The Manager Who Paid Himself First
Ridgeline Holdings is a manager-managed LLC with four members: Alan, Beth, Chen, and Dana. Alan is the sole manager under an operating agreement that grants him "full authority to conduct the ordinary business of the company" and requires member approval only for sales of substantially all assets and admissions of new members. The agreement also states that members owe no fiduciary duties except the implied duty of good faith and fair dealing, a clause drafted loosely by Alan's cousin. Ridgeline owns two rental properties. Last quarter Alan paid himself a $90,000 "management fee" not mentioned in the agreement, used $25,000 of company funds to renovate a unit he rents personally at below-market rates, and declined a $1.2 million offer for one property without telling the other members. The company's cash reserve fell from $300,000 to $60,000. Beth discovered the payments while reviewing a bank statement.
1. Can the members hold Alan liable for the management fee and the renovation? Analyze the effect of the clause disclaiming fiduciary duties.
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Start with the operating agreement, because it governs. The clause eliminating fiduciary duties except good faith and fair dealing is enforceable in most LLC statutes, but its scope is narrower than Alan assumes. It does not authorize self-dealing; it limits the duties members owe, not the meaning of the contract. Alan's authority is to conduct the ordinary business of the company, and paying himself an unagreed $90,000 fee is not ordinary business when the agreement is silent.
Two independent theories survive the clause. First, breach of the operating agreement: the implied duty of good faith and fair dealing prevents a party from using contract discretion to deprive the others of the benefit of the bargain. A manager who redirects company cash to himself defeats the members' reasonable expectations. Second, unjust enrichment and conversion as to the $25,000 spent improving Alan's personal residence, which is not a company asset at all.
Alan's best defense is that the clause permits him to act in his own interest. That argument may reduce exposure on discretionary business judgments but is weak against undisclosed self-payments. Beth should demand an accounting and preserve the bank records.
2. Did Alan breach any duty by rejecting the $1.2 million offer without telling the members? Does the answer change if the offer was for both properties?
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For a single property, the operating agreement gives Alan authority over ordinary business and requires member approval only for sales of substantially all assets. Declining an unsolicited offer for one of two rental properties is plausibly an ordinary management decision, and the fiduciary disclaimer further shields him. Members who wanted input should have negotiated approval rights over dispositions above a threshold.
If the offer covered both properties, the analysis flips. Selling substantially all assets requires member approval under the agreement, and Alan cannot avoid that requirement by simply declining to present the offer. Concealing a transaction that triggers a member vote interferes with the members' contractual right to decide and breaches the duty of good faith and fair dealing even under the disclaimer. The members could also argue that a sale of the entire portfolio is a fundamental change outside "ordinary business."
The remedy differs too. For the single-property rejection, damages are speculative because the members might have declined the offer anyway. For the portfolio offer, the members can seek to compel a vote or claim lost opportunity if Alan's concealment caused the deal to lapse.
3. The members want to amend the operating agreement to prevent a repeat. Propose specific amendments and explain how each addresses what went wrong.
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Compensation: require member approval of any manager compensation and prohibit self-dealing transactions without disclosure and a disinterested-member vote. This directly addresses the $90,000 fee.
Related-party transactions: require written disclosure and approval of any transaction between the company and a manager or affiliate, including use of company funds on personal property. This catches the $25,000 renovation.
Approval thresholds: lower the disposition threshold so any sale above a stated dollar figure, or any sale of a property, requires member approval. This closes the single-property gap.
Fiduciary standard: replace the loose disclaimer with an express statement that the implied duty of good faith and fair dealing applies and that the manager owes duties of loyalty and care to the extent the statute permits. If the members want a disclaimer, have competent counsel draft it with carve-outs for self-dealing.
Reporting and controls: require quarterly financial statements, dual signatures on transfers above a threshold, and an annual audit or review. The cash drop from $300,000 to $60,000 went unnoticed for a quarter.
Removal and indemnification: add a removal mechanism for cause by majority vote and limit indemnification to good-faith conduct.