Katris v. Carroll
299 Ill. Dec. 482, 842 N.E.2d 221, 362 Ill. App. 3d 1140 (2005)
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Rule of Law:
Under the Illinois Limited Liability Company Act, a non-manager member of a manager-managed LLC does not owe fiduciary duties to the company or its other members unless the operating agreement explicitly grants that member managerial authority.
Facts:
- Stephen Doherty wrote a software program called 'Viper' for Lester Szlendak.
- On February 14, 1997, Peter Katris, William Hamburg, Szlendak, and Doherty formed Viper Execution Systems, L.L.C. to develop the software, with each holding a 25% interest.
- The LLC's articles of organization and its operating agreement specified that the LLC was 'manager-managed,' with Katris and Hamburg as the sole managers.
- The operating agreement required an affirmative vote by members holding a majority interest to amend its terms; Katris and Hamburg together held only a 50% interest.
- On the same day the LLC was formed, managers Katris and Hamburg issued a 'written consent' resolution that, among other things, appointed Doherty as 'director of technical services.'
- While a member of the LLC, Doherty was employed by Ernst & Company and worked for Patrick Carroll.
- Doherty worked with another programmer at Ernst to develop a software program called 'Worldwide Options Web (WWOW),' which Katris alleged was functionally similar to Viper.
Procedural Posture:
- Peter Katris sued Stephen Doherty for breach of fiduciary duty and sued Patrick Carroll and Ernst & Company for collusion in the circuit court of Cook County (trial court).
- Doherty settled with Katris and was dismissed from the lawsuit.
- Carroll and Ernst filed a motion for summary judgment, arguing Doherty owed no fiduciary duty.
- The trial court granted summary judgment in favor of Carroll and Ernst.
- Katris's motion for reconsideration was denied by the trial court.
- Katris, as the appellant, appealed the summary judgment ruling to the Illinois Appellate Court, with Carroll and Ernst as appellees.
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Issue:
Does a non-manager member of a manager-managed limited liability company owe fiduciary duties to the company when the company's managers grant him an officer title and responsibilities, but the operating agreement does not grant him any managerial authority?
Opinions:
Majority - Presiding Justice McNulty
No. A non-manager member of a manager-managed LLC owes no fiduciary duties unless they exercise managerial authority pursuant to the operating agreement. The court reasoned that the Illinois LLC Act is clear: a member in a manager-managed LLC owes no fiduciary duties solely by reason of being a member. For such duties to arise under section 15–3(g)(3) of the Act, a member must exercise the authority of a manager 'pursuant to the operating agreement.' Here, the operating agreement explicitly vested all managerial authority in Katris and Hamburg and did not grant any to Doherty. The managers' subsequent 'written consent' appointing Doherty as 'Director of Technology' did not constitute a valid amendment to the operating agreement because it was not approved by a majority of the members as the agreement required. Therefore, since Doherty exercised no authority pursuant to the operating agreement, he owed no fiduciary duties, and the collusion claim against Carroll and Ernst necessarily fails.
Analysis:
This decision strictly construes the Illinois LLC Act, solidifying the principle that the operating agreement is the paramount document for defining duties within a manager-managed LLC. It clarifies that informal delegations of responsibility or the granting of officer titles are insufficient to impose fiduciary duties on non-manager members. The ruling underscores the statutory 'safe harbor' for passive members, protecting them from the stringent duties of loyalty and care unless they are explicitly given managerial power in the company's foundational legal document. This precedent forces LLCs to be precise in their operating agreements if they wish for non-manager members to be bound by fiduciary standards.
