose of the LLC property in any way she saw fit because the LLC was not for profit, but was irreconcilable with the operating agreement, which required Bonnie to consider the best interests of the LLC and Harbison before making any business decisions regarding the LLC. Because Bonnie failed do so, the trial court was to determine whether Bonnie violated her managerial duties. Accordingly, the appeals court reversed the decision of the trial court and remanded the case.