Cross-7e: Case Problem with Sample Answer
Chapter 17: Limited Liability Companies and Limited Partnerships
17–8. Case Problem with Sample Answer
Westbury Properties, Inc., and others (collectively, the Westbury group) owned, managed, and developed real property. Jerry Stoker and the Stoker Group, Inc. (the Stokers), also developed real property. The Westbury group entered into agreements with the Stokers concerning a large tract of property in Houston County, Georgia. The parties formed limited liability companies (LLCs), including Bellemeade, LLC (the LLC group), to develop various parcels of the tract for residential purposes. The operating agreements provided that “no Member shall be accountable to the [LLC] or to any other Member with respect to [any other] business or activity even if the business or activity competes with the [LLC’s] business.” The Westbury group entered into agreements with other parties to develop additional parcels within the tract in competition with the LLC group. The Stokers filed a suit in a Georgia state court against the Westbury group, alleging, among other things, breach of fiduciary duty. What duties do the members of an LLC owe to each other? Under what principle might the terms of an operating agreement alter these duties? In whose favor should the court rule? Discuss. [Stoker v. Bellemeade, LLC, 272 Ga.App. 817, 615 S.E.2d 1 (2005)]
Sample Answer:
The court issued a summary judgment in the Westbury group’s favor, and the Stokers appealed to a state intermediate appellate court, which affirmed this judgment. The appellate court stated that “there was no basis for finding that [the Westbury group] breached fiduciary duties owed as members of the LLCs.” A member of an LLC has a fiduciary duty to “act in a manner he or she believes in good faith to be in the best interests of the limited liability company and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” But this duty “may be expanded, restricted, or eliminated by provisions in ... a written operating agreement. ... It is the policy of this state with respect to limited liability companies to give maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.” Here, the provisions in the operating agreements between the Stokers and the Westbury group “make clear” that “the members exercised the freedom ... to restrict or eliminate [their] duties by contract and to engage in activities which competed with the LLC’s business.”