This is the third part of a review of Mary Szto’s article, “Limited Liability Company Morality: Fiduciary Duties in Historical Context,” 23 Quinnipiac Law Review 61 (2004-2005).  This week we get to the heart of the matter – the case law summary.

The author starts by explaining that, “In the Anglo-American tradition, principals of a firm are fiduciaries expected to lay aside self-interests.  A fiduciary’s duties, include a duty of care and a duty of loyalty owed to the firm, other principals, and/or other members of the firm.”

As the author surveys the case law involving fiduciary duties in a limited liability company context, she posits that courts “demonstrate a preference for corporate duty of care and a partnership duty of loyalty.”

Building on her history lessons she states that, “Canonists may never have imagined that the corporate form would become the chief engine for business growth today.  Nevertheless, in the 1800’s, business corporations came into prominence.  Agency, partnership, and trust duties chiefly influenced them, and still do today . . . English and American commentators readily applied agency, trust and partnership law to corporate fiduciary law.  Duties of care and loyalty were also addressed.”

Says Ms. Szto, “The duty of care cases focus on statutory or contractual corporate standards.  Duty of loyalty cases show a slight preference for partnership standards.  Also, enforcing contractual provisions, the courts still find equitable duties.  Even when LLC members ‘opt out’ of loyalty duties, courts find equitable duties that cannot be eviscerated.  This is in agreement with equity.  Many courts, notably Delaware’s and Ohio’s recognize a transcendent selfless standard for LLC fiduciaries.”

As Ms. Szto reviews the case law, she concludes, “In duty of loyalty cases, courts enforce contractual waivers and standards for fiduciary duties.  However, where there was self-serving behavior, they also found equitable duty breaches.  This was the case even when LLC operating agreements modified or limited fiduciary duties.  Of note is approach of Delaware, Ohio, New York, and Indiana.  Duty of loyalty cases may concern usurpation of firm opportunities, the duty to disclose information, conflicts of interests, and the duty not to compete with the firm.”

Ms. Szto states, “Also, when a statutory duty existed, corporate standards were applied using the best interests of the LLC as a main factor.  For example, a Maryland case found that all decisions by the LLC’s board were protected from second guessing by the business rule, which insulated the board from claims unless it ‘acted in bad fath.’  Another Maryland case noted that a majority interest holder owes a fiduciary duty to the LLC’s minority interests holder, which standard is similar to that of closely-held corporations.

The author states, “In sum recent LLC cases illustrate that in duty of care cases, corporate standards prevail.  ‘Best interests of the LLC’ are a primary focus.  In duty of loyalty cases, agency and partnership standards are favored.  Also, courts (Delaware’s chief among them), recognized equitable duties that are transcendent.  Ohio’s court stated that LLC members owe each other the ‘up most trust and loyalty.’”

The author concludes that, “Fiduciary duties are ingrained in Anglo-American jurisprudence in the business association.  They reach back to the biblical tradition, Roman, and ecclesiastical law.  They develop with fidei commissa, utilitas ecclesiae, the use, trusts, and agents.  They constitute partnerships, limited partnerships, and corporations.”

“To the extent that LLC fiduciary duties are true to their equitable roots, the LLC will take its place among enduring business entities and are constituted by a transcendent business morality.  There is promise of this in legislation that affirms equitable standards and in case law that promotes a corporate duty of care and partnership duty of loyalty that is selfless.  This is the rich legacy of fiduciary duties.”

I give this article six stars out of ten.  I would have appreciated more focus on the theories of LLCs and how these theories tie in to the particular fiduciary duties assigned by the courts, and less on the Anglo-Saxon religious roots.  In the end, the title has more sizzle than the article.

This is part two of a discussion of an intriguing law review article on fiduciary duties as applied in the context of limited liability companies.  The prior blog considered the theological roots cited by Ms. Szto.  This part examines other roots for fiduciary duties.

Ms. Szto starts again with a religious analysis.  Says she, “Canon lawyers provided the link between Roman legal devices and biblical views of property.  For several centuries, the study of Roman law found a home within the church.  Augustine taught that property must have a spiritual use.”

Now we are introduced to the connection between fiduciary obligations and the church – Ecclesiastical courts handled probate matters.

Says the author, “The Middle Ages saw the development of the use, the forbear of trust and agency law (agency and trust law being the forbears of partnership and corporate law).  This came about mainly through ecclesiastical courts.  It was accomplished through continued clerical adaptation of fidei commissa . . . and the ecclesiastical court’s jurisdiction over probate law.  Eventually, the Courts of Chancery enforced uses.  All these lay the groundwork for high business fiduciary duties, many centuries later.”

In this way, fiduciary relationships evolved from rules limiting inheritances in real property.  Ms.  Szto explains that, “Uses of personalty were enforced in the 1100’s by English common law courts.  However, the Franciscans are credited for the first wide-scale employment.  St. Francis of Assisi founded the Franciscan Order in 1209.  According to Maitland, although the Franciscans had taken vows of property, they employed the ‘ad opus’ to receive the benefits of property ownership, which was akin to the Roman ‘usus.’”

Which is to say, the clergy helped drive the “use,” in which beneficial possession was separated from actual legal title.  Even more, conveyance of fee ownership by will was limited, at least in England.  “Because the common law prohibited the devise of freehold land, the feoffment to uses were popular during the rein of Edward III (1327-1377).  Feoffors would convey land to feoffees, who then conveyed land to third persons – cestui que uses – named in the feoffors’ wills.  The terms use, confidence, and trust were used simultaneously.”

Still, a right without a remedy has little value.  The court must step in when misconduct occurs.   “There is evidence that ecclesiastical courts enforced uses before the Courts of Chancery did.  This is because ecclesiastical courts had jurisdiction over probate matters. . . . Interestingly, records of ecclesiastical enforcement of uses disappear in the last part of the 1400’s, apparently because of the jurisdiction of the Courts of Chancery over uses at that time.”

More next week on the limited liability companies.

Mary Szto, “Limited Liability Company Morality: Fiduciary Duties in Historical Context,” 23 Quinnipiac Law Review 61 (2004-2005).

Legal commentators have differing opinions regarding the origin and background of fiduciary duties.  A recent article by Mary Szto would seem to focus on the business side of things, as her article is entitled “Limited Liability Company Morality: Fiduciary Duties in Historical Context,” 23 Quinnipiac Law Review 61 (2004-2005).

However, the author strikes a deep religious tone to fiduciary relationships.  Says Ms. Szto, “Fiduciary duties are the offspring of ecclesiastical property views and Roman legal forms.  They would then mature into agency and trust law; partnership and corporate law would later wed them to the business association.  They are Christological in origin.  Fiduciary duties acknowledge that property ownership, including the business enterprise, requires stewardship.”

In analyzing the history of fiduciary duties, she argues that, “The origin of fiduciary duties has religious and secular roots.  These roots were wed by canon lawyers in the medieval era . . . Fiduciary duties in the biblical tradition begin in the Genesis creation account.  The human mission on earth is being a fiduciary, being a steward of God’s and other’s property.  Israel is a fiduciary.  So is Jesus Christ.”

Continuing in this vein, she explains that,  “In the biblical account, after creating the world, God appoints man and woman as agents.  They steward the world, exercise dominion, and are fruitful.   God is the world’s eternal owner, and his agents are stewards.  Fiduciary duties thus bond God, his creation, and his creatures.  Adam and Eve failed in the enterprise, however, and the rest of biblical history is the story of redemption.  It is a search for the faithful fiduciary and a permanent inheritance.  God redeems Israel from Egypt and gives Canaan to her as an inheritance.

“Within this creative-redemptive-consumptive framework, business people in the Bible have fiduciary duties to God and others . . . In Christian theology, Christ is the perfect fiduciary.  He is the selfless steward who lays down his life for others.  By dying and rising, he enables those who accept him to have an eternal inheritance.  Christ is the bridge between death and life, time and eternity, temporal and permanent property.”

Next week we’ll continue an analysis of this article.