In Donahue v Rodd Electrotype Company of New England, Inc.[1] the Massachusetts Supreme Judicial Court held that shareholders in a close corporation owe each other a heightened “fiduciary duty” and thus must offer minority shareholders equal opportunity to corporate benefits.  In almost 50 years since the decision, Massachusetts courts have broadened, narrowed and construed that “fiduciary duty.”  This duty is likened to the duty partners owe to one another.

            Does this duty also apply to the members of a closely held limited liability company?

Two cases, Butts v Freedman[2], and Pointer v. Castellani[3] present some difficulties in determining whether the Donahue doctrine extends to limited liability companies.  Factually, the cases involved alleged breaches of fiduciary duties in limited liability companies.  The Courts’ opinions however both mistakenly referred to fiduciary duties in corporations when factually dealing with limited liability companies.  Thus, in discussing fiduciary duty in a limited liability company, the Court in Pointer stated “[i]t is uncontested that FGC [which the Court defined Fletcher Granite Company, LLC] is a close corporation”.[4]  FGC was, however, clearly a limited liability company.  Likewise in Freedman, with respect to an entity clearly an LLC, the Court stated that “we agree with the judge that Freedman, as a member of a closely held corporation owed Butts and BEA a fiduciary duty.” [5] BEA, however, was not a corporation but an LLC.

In Allison v. Eriksson[6] the Supreme Judicial Court recognized that fiduciary duties do in fact exist in limited liability companies pursuant to M. G. L. A. c. 156C, § 63 (b).  In that case, however, the limited liability company provided for fiduciary duties to members akin to the fiduciary duties owed shareholders in a close corporation, in the LLC’s operating agreement.  The Court found that the operating agreement thus required an “analogous relationship and duty among its members, and thus, the close corporation doctrine and the strict fiduciary duty it imposes applies . . .”[7]  Because the Court reached its decision on an provision in the operating agreement which granted fiduciary duty to the members, it did not have to decide the broader question of whether fiduciary duties existed by virtue of the entity in closely held LLCs.

In Butler v. Moore[8], the Federal District Court for the District of Massachusetts noted Pointer and Freedman and suggested:

“In both cases [Pointer and Freedman], the opinions applied the principles of Donahue to an LLC, but erroneously referred to the LLC as a ‘close corporation’. . . As a matter of logic and fairness, there is no reason why the fiduciary duties of members of a closely held LLC should be materially different from those of shareholders of a closely held corporation. The policy considerations underlying the Donahue line of cases appear to be identical when considered in the context of LLCs. Moreover, an LLC is, practically speaking, something of a hybrid of a corporation and a partnership; it would be highly anomalous if members of a closely held LLC had lesser fiduciary duties than those of a closely held corporation or a partnership.[9] “

            I think that the Federal District Court was correct and the closely held LLC is an equivalent of a close corporation.  A Massachusetts court should find that LLC members owe to each other a fiduciary duty.  This result however is not free from doubt and, because of that doubt, a colleague of mine has expressed concern about using limited liability companies in certain situations.

[1]                367 Mass. 578, 328 N. E. 2d 505 (1975).

[2]                98 Mass. App. Ct. 827, 140 N. E. 3d 486 (2020).

[3]                455 Mass. 537, 918 N. E. 2d 805 (2009).

[4]                455 Mass. 537 at 568 918 N. E. 2d 805 at 815. 

[5]                96 Mass. App. Ct. 827 at. 828, 140 N. E. 3d 466, at 468, 469. see also One to One Interactive, LLC v. Landrith, 76 Mass. App. Ct. 142 920 N. E. 2d 303 (2009). 

[6]                479 Mass. 626, 98 N. E. 3d 143 (2018),

[7]                479 Mass. 626 at 636, 98 N. E. 3d 143 at 152. 

[8]                2015 WL 1409676 (D. Mass. 2015).

[9]           2015 WL 1409676, at 61.