Thursday, June 17, 2021

No Default Fiduciary Duties for Nevada LLCs

In my business organizations course, I usually highlight the difference between Nevada and Delaware law on fiduciary duties for LLCs.  My reading of changes to the Nevada statute in 2019 meant that Nevada LLCs do not come with default fiduciary duties.  This is the current statutory language:  

NRS 86.298  Duties of manager or managing member.  The duties of a manager or managing member of a limited-liability company to the limited-liability company, to any series of the limited-liability company, to any member or to another person that is a party to or otherwise bound by the operating agreement are only:

      1.  The implied contractual covenant of good faith and fair dealing; and

      2.  Such other duties, including, without limitation, fiduciary duties, if any, as are expressly prescribed by the articles of organization or the operating agreement.

What about Nevada LLCs formed prior to 2019?  There's one relatively recent unpublished decision from the Nevada Supreme Court-- Israyelyan v. Chavez, 466 P.3d 939 (Nev. 2020).  It involved an LLC formed prior to 2019.  The Supreme Court read the 2019 amendment as a clarification, meaning that Nevada LLCs did not have default fiduciary duties prior to 2019.  This is the language:

We note that in 2019 the Legislature added NRS 86.298, which expressly states that the LLC's members' duties are limited to those contracted to in the articles of organization and operating agreement, aside from the implied contractual covenant of good faith and fair dealing. That statute further suggests the Legislature did not intend for NRS Chapter 86 to impose implied fiduciary duties upon LLCs. See 2B Norman J. Singer & J.D. Shambie Singer, Sutherland Statutory Construction § 49:9, at 129 (7th ed. 2012) (“Where a legislature amends a former state, or clarifies a doubtful meaning by subsequent legislation, such amendment or subsequent legislation is strong evidence of the legislative intent of the first statute.”); see also Pub. Emp.s' Benefits Program v. LVMPD, 124 Nev. 138, 157, 179 P.3d 542, 554-55 (2008) (holding that when the Legislature clarifies a statute “through subsequent legislation, we may consider the subsequent legislation persuasive evidence of what the Legislature originally intended”).
The big takeaway here is that Nevada and Delaware defaults are different.  You need to put the fiduciary duties in in Nevada.  In Delaware you must take them out if you do not want them.

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Does the operating agreement have to use the word, 'fiduciary' to be a fiduciary responsibility before 2019? Or are specific acts describing a fiduciary responsibility before 2019, prove fiduciary responsibility is included in the operating agreement?

Posted by: Nancy | May 11, 2022 11:47:50 AM

My take is that you probably need to be explicit about any duties in a Nevada operating agreement. If Nevada courts read the language as a "clarification" that'll mean that there were not default fiduciary duties prior to the statutory change.

Posted by: Benjamin Edwards | May 12, 2022 12:33:43 PM

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