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A Second Look at the Reduction of Fiduciary Duties in Oregon LLCs

A Second Look at the Reduction of Fiduciary Duties in Oregon LLCs

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Limited liability companies were created as a new, more flexible form of business entity which would enable its members to exercise their freedom of contract to the fullest permissible limits. Because they are contractually malleable, the language of the operating agreement organically defining an LLC must be precise and judicious. In Synectic Ventures I, LLC v. EVI Corp., 353 Or. 62 (2012) the Oregon Supreme Court, reversing an earlier decision by the Court of Appeals, reiterated how critically important the operating agreement language is in determining the rights and obligations of limited liability members and managers both to their company and to each other.
Limited liability companies were created as a new, more flexible form of business entity which would enable its members to exercise their freedom of contract to the fullest permissible limits. Because they are contractually malleable, the language of the operating agreement organically defining an LLC must be precise and judicious. In Synectic Ventures I, LLC v. EVI Corp., 353 Or. 62 (2012) the Oregon Supreme Court, reversing an earlier decision by the Court of Appeals, reiterated how critically important the operating agreement language is in determining the rights and obligations of limited liability members and managers both to their company and to each other.

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Categories:Types, Business/Law
Published by: Hunt and Associates, PC on Mar 20, 2013
Copyright:Attribution Non-commercial

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A Second Look at the Reduction of Fiduciary Duties in Oregon LLCs
Limited liability companies were created as a new, more flexible form of business entity whichwould enable its members to exercise their freedom of contract to the fullest permissible limits.Because they are contractually malleable, the language of the operating agreement organicallydefining an LLC must be precise and judicious. In
Synectic Ventures I, LLC v. EVI Corp.,
353Or. 62 (2012) the Oregon Supreme Court, reversing an earlier decision by the Court of Appeals,reiterated how critically important the operating agreement language is in determining the rightsand obligations of limited liability members and managers both to their company and to eachother.
In an April 26, 2011 blog post I discussed the Court of Appeals’
earlier decision in
SynecticVentures
which affirmed the trial court’s award of summary judgment to the defendant who was
both the managing member of a limited liability company and the chairman of the board,treasurer and equity owner of a corporation indebted to the limited liability company, who
unilaterally altered the terms of the corporation’s indebtedness to the LLC without disclosure or consent of the LLC’s other members. The LLC’s other members and the LLC
had challengedthat unilateral alteration of the loan terms
as a breach of the defendant’s duty of loyalty.
In awarding the defendant managing member and the defendant corporation summary judgmentthe trial court and the court of appeals had relied on language in the LLC operating agreementgenerally granting the defendant as managing member the right to bind the company. TheSupreme Court rejected that analysis holding that any contractual modification of the general
duty of loyalty which the defendant owed to the LLC and its members must be “specific” and
cons
istent with the statutory restriction on elimination of a manager’s duty of loyalty in ORS
63.155(10)(a).That is, the Court essentially seemed to hold in
Synectic Ventures
that any contractual reductionin the general duty of loyalty defined in ORS 63.155(2) must take the form of a specific
identification of those “. . . types or categories of activities that do not violate the duty of loyalty,if not unconscionable . . . and “[s]pecify the number or percentage of members . . . or managers .. .” that
may authorize or ratify a specific act or transaction that would otherwise violate the dutyof loyalty. ORS 63.155(10)(a)(A) and (B). The Court will not, in short, imply a contractualdiminishment of the duty of loyalty where such a contractual contraction of that duty is notspecifically stated in accordance with the statutory provisions allowing the parties to modify thatduty.The
Supreme Court’s
holding in
Synectic Ventures
illustrates, again, the need for careful draftingboth in limited liability company operating agreements and in most other contracts. As with theearlier decision by the Court of Appeals, it is the language of the operating agreement on whichthe court focuses.The case also demonstrates the need for those thinking of forming or becoming members ormanagers of any limited liability company to obtain and consult with their own attorney

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