Pappas v. Tzolis - 2011 NY Slip Op 6455, 87 A.D.3d 889, 932 N.Y.S.2d 439 (App. Div. 1st Dept.)

Rule:

Delaware law permits parties to a limited liability company (LLC) agreement to eliminate traditional fiduciary duties (Del Code Ann. tit. 6, § 18-1101(c)). Under Delaware law, unless the LLC agreement in a manager-managed LLC explicitly restricts or eliminates traditional fiduciary duties, managers owe those duties to the LLC's members.

Facts:

The parties formed Vrahos LLC, a limited liability company, for the purpose of entering into a long-term lease on a building. Steve Tzolis paid the security deposit and as consideration therefore, he had the right, upon conditions, to enter into a sublease of the property with the LLC. The sublease was entered into, and rather than pay pursuant to the additional conditions, the parties negotiated an assignment of plaintiffs' interests in the LLC to Tzolis. Thereafter, plaintiffs filed multiple claims against Tzolis, alleging that he had begun negotiations to assign the LLC's lease to a nonparty before the parties' assignments to him had been completed. The trial court granted dismissal of multiple claims.

Issue:

Did Tzolis breach a fiduciary duty to keep the plaintiffs informed of any and all opportunities he was pursuing on behalf of the LLC?

Answer:

Yes.

Conclusion:

The court held that Delaware law permits parties to a limited liability company agreement to eliminate traditional fiduciary duties (Del Code Ann. tit. 6, § 18-1101(c)). Under Delaware law, unless the LLC agreement in a manager-managed LLC explicitly restricts or eliminates traditional fiduciary duties, managers owe those duties to the LLC's members. In this case, the court found that the parties' agreement did not "clearly" permit Tzolis to engage in the allegedly improper behavior, such that breach of fiduciary duty and fraud claims should have survived. Rather, Tzolis had an overriding duty to disclose his dealings. Conversion and unjust enrichment claims also were valid, as due to Tzolis’ surreptitious behavior, plaintiffs' sale of their interests in the LLC was not willingly done or at arm's length.