I am often approached by co-owners or members of an LLC who have been victimized by self-dealing or embezzlement or mismanagement of funds when other members of an LLC have taken money out of the LLC for their own use or simply misused company funds by, for instance, overpaying for equipment in order to help a family member who sells the equipment.

In a member-managed LLC, one of the key claims you can bring against the members who have mismanaged or stolen funds is “breach of fiduciary duty.” A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interest ahead of their own. For instance, your investment advisor has a fiduciary duty to you. And so do other members of your member-managed LLC. Those other members owe the LLC a duty to manage company funds with care and to put the interests of the LLC ahead of their own interest in the way they manage or use LLC funds.

But in California, there are two types of LLCs: member-managed and manager-managed. Per Corporations Code Section 17704.09, in a manager-managed LLC, the members do not have a fiduciary duty to each other, even if those members manage or control LLC funds.

This distinction was brought home in the recent case of HTD Pine Products v. Nguyen, which is still pending in Los Angeles Superior Court. In that case, some members of an LLC alleged that the LLC manager, along with other members of the LLC, took company funds for themselves and overpaid themselves for services provided to the LLC. But the Court dismissed all of the breach of fiduciary claims against all of the members of the LLC except the manager, citing Corporations Code 17704.09 for the rule that you cannot sue LLC members for breach of fiduciary duty in a manager-managed LLC, because the members do not have fiduciary duties to each other. 

This doesn’t mean you can’t sue other members of your manager-managed LLC who are stealing, misusing, or embezzling company funds. There are plenty of other claims out there including conversion, fraud, “money had and received,” and even simple negligence. But one of the most powerful claims in available in member-managed LLCs, breach of fiduciary duty, will not be available if you want to sue members of your manager-managed LLC.