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Disputes within Closely Held Entities

Clay Stucki

Stucki & Rencher

clay@stuckirencher.com

(801) 961-1300

I. Ethical Considerations

A. Who Do You Represent?

1. Rule 1.7 of the Utah Rules of Professional Conduct. Conflict of

Interest: Current Clients.

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the

representation involves a concurrent conflict of interest. A concurrent conflict of

interest exists if:

(a)(1) The representation of one client will be directly adverse to another client; or

(a)(2) There is a significant risk that the representation of one or more clients will

be materially limited by the lawyer’s responsibilities to another client, a former

client or a third person or by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under

paragraph (a), a lawyer may represent a client if:

(b)(1) the lawyer reasonably believes that the lawyer will be able to provide

competent and diligent representation to each affected client;

(b)(2) the representation is not prohibited by law;

(b)(3) the representation does not involve the assertion of a claim by one client

against another client represented by the lawyer in the same litigation or other

proceeding before a tribunal; and

(b)(4) each affected client gives informed consent, confirmed in writing.

2. Could any of the members or shareholders of the closely held business

entity understand that you represent their interests with regard to the entity?

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3. MUJI 2d CV404; Roderick v. Ricks, 2002 UT 84, ¶¶ 32, 40: An attorney-

client relationship can be established by an express contract between the parties,

or by an implied contract based upon the attorney’s statements or conduct. An

implied attorney-client relationship exists when the client reasonably believes the

attorney represents the client’s legal interests. In order for a person to

“reasonably believe” that an attorney represents the person: (1) the person must

subjectively believe the attorney represents him or her; and (2) this subjective

belief must be reasonable under the circumstances. The relationship terminates

when the client clearly understands or reasonably should understand that the

relationship is no longer to be depended upon.

4. MUJI 2d CV406: In general, an attorney has no duty to act beyond the

scope of representation. “Scope of representation” means what the attorney will

do for the client. The attorney may limit the scope of representation if the

limitation is reasonable, and if the client gives informed consent.

5. MUJI 2d CV403; Roderick v. Ricks, 2002 UT 84, ¶29; USA Power, LLC v.

PacifiCorp, 2010 UT 33, ¶ 61; Kilpatrick v. Wiley, Rein & Fielding, 909 P.2d

1283, 1290 (Utah Ct. App. 1996): To prove a breach of the attorney fiduciary

duty, the client must prove by a preponderance of the evidence:

1. The existence of an attorney-client relationship; and

2. The attorney, within the scope of that relationship1,

a. Took improper advantage of his superior legal knowledge and

position;

b. Failed to have undivided loyalty to client;

c. Failed to treat the client’s matters as confidential;

d. Concealed important facts or law from the client; or

e. Deceived the client; and

3. The client suffered damages; and

4. The breach of the fiduciary duty was the cause of those damages.

1 This scope limitation is not in CV403, but this limitation may be added in the appropriate case pursuant to the

other case law referenced.

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6. Rule 1.13 of the Utah Rules of Professional Conduct. Organization as

a Client.

(a) A lawyer employed or retained by an organization represents the organization

acting through its duly authorized constituents.

(b) If a lawyer for an organization knows that an officer, employee or other

person associated with the organization is engaged in action, intends to act or

refuses to act in a matter related to the representation that is a violation of a legal

obligation to the organization, or a violation of law that reasonably might be

imputed to the organization, and that is likely to result in substantial injury to the

organization, then the lawyer shall proceed as is reasonably necessary in the best

interest of the organization. Unless the lawyer reasonably believes that it is not

necessary in the best interest of the organization to do so, the lawyer shall refer

the matter to higher authority in the organization, including, if warranted by the

circumstances, to the highest authority that can act on behalf of the organization

as determined by applicable law.

(c) Except as provided in paragraph (d), if,

(c)(1) despite the lawyer's efforts in accordance with paragraph (b), the highest

authority that can act on behalf of the organization insists upon or fails to address

in a timely and appropriate manner an action, or a refusal to act, that is clearly a

violation of law, and

(c)(2) the lawyer reasonably believes that the violation is reasonably certain to

result in substantial injury to the organization, then the lawyer may reveal

information relating to the representation whether or not Rule 1.6 permits such

disclosure, but only if and to the extent the lawyer reasonably believes necessary

to prevent substantial injury to the organization.

(d) Paragraph (c) shall not apply with respect to information relating to a lawyer’s

representation of an organization to investigate an alleged violation of law or to

defend the organization or an officer, employee or other constituent associated

with the organization against a claim arising out of an alleged violation of law.

(e) A lawyer who has been discharged and reasonably believes the discharge was

because of the lawyer’s actions taken pursuant to paragraphs (b) or (c), or who

withdraws under circumstances that require or permit the lawyer to take action

under either of those paragraphs, shall proceed as the lawyer reasonably believes

necessary to ensure that the organization’s highest authority is informed of the

lawyer’s discharge or withdrawal.

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(f) In dealing with an organization's directors, officers, employees, members,

shareholders or other constituents, a lawyer shall explain the identity of the client

when the lawyer knows or reasonably should know that the organization’s

interests are adverse to those of the constituents with whom the lawyer is dealing.

(g) A lawyer representing an organization may also represent any of its directors,

officers, employees, members, shareholders or other constituents, subject to the

provisions of Rule 1.7. If the organization's consent to the dual representation is

required by Rule 1.7, the consent shall be given by an appropriate official of the

organization other than the individual who is to be represented, or by the

shareholders.

(h) A lawyer elected, appointed, retained or employed to represent a

governmental entity shall be considered for the purpose of this rule as

representing an organization. The government lawyer's client is the governmental

entity except as the representation or duties are otherwise required by law. The

responsibilities of the lawyer in paragraphs (b) and (c) may be modified by the

duties required by law for the government lawyer.

Comments for Rule 1.13:

[1] An organizational client is a legal entity, but it cannot act except through its

officers, directors, employees, shareholders and other constituents. Officers,

directors, employees and shareholders are the constituents of the corporate

organizational client. The duties defined in this Comment apply equally to

unincorporated associations. "Other constituents" as used in this Comment means

the positions equivalent to officers, directors, employees and shareholders held by

persons acting for organizational clients that are not corporations.

[2] When one of the constituents of an organizational client communicates with

the organization's lawyer in that person's organizational capacity, the

communication is protected by Rule 1.6. Thus, by way of example, if an

organizational client requests its lawyer to investigate allegations of wrongdoing,

interviews made in the course of that investigation between the lawyer and the

client's employees or other constituents are covered by Rule 1.6. This does not

mean, however, that constituents of an organizational client are the clients of the

lawyer. The lawyer may not disclose to such constituents information relating to

the representation except for disclosures explicitly or impliedly authorized by the

organizational client in order to carry out the representation or as otherwise

permitted by Rule 1.6.

[3] When constituents of the organization make decisions for it, the decisions

ordinarily must be accepted by the lawyer even if their utility or prudence is

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doubtful. Decisions concerning policy and operations, including ones entailing

serious risk, are not as such in the lawyer’s province. Paragraph (b) makes clear,

however, that when the lawyer knows that the organization is likely to be

substantially injured by action of an officer or other constituent that violates a

legal obligation to the organization or is in violation of law that might be imputed

to the organization, the lawyer must proceed as is reasonably necessary in the best

interest of the organization. As defined in Rule 1.0(f), knowledge can be inferred

from circumstances, and a lawyer cannot ignore the obvious.

[4] In determining how to proceed under paragraph (b), the lawyer should give

due consideration to the seriousness of the violation and its consequences, the

responsibility in the organization and the apparent motivation of the person

involved, the policies of the organization concerning such matters, and any other

relevant considerations. Ordinarily, referral to a higher authority would be

necessary. In some circumstances, however, it may be appropriate for the lawyer

to ask the constituent to reconsider the matter; for example, if the circumstances

involve a constituent’s innocent misunderstanding of law and subsequent

acceptance of the lawyer’s advice, the lawyer may reasonably conclude that the

best interest of the organization does not require that the matter be referred to

higher authority. If a constituent persists in conduct contrary to the lawyer’s

advice, it will be necessary for the lawyer to take steps to have the matter

reviewed by a higher authority in the organization. If the matter is of sufficient

seriousness and importance or urgency to the organization, referral to higher

authority in the organization may be necessary even if the lawyer has not

communicated with the constituent. Any measures taken should, to the extent

practicable, minimize the risk of revealing information relating to the

representation to persons outside the organization. Even in circumstances where a

lawyer is not obligated by Rule 1.13 to proceed, a lawyer may bring to the

attention of an organizational client, including its highest authority, matters that

the lawyer reasonably believes to be of sufficient importance to warrant doing so

in the best interest of the organization.

[5] Paragraph (b) also makes clear that when it is reasonably necessary to enable

the organization to address the matter in a timely and appropriate manner, the

lawyer must refer to higher authority, including, if warranted by the

circumstances, the highest authority that can act on behalf of the organization

under applicable law. The organization’s highest authority to whom a matter may

be referred ordinarily will be the board of directors or similar governing body.

However, applicable law may prescribe that under certain conditions the highest

authority reposes elsewhere, for example, in the independent directors of a

corporation.

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Relation to Other Rules

[6] The authority and responsibility provided in this Rule are concurrent with the

authority and responsibility provided in other rules. In particular, this Rule does

not limit or expand the lawyer's responsibility under Rules, 1.8, 1.16, 3.3 or 4.1.

Paragraph (c) of this Rule supplements Rule 1.6(b) by providing an additional

basis upon which the lawyer may reveal information relating to the representation,

but does not modify, restrict or limit the provisions of Rule 1.6(b)(1) – (6). Under

paragraph (c) the lawyer may reveal such information only when the

organization’s highest authority insists upon or fails to address threatened or

ongoing action that is clearly a violation of law, and then only to the extent the

lawyer reasonably believes necessary to prevent reasonably certain substantial

injury to the organization. It is not necessary that the lawyer’s services be used in

furtherance of the violation, but it is required that the matter be related to the

lawyer’s representation of the organization. If the lawyer's services are being used

by an organization to further a crime or fraud by the organization, Rules 1.6(b)(2)

and 1.6(b)(3) may permit the lawyer to disclose confidential information. In such

circumstances, Rule 1.2(d) may also be applicable, in which event, withdrawal

from the representation under Rule 1.16(a)(1) may be required.

[7] Paragraph (d) makes clear that the authority of a lawyer to disclose

information relating to a representation in circumstances described in paragraph

(c) does not apply with respect to information relating to a lawyer’s engagement

by an organization to investigate an alleged violation of law or to defend the

organization or an officer, employee or other person associated with the

organization against a claim arising out of an alleged violation of law. This is

necessary in order to enable organizational clients to enjoy the full benefits of

legal counsel in conducting an investigation or defending against a claim.

[8] A discharged lawyer who reasonably believes the discharge was because of

the lawyer’s actions taken pursuant to paragraph (b) or (c), or who withdraws in

circumstances that require or permit the lawyer to take action under either of these

paragraphs, must proceed as the lawyer reasonably believes necessary to ensure

that the organization’s highest authority is informed of the lawyer’s discharge or

withdrawal.

Clarifying the Lawyer's Role

[9] There are times when the organization's interest may be or become adverse to

those of one or more of its constituents. In such circumstances the lawyer should

advise any constituent whose interest the lawyer finds adverse to that of the

organization of the conflict or potential conflict of interest, that the lawyer cannot

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represent such constituent, and that such person may wish to obtain independent

representation. Care must be taken to ensure that the individual understands that,

when there is such adversity of interest, the lawyer for the organization cannot

provide legal representation for that constituent individual, and that discussions

between the lawyer for the organization and the individual may not be privileged.

[10] Whether such a warning should be given by the lawyer for the organization

to any constituent individual may turn on the facts of the case.

Dual Representation

[11] Paragraph (g) recognizes that a lawyer for an organization may also represent

a principal officer or major shareholder.

Derivative Actions

[12] Under some circumstances, the shareholders or members of a corporation

may bring suit to compel the directors to perform their legal obligations in the

supervision of the organization. Members of unincorporated associations have

essentially the same right. Such an action may be brought nominally by the

organization, but usually is, in fact, a legal controversy over management of the

organization.

[13] The question can arise whether counsel for the organization may defend such

an action. The proposition that the organization is the lawyer's client does not

alone resolve the issue. Most derivative actions are a normal incident of an

organization's affairs, to be defended by the organization's lawyer like any other

suit. However, if the claim involves serious charges of wrongdoing by those in

control of the organization, a conflict may arise between the lawyer's duty to the

organization and the lawyer's relationship with the board. In those circumstances,

Rule 1.7 governs who should represent the directors and the organization.

7. Rule 1.9. Duties to Former Clients.

(a) A lawyer who has formerly represented a client in a matter shall not thereafter

represent another person in the same or a substantially related matter in which that

person's interests are materially adverse to the interests of the former client unless

the former client gives informed consent, confirmed in writing.

(b) A lawyer shall not knowingly represent a person in the same or a substantially

related matter in which a firm with which the lawyer formerly was associated had

previously represented a client

(b)(1) whose interests are materially adverse to that person; and

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(b)(2) about whom the lawyer had acquired information protected by Rules 1.6

and 1.9(c) that is material to the matter;

unless the former client gives informed consent, confirmed in writing.

(c) A lawyer who has formerly represented a client in a matter or whose present

or former firm has formerly represented a client in a matter shall not thereafter:

(c)(1) use information relating to the representation to the disadvantage of the

former client except as these Rules would permit or require with respect to a

client, or when the information has become generally known; or

(c)(2) reveal information relating to the representation except as these Rules

would permit or require with respect to a client.

8. In any litigation over a closely held entity, even though there are certainly

ethical complications that must be considered, there are possible advantages of

representing more than one client with interests aligned, especially in the case of a

jury trial.

a. Economic advantages; is the dispute too expensive to litigate if

every member or shareholder has to hire their own attorney?

b. Advantage to showing the jury that there is a general consensus in

the company but for the opposing party.

i. witness exclusion rules

B. Preventing Potential Claims on Ethical Issues

1. Make sure you have a retainer letter clearly define the client and scope of

representation and that you use emails or other writings to reinforce the limited

scope of any representation, including informed consent agreements where

advisable.

2. Insist on broad, protective clarification clauses in formation documents

such as operating agreements, shareholder agreements, or bylaws, with a

provision such as:

Disclosure and Waiver of Conflicts. In connection with the preparation of this

Agreement, the Members hereby acknowledge and agree by executing this

Agreement that: (a) the attorney that prepared this Agreement (the “Attorney”)

acted as legal counsel to the Company and not for any Member thereof; (b) the

Members are hereby advised by the Attorney that the interests of the Members are

opposed to each other and are opposed to the interests of the Company and,

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accordingly, the Attorney’s representation of the Company may not be in the best

interests of any individual Members; and (c) each of the Members has been

advised by the Attorney to retain their separate legal counsel with regard to the

negotiation and execution of this Agreement. Notwithstanding the foregoing, the

Members (a) desire the Attorney to represent the Company; (b) acknowledge that

they have been advised to retain separate counsel and have waived their right to

do so; and (c) jointly and severally forever waive any claim that the Attorney’s

representation of the Company constitutes a conflict of interest. Moreover, each

Member hereby agrees and acknowledges that they are not a client of the

Attorney and that any duty owed by the Attorney is owed to the Company and not

to any individual Member of the Company. If the Company causes the Attorney

to represent any Member, officer, or director of the Company, it is understood that

(1) the Attorney’s duties to the Company shall always take precedence over any

duty owed to such individual, (2) that the Attorney may terminate such

representation of the individual if the Attorney later determines that the interests

of the individual may be adverse to the interests of the Company, and (3) the

Attorney may continue to represent the Company even if a conflict of interest

arises, and the Member hereby gives consents to such ongoing representation of

the Company.

II. Common Disputes

A. Breach of Fiduciary Duties by Company Directors, Members, or Officers.

In Utah, a claim for breach of fiduciary duty is an independent tort that

may arise from contractual duty and serve as the basis for punitive damages.

Campbell v. State Farm Mut. Auto. Ins. Co., 2001 UT 89 ¶¶ 44-45, 65 P.3d 1134,

1150. In the context of corporate or limited liability company fiduciary duty

claims, it is well settled that officers and managers owe the company a duty to act

in good faith, with prudent care, and within the best interest of the company.

McLaughlin v. Schenk, 2009 UT 64, ¶16 (holding that officers and directors of

corporations have fiduciary duties of care and loyalty). See also Stevensen 3rd

East, LC v. Watts, 2009 UT App 137 (applying corporate fiduciary duties to

managers of limited liability companies); Shields v. Cape Fox Corp., 42 P.3d

1083, 1089 n. 13 (Alaska 2002); AMERCO v. Shoesn, 184 Ariz. 150, 907 P.2d

536, 542-547 (Ct. App. Div. 1, 1995), corrected, (Aug 29, 1995); Long v.

Lampton, 324 Ark. 511, 922 S.W. 2d 692, 698 (1996).

Breach of the fiduciary duty of loyalty occurs when a fiduciary places his

or her interests before the interests of the beneficiary, and thus damages the

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beneficiary. The fiduciary duty of loyalty has been analyzed in Utah primarily

through application of agency and trust law. The “general fiduciary principle

requires that the agent subordinate the agent’s interests to those of the principal

and place the principal’s interests first as to matters connected with the agency

relationship.” Eagar v. Burrows, 2008 UT 42, ¶25. In the context of a property

trust, the duty of loyalty requires the trustee to administer the trust solely in the

interest of the beneficiary. Wheeler v. Mann, 763 P.2d 758, 760 (Utah, 1988)

(citations omitted).

Managers also breach their fiduciary duties when their performance fails

to satisfy a minimum standard of care. For managers of a limited liability

company, their standard of care requires that they exercise the amount of skill and

learning ordinarily possessed and exercised by other managers in similar

circumstances. Stevensen at ¶30 (applying the fiduciary duty of care for directors

of corporations as enumerated in Utah Code Ann. §16-10a-840(1)(b) to managers

of limited liability companies). Courts have found breaches of the fiduciary duty

of care in circumstances in which corporate directors utterly neglect their duties or

only attend to their duties in a perfunctory or careless manner. Francis v. United

Jersey Bank, 87 N.J. 15, 432 A.2d 814, 820 (1981) (holding that embracing a

“woefully inadequate and highly dangerous bookkeeping system” breached the

fiduciary duty of care).

A breach of the duty of loyalty or care often arises from acts of self-

dealing. Fiduciary duties are breached by self-dealing which occurs when a

fiduciary “[participates] in a transaction that benefits oneself instead of another

who is owed a fiduciary duty.” Id. at ¶32 (citing Black’s Law Dictionary, 1390

(8th

ed. 2004)). A trustee is not permitted to engage in self-dealing, or “to place

himself in a position where it would be for his own benefit to violate his duty to

the beneficiaries.” Wheeler, 763 P.2d at 760. “The prohibition against self-

dealing does not depend upon proof of bad faith, but is absolute so as to avoid the

possibility of fraud…any transaction involving self-dealing by a trustee is not

only prima facie invalid, but is voidable by the beneficiaries, regardless of any

loss suffered….” Id. (emphasis added). Consent to such self-dealing must be

obtained from those potentially at risk from the self-dealing transactions. Even if

such consent if obtained, the transactions are still voidable unless the fiduciary

“disclosed . . . all the material facts which he knew or should have known

concerning the transaction and the transaction was fair and reasonable in all

respects. Id. (emphasis added). Indeed, the duty to avoid self-dealing is viewed

as so important by the Utah Legislature that it is one of the few duties that cannot

be limited or eliminated pursuant to section U.C.A. § 48-2c-502 (1)(d) of the

applicable Utah Revised Limited Liability Company Act (the “Utah LLC Act”).

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See U.C.A. §§ 48-2c-120(b); 48-2c-807(2) (Each member or manager must

account for and hold in trust for the company any benefit or profit derived from

the self-dealing of a member or manager without the consent of the other

members holding a majority profits interest in the company.)

The specific elements for the tort of breach of fiduciary duty as outlined in

neighboring jurisdictions are consistent with Utah law. To prove a breach of the

fiduciary duty of loyalty that a plaintiff must prove 1) that the defendant was a

fiduciary 2) that the defendant acted against the plaintiff’s interests 3) that

plaintiff was thereby harmed; and 4) that the defendant’s act was a substantial

factor in causing plaintiff’s harm.2 To prevail upon a claim for breach of the

fiduciary duty of care, a plaintiff was show 1) that the defendant was a fiduciary

2) that the defendant failed to act as a reasonably careful manager of a similar

limited liability company would have 3) the plaintiff was harmed; and 4) the

defendant’s conduct was a substantial factor in causing the plaintiff’s harm.3

Fiduciary duties do not arise solely from formal and limited categories of

legal relationships or statuses. A fiduciary relationship “results from the

manifestation of consent by one person to another that the other shall act on his

behalf and subject to his control, and consent by the other so to act.” Wardley

Corp. v. Welsh, 962 P.2d 86, 89 (Utah Ct. App. 1998). The manifestation of

consent to form an agency relationship can be established by contract or implied

as a matter of law based on the factual circumstances. First Sec. Bank N.A. v.

Banberry Dev. Corp., 786 P.2d 1326, 1332 (Utah, 1990). A fiduciary is a person

with a duty to act primarily for the benefit of another. Engle v. Dist. Court, 96

Utah 245, 85 P.2d 627, 629 (Utah, 1938).

Directors and officers of a company are fiduciaries to the company itself.

Nicholson v. Evans, 642 P.2d 727, 730 (Utah 1982). “They are obligated to use

their ingenuity, influence, and energy, and to employ all the resources of the

corporation, to preserve and enhance the property and earning power of the

corporation, even if the interests of the corporation are in conflict with their own

personal interests.” Id. “Any action on the part of directors looking to the

impairment of corporate rights, the sacrifice of corporate interests, the retardation

of the objections of the corporation…will be regarded as a flagrant breach of trust

on the part of the directors engaged therein.” Glen Allen Mining Co. v. Park

Galena Mining Co., 77 Utah 362, 296 P. 231 (1931).

2 See generally the Judicial Council of California Civil Jury Instructions (“CACI”) at 4102

(relevant excerpts of which are attached hereto as Exhibit 106).

3 See CACI 4101.

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1. FIDUCIARY DUTY OF COMPANY OFFICERS

Managers and officers of a company are entrusted with management of the

company’s business and property for the benefit of all the members. As

such, they owe fiduciary duties of care, good faith, and loyalty to the

company. Defendant was obligated to act in good faith, with the care an

ordinary prudent person in a like position would exercise under similar

circumstances and in a manner in which he believed to be in the best

interest of the Company and its other Members, using all reasonable

inquiry, diligence, and prudence. As a manager or officer of the

Company, Defendant was obligated to subordinate his interest to those of

the Company and place the Company’s interest first in case of any

conflict.

Reference: 16-10a-840 (listing the general standards of conduct for

directors and officers of a corporation). also see Stevenson 3rd East v.

Watt, 2009 UT App 137 (Applying corporate fiduciary duties to managers

of limited liability companies).

2. BREACH OF FIDUCIARY DUTY OF LOYALTY

the Company and all of the other Members have alleged Defendant

breached the fiduciary duty of loyalty he owed to the Company and the

other Members. Because Defendant was exercising management authority

over the Company and owed a fiduciary duty of loyalty to the Company

and the other Members, to recover on this claim, the Company or the other

Members must prove all of the following:

A) that Defendant acted in any way that favored his own interests over

the interests of the Company or the other Members;

B) that the other Members did not give informed consent to such

conduct by Defendant;

C) that the Company or the other Members were harmed by such

actions; and

D) that the actions of Defendant were a substantial factor in causing

such harm.

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Reference: Nicholson v. Evans, 642 P.2d 727, 730; also see

Stevenson 3rd East v. Watt, 2009 UT App 137 (Applying corporate

fiduciary duties to managers of limited liability companies).

3. ELEMENTS OF BREACH OF FIDUCIARY DUTY OF CARE

the Company and all of the other Members have alleged that Defendant

breached the fiduciary duty of care he owed to the Company and the other

Members. Because Defendant was exercising management authority over

the Company and owed a fiduciary duty of care to the Company and the

other Members, to recover on this claim, the Company or the other

Members must prove all of the following:

A) that Defendant acted on the behalf of the Company and the other

Members for the purpose of managing and operating the Company;

B) that Defendant failed to act as a reasonably careful manager using all

reasonable inquiry, diligence, and prudence or otherwise breached an

established standard of care.

C) the Company or the other Members were harmed; and

D) the conduct of Defendant was a substantial factor in causing such

harm.

Reference: McLaughlin v. Schenk, 2009 UT 64, ¶16 (“[D]irectors

and officers are required to carry out their corporate duties in good faith,

with prudent care, and in the best interest of the corporation.”). See also

Stevenson 3rd East v. Watt, 2009 UT App 137 (Applying corporate

fiduciary duties to managers of limited liability companies).

3. BREACH OF FIDUCIARY DUTY OF CARE BY

COMMINGLING

“Commingling” occurs when a fiduciary mixes the accounts, funds, or

expenses of the company managed by the fiduciary with the fiduciary’s

personal accounts, funds, or expenses, or of another company’s accounts,

funds, or expenses.

Reference: Glazer v. Kurman, 384 Pa. 283, 120 A.2d 892, 894

(1956)

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4. BURDEN OF PROOF FOR COMMINGLED ACCOUNTS

If you find that Defendant commingled any expenses of the

Company, then Defendant bears the burden of proving that any and all

expenses charged to the Company were for the benefit of the Company

and the other Members and were not for the benefit of Defendant or his

other companies. To prove that commingled expenses were for the

Company, Defendant must provide evidence that specifically shows an

expense was for the benefit of the Company, and he cannot rely on a

general presumption or allegation that certain types of charges were

generally for the Company.

Reference: Utah Foundry & Mach. Co. v. Utah Gas, 42 Utah 533,

541-42 (1912); In re Green, 2012 WL 3028462, p. 6 (Bkrtcy.W.D.Mo.)

(citing McMerty v. Herzog, 710 F.2d 429, 430 (8th Cir. 1983)) (once it is

has established that funds used for personal expenses were those of the

LLC, the burden should then shift to the commingling party to show what

proportion was not embezzled); Clement v. Clement, 260 A.2d 728, 729-

30 (Pa. 1970) (“where a partner fails to keep a record of partnership

transactions, and is unable to account for them, every presumption will be

made against him. Likewise, where a partner commingles partnership

funds with his own and generally deals loosely with partnership assets he

ought to have to shoulder the task of demonstrating the probity of his

conduct”) (internal quotations and citations omitted).

5. FIDUCIARY DUTY TO ACCOUNT TO COMPANY FOR

BENEFITS OR PROFITS

Unless he first obtained approval of the other Members of the

Company, Defendant had the fiduciary duty to account for, hold as trustee,

and pay to the Company any profit or benefit derived by Defendant from:

(a) any transaction connected with the conduct of the Company’s

business; or

(b) any use by Defendant of the Company property, including

confidential or proprietary information or other matters entrusted to

Defendant in the capacity of a member or manager.

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Reference: Utah Code § 48-3a-409(2) (Utah Revised Uniform

Limited Liability Company Act); Utah Code § 48-2c-807(2) (prior to July

2013).

6. Utah Code § 48-3a-409. Standards of conduct for members

and managers.

(1) A member of a member-managed limited liability company

owes to the limited liability company and, subject to Subsection 48-3-

901(2), the other members the fiduciary duties of loyalty and care stated in

Subsections (2) and (3).

(2) The duty of loyalty of a member in a member-managed limited

liability company includes the duties:

(a) to account to the limited liability company and to hold as

trustee for it any property, profit, or benefit derived by the member:

(i) in the conduct or winding up of the limited liability company's

activities;

(ii) from a use by the member of the limited liability company's

property; or

(iii) from the appropriation of a limited liability company

opportunity;

(b) to refrain from dealing with the limited liability company in the

conduct or winding up of the limited liability company's activities as or on

behalf of a person having an interest adverse to the limited liability

company; and

(c) to refrain from competing with the limited liability company in

the conduct of the limited liability company's activities before the

dissolution of the limited liability company.

(3) The duty of care of a member in a member-managed limited

liability company in the conduct and winding up of the limited liability

company's activities is to refrain from conduct or inaction that constitutes:

(a) gross negligence;

(b) intentional misconduct; or

16

(c) an intentional violation of law.

(4) A member in a member-managed limited liability company or a

manager-managed limited liability company shall discharge the duties

under this chapter or under the operating agreement and exercise any

rights consistently with the contractual obligation of good faith and fair

dealing.

(5) It is a defense to a claim under Subsection (2)(b) and any

comparable claim in equity or at common law that the transaction was fair

to the limited liability company.

(6) All of the members of a member-managed limited liability

company or a manager-managed limited liability company may authorize

or ratify, after full disclosure of all material facts, a specific act or

transaction that otherwise would violate the duty of loyalty.

(7) In a manager-managed limited liability company, the following

rules apply:

(a) Subsections (1), (2), (3), and (5) apply to the manager or

managers and not the members, except that the operating agreement of a

limited liability company may apply the duty stated in Subsection (2)(c) to

a member.

(b) The duty stated under Subsection (2)(c) continues until winding

up is completed.

(c) Subsection (4) applies to the members and managers.

(d) Subsection (6) applies only to the members.

(e) A member does not have any fiduciary duty to the limited

liability company or to any other member solely by reason of being a

member.

7. In the case of an LLC, it is absolutely necessary to thoroughly read

and understand the applicable operating agreement.

48-3a-112. Operating agreement -- Scope, functions, and limitations.

(1) Except as otherwise provided in Subsections (3) and (4), the

operating agreement governs:

17

(a) relations among the members as members and between the

members and the limited liability company;

(b) the rights and duties under this chapter of a person in the

capacity of manager;

(c) the activities and affairs of the limited liability company and

the conduct of those activities and affairs; and

(d) the means and conditions for amending the operating

agreement.

(2) To the extent the operating agreement does not provide for a

matter described in Subsection (1), this chapter governs the matter.

(3) An operating agreement may not:

(a) vary a limited liability company's capacity under Section 48-3a-

105 to sue and be sued in its own name;

(b) vary the law applicable under Section 48-3a-106;

(c) vary any requirement, procedure, or other provision of this

chapter pertaining to:

(i) registered agents; or

(ii) the division, including provisions pertaining to records

authorized or required to be delivered to the division for filing under this

chapter;

(d) vary the provisions of Section 48-3a-204;

(e) eliminate the duty of loyalty or the duty of care, except as

otherwise provided in Subsection (4);

(f) eliminate the contractual obligation of good faith and fair

dealing under Subsection 48-3a-409(4), but the operating agreement may

prescribe the standards, if not unconscionable or against public policy, by

which the performance of the obligation is to be measured;

(g) relieve or exonerate a person from liability for conduct

involving bad faith, willful misconduct, or recklessness;

(h) unreasonably restrict the duties and rights under Section 48-3a-

410, but the operating agreement may impose reasonable restrictions on

18

the availability and use of information obtained under that section and

may define appropriate remedies, including liquidated damages, for a

breach of any reasonable restriction on use;

(i) vary the causes of dissolution specified in Subsections 48-3a-

701(4)(a) and (5);

(j) vary the requirement to wind up the limited liability company's

activities and affairs as specified in Subsections 48-3a-703(1), (2)(a), and

(5);

(k) unreasonably restrict the right of a member to maintain an

action under Part 8, Action By Members;

(l) vary the provisions of Section 48-3a-805, but the operating

agreement may provide that the limited liability company may not have a

special litigation committee;

(m) vary the right of a member to approve a merger, interest

exchange, conversion, or domestication under Subsections 48-3a-

1023(1)(b), 48-3a-1033(1)(b), 48-3a-1043(1)(b), or 48-3a-1053(1)(b); or

(n) except as otherwise provided in Section 48-3a-113 and

Subsection 48-3a-114(2), restrict the rights under this chapter of a person

other than a member or manager.

(4) Subject to Subsection (3)(g), without limiting other terms that

may be included in an operating agreement, the following rules apply:

(a) The operating agreement may specify the method by which a

specific act or transaction that would otherwise violate the duty of loyalty

may be authorized or ratified by one or more disinterested and

independent persons after full disclosure of all material facts.

(b) To the extent the operating agreement of a member-managed

limited liability company expressly relieves a member of a responsibility

that the member would otherwise have under this chapter and imposes the

responsibility on one or more other members, the operating agreement

may, to the benefit of the member that the operating agreement relieves of

the responsibility, also eliminate or limit any fiduciary duty that would

have pertained to the responsibility.

(c) If not unconscionable or against public policy, the operating

agreement may:

19

(i) alter or eliminate the aspects of the duty of loyalty stated in

Subsections 48-3a-409(2) and (9);

(ii) identify specific types or categories of activities that do not

violate the duty of loyalty;

(iii) alter the duty of care, but may not authorize intentional

misconduct or knowing violation of law; and

(iv) alter or eliminate any other fiduciary duty.

(5) The court shall decide as a matter of law whether a term of an

operating agreement is unconscionable or against public policy under

Subsection (3)(f) or (4)(c). The court:

(a) shall make its determination as of the time the challenged term

became part of the operating agreement and by considering only

circumstances existing at that time; and

(b) may invalidate the term only if, in light of the purposes,

activities, and affairs of the limited liability company, it is readily apparent

that:

(i) the objective of the term is unconscionable or against public

policy; or

(ii) the means to achieve the term's objective is unconscionable or

against public policy.

Enacted by Chapter 412, 2013 General Session

8. Indemnification. Utah Code § 48-3a-408(2): A limited liability company

shall indemnify and hold harmless a person with respect to any claim or demand

against the person and any debt, obligation, or other liability incurred by the

person by reason of the person's former or present capacity as a member or

manager, if the claim, demand, debt, obligation, or other liability does not arise

from the person's breach of Section 48-3a-405, 48-3a-407, or 48-3a-409.

a. Although it is reasonably clear that the model act from which this

section is derived was attempting to codify an indemnification based in

part on the business judgment rule, the language adopted by the Utah

Legislature can be read more broadly and now creates ambiguity if an

operating agreement adds or alters the fiduciary duties associated with 48-

20

3a-409 without also adding a related indemnification provision to the

operating agreement.

B. Breach of Contract (e.g., operating agreements, shareholder agreements, or

bylaws)

1. ELEMENTS OF A BREACH OF CONTRACT

In order to recover damages for a breach of contract, the other Members of

the Company must prove each of these four things:

1) that there was a contract between the other Members and Defendant;

2) that the other Members did what the contract required them to do, or

that they were excused from performing their obligations due to a material breach

by Defendant;

3) that Defendant breached the contract by not performing his obligations;

and

4) that the other Members were damaged because Defendant breached the

contract.

Reference: MUJI 2d. CV2102

2. BREACH OF CONTRACT

The other Members of the Company claim that Defendant breached the

Operating Agreement. A party to a contract breaches the contract if he fails to do

what he promised to do in the contract.

Reference: MUJI CV2115

C. Expulsion of an LLC Member

1. 48-3a-602. Events causing dissociation.

A person is dissociated as a member when:

21

(1) the limited liability company has notice of the person's express will to

withdraw as a member, but, if the person specified a withdrawal date later than

the date the limited liability company had notice, on that later date;

(2) an event stated in the operating agreement as causing the person's

dissociation occurs;

(3) the person's entire interest is transferred in a foreclosure sale under

Subsection 48-3a-503(6);

(4) the person is expelled as a member pursuant to the operating

agreement;

(5) the person is expelled as a member by the unanimous consent of the

other members if:

(a) it is unlawful to carry on the limited liability company's activities and

affairs with the person as a member;

(b) there has been a transfer of all the person's transferable interest in the

limited liability company, other than:

(i) a transfer for security purposes; or

(ii) a charging order in effect under Section 48-3a-503 which has not been

foreclosed;

(c) the person is a corporation, and:

(i) the limited liability company notifies the person that it will be expelled

as a member because the person has filed a statement of dissolution or the

equivalent, its charter has been revoked, or its right to conduct business has been

suspended by the jurisdiction of its incorporation; and

(ii) not later than 90 days after the notification the statement of dissolution

or the equivalent has not been revoked or its charter or right to conduct business

has not been reinstated; or

(d) the person is an unincorporated entity that has been dissolved and

whose business is being wound up;

(6) on application by the limited liability company or a member in a

direct action under Section 48-3a-801, the person is expelled as a member by

judicial order because the person:

22

(a) has engaged or is engaging in wrongful conduct that has affected

adversely and materially, or will affect adversely and materially, the limited

liability company's activities and affairs;

(b) has committed willfully or persistently, or is committing willfully

or persistently, a material breach of the operating agreement or a duty or

obligation under Section 48-3a-409; or

(c) has engaged or is engaging in conduct relating to the limited

liability company's activities and affairs which makes it not reasonably

practicable to carry on the activities and affairs with the person as a

member;

(7) in the case of an individual:

(a) the individual dies; or

(b) in a member-managed limited liability company:

(i) a guardian or general conservator for the individual is appointed; or

(ii) a court orders that the individual has otherwise become incapable of

performing the individual's duties as a member under this chapter or the operating

agreement;

(8) in a member-managed limited liability company, the person:

(a) becomes a debtor in bankruptcy;

(b) executes an assignment for the benefit of creditors; or

(c) seeks, consents to, or acquiesces in the appointment of a trustee,

receiver, or liquidator of the person or of all or substantially all the person's

property;

(9) . . .

Enacted by Chapter 412, 2013 General Session

2. Expulsion of an LLC member pursuant to Utah Code § 48-3a-602(6)(c):

The third independent basis on which a member may be judicially expelled from

an LLC is upon the Court’s determination that the member “has engaged or is

engaging in conduct relating to the limited liability company's activities and

affairs which makes it not reasonably practicable to carry on the activities and

23

affairs with the person as a member.” Utah Code § 48-3a-602(6)(c). This third

provision of the judicial expulsion statute is unique because it does not contain “a

wrongfulness element, [instead] merely requiring ‘conduct’ by the member that

makes it ‘not reasonably practicable to carry on the business’ with the member’s

participation.” All Saints University of Medicine Aruba v. Chilana, 2012 WL

6652510, *14 (N.J. Super. A.D., Dec. 24, 2012). Thus, unlike subsections (a) and

(b) of section 48-3a-602(6), there is no requirement that a plaintiff demonstrate

the defendant engaged in wrongful conduct to obtain an order of expulsion. Nor

is it necessary to show that the company actually suffered harm as a result of the

defendant’s conduct. Unlike subsection (a), “subsection (c) has a prospective

orientation, examining whether, looking forward, the member’s conduct ‘makes it

not reasonably practicable to carry on the businesses’ with that member.” Id. As

the Chilana court observed, it is “easier to justify [expulsion] under subsection (c)

than (a).” Id.

In Giles v. Giles Land Co., L.P., 279 P.3d 139 (Kan. 2012), the Kansas

Court of Appeals interpreted the same “not reasonably practicable” standard set

forth in Kansas Uniform Partnership Act, which parallels almost verbatim the

language of Utah Code Ann. section 48-3a-602(6)(c). The court affirmed the trial

court’s expulsion of a member of the partnership, noting that the expelled partner

did not trust the other partners, nor did the other partners trust the expelled

partner. Id. at 142. In addition, the Giles court concluded that the relationship

among the partners “was irretrievably broken.” Id. at 142–43. In support of this

conclusion, the court noted that the other partners were unable to communicate

with the expelled partner and that each of the other partners testified that “he or

she believed that it was in the best interest of the partnership to not have [the

expelled partner] remain a partner.” Id. Indeed the court characterized the

partners’ relationship in Giles as one of “animosity” and “distrust”. Id. at 751.

The Chilana court reached the same conclusion, noting the confrontational

actions of the members and quoting the trial court’s finding that the members of

the limited liability company “cannot work together to advance the interests of the

LLC.” Chilana, 2012 WL 6652510, at *17.

3. Case Law on Materiality, the First Breach Doctrine, and Other Expulsion

Issues. “It is well-settled law that one party's breach excuses further performance

by the non-breaching party if the breach is material.” Orlob v. Wasatch Med.

Mgmt., 2005 UT App 430, ¶ 26, 124 P.3d 269 (emphasis added). “Whether a

particular breach is material is a conclusion of law to be reviewed independently.”

Saunders v. Sharp, 840 P.2d 796, 806 (Utah Ct. App. 1992). Materiality turns in

part on the nature of the promise breached and whether the promises were truly

dependent in the sense that the aggrieved party would not have given its promise

24

without the corresponding promise that was breached. “[A] party committing a

substantial breach of a contract cannot maintain an action against the other

contracting party . . . for a subsequent failure to perform if the promises are

dependent.” Id. (quoting Rogers v. Relyea, 601 P.2d 37, 41 (Mont. 1979). As the

Rogers court stated, “[a] substantial or material breach is one which touches the

fundamental purposes of the contract and defeats the object of the parties in

making the contract. . . . Implicit in the court’s order was the fact that the

covenants were dependent.” Rogers, 601 P.2d at 41.

This well-settled doctrine of first breach has been recognized in the

seminal Utah case regarding the removal of a member, CCD, L.C. v. Millsap,

2005 UT 42. In CCD, the Utah Supreme Court noted that “[t]he district court

applied this doctrine to conclude that Mr. Millsap’s misuse of company funds

constituted a breach of the initial and amended operating agreements that

deprived him of the right to enforce the operating agreement's retirement

provisions.” Id. at ¶ 29; 116 P.3d at 373. The Court also noted that “under the

first breach rule a party first guilty of a substantial or material breach of contract

cannot complain if the other party thereafter refuses to perform. He can neither

insist on performance by the other party nor maintain an action against the other

party for a subsequent failure to perform. Id. (citations and quotations omitted).

Judicial expulsion from a limited liability company is appropriate when a

member’s misdeeds or behavior “could reasonably be interpreted to satisfy one or

more of these statutory events.” CCD, L.C. v. Millsap, 2005 UT 42, ¶16, 116

P.3d 366. Further, when undisputed material facts demonstrate conduct that

satisfies one of the statutory elements enunciated in §48-2c-710(3), an order of

summary judgment expelling a member from a limited liability company is

appropriate. Id.

In CCD, L.C. v. Millsap, the Utah Supreme Court rejected Millsap’s

contention that his “indiscretions were not grave enough to permit expulsion”

because the total amount at issue was only $11,540.06 and because Millsap had

been sufficiently removed from company operations such that he “could no longer

adversely and materially affect CCD’s business.” 2005 UT at ¶¶ 31, 32; 116 P.3d

at 373. The Utah Supreme Court found that misappropriations totaling

$11,540.06 were material as a matter of law and that expulsion of Millsap was

proper upon a motion for summary judgment. 2005 UT at ¶ 35; 116 P.3d at 374.

However, the Court’s determination of materiality may have been influenced by

the fact that Millsap had previously taken much larger amounts from CCD on an

earlier occasion and that previous indiscretion was forgiven by the other

members, essentially making the $11,540.06 misappropriation a second offense.

25

4. Consequences of Expulsion. Holladay v. Storey, 2013 UT App. 158, provides

important new precedent on the issue of what an expulsion of an LLC means in financial terms

for the company and the member. The appellant in Holladay “argue[d] that the trial court erred

by retroactively setting the effective date of his expulsion because, pursuant to Utah Code

section 48-2c-710, the date of expulsion must be the same as the date of judicial determination of

expulsion.” 2013 UT App 158, ¶ 17. In rejecting this argument, the Utah Court of Appeals

discussed the factors that governed the trial court’s exercise of discretion. The Utah Court of

Appeals first noted that “the objective of the Act is to allow members to seek judicial

determination for an expulsion based on another member's wrongful acts,” id. ¶ 24, and reasoned

that this objective would be undermined if an expelled member could continue to reap a profit

from the Company despite having engaged in the wrongful conduct that led his expulsion:

If the court were precluded from valuing an expelled member's interest as of a particular

date based on that member's misconduct, it would undermine the effectiveness of the

right to judicially expel a member pursuant to subsection 48-2c-710(3). See id. § 48-2c-

710(3) ("A member of a company may be expelled . . . by judicial determination that the

member . . . has engaged in wrongful conduct that adversely and materially affected the

company's business."). If the court is not permitted to set the date for the valuation of the

expelled member's interest in the company to the time of the commission of misconduct

that led to expulsion, then that interest could not be valued until the company is

dissolved. This would mean that the expelled member would continue to benefit from

profits or, likewise, to suffer any losses of the company until such time as the company

dissolves.

Id. ¶ 30.

The Court further relied on the decision in CCD, LC v. Millsap, 2005 UT 42, ¶¶ 18-21,

116 P.3d 366, 371, which Utah Supreme Court decision rejected a bare mechanical application

of subsection 48-2c-710(3) without reference to the purpose and policy considerations associated

with a member expulsion. 2005 UT 42, ¶ 20, 116 P.3d at 371. Indeed, the Utah Court of

Appeals in Holladay noted that “expulsion of Millsap precluded him from receiving retirement

26

benefits and thus reaping a profit, despite having engaged in the wrongful misappropriation that

had led to his expulsion.” 2013 UT App 158, ¶ 31. Based on the purpose and policy

considerations inherent in subsection 48-2c-710(3), the Court of Appeals in Holladay then

approved the fact that the trial court properly prevented the expelled member from reaping any

benefit from the necessary delay between a request for judicial expulsion and the final

determination of expulsion:

Here, by backdating [appellant’s] expulsion and the valuation of his interest to December

31, 2005, the trial court prevented [appellant] Storey from reaping the benefits of the

increased profits the Company enjoyed after his wrongful acts were discovered and

stopped but before judicial expulsion could be accomplished. Accordingly, the trial court

denied Storey the windfall he would have obtained had his interest been valued as of the

date of the trial court's determination of expulsion in 2009.

Id. ¶ 32.

In sum, although the trial court has the discretion to set the valuation date of the

Company based on the equities of the case, the overriding considerations for determining the

valuation are (1) the date of the alleged misconduct, id. ¶ 33, (2) the date other members acted

pursuant to the terms of the operating agreement or subsection 48-2c-710(3) to remove the

member from company operations, id., and (3) the logical policy of preventing the expelled

member from reaping any profits or suffering any losses of the company after the remedy of

expulsion is sought, id. ¶¶ 30, 32. No other factors are identified by the Court of Appeals in

Holladay for determining the date of valuation of the interest of an expelled member.

Moreover, the Court of Appeals in Holladay required a valuation of the interest and

complete disassociation of the member despite the fact that the statute allowed the member to

continue as an assignee of the profits interest under the statute without any other member rights.

At all times relevant to the Holladay case, the plain language of the applicable statute provides

27

that a judicially expelled member is treated as a mere assignee with no rights to participate in the

company’s management or affairs. See Utah Code Ann. § 48-2c-1102.

5. 48-3a-603. Effect of dissociation.

(1) If a person is dissociated as a member:

(a) the person's right to participate as a member in the management and

conduct of the company's activities and affairs terminates;

(b) if the limited liability company is member-managed, the person's

duties and obligations under Section 48-3a-409 as a member end with regard to matters

arising and events occurring after the person's dissociation; and

(c) subject to Section 48-3a-504 and Part 10, Merger, Interest Exchange,

Conversion, and Domestication, any transferable interest owned by the person in the

person's capacity as a member immediately before dissociation as a member is owned by

the person solely as a transferee.

(2) A person's dissociation as a member does not of itself discharge the

person from any debt, obligation, or other liability to the limited liability company or the

other members which the person incurred while a member.

Enacted by Chapter 412, 2013 General Session

6. 48-3a-102. Definitions.

As used in this chapter:

…

(28) "Transfer" includes:

(a) an assignment;

(b) a conveyance;

(c) a sale;

(d) a lease;

(e) an encumbrance, including a mortgage or security interest;

(f) a gift; and

(g) a transfer by operation of law.

(29) "Transferable interest" means the right, as initially owned by a person

in the person's capacity as a member, to receive distributions from a limited liability

company in accordance with the operating agreement, whether or not the person remains

a member or continues to own any part of the right. The term applies to any fraction of

the interest by whomever owned.

28

(30) "Transferee" means a person to which all or part of a transferable

interest has been transferred, whether or not the transferor is a member. The term

includes a person that owns a transferable interest under Subsection 48-3a-603(1)(c).

D. Control Over Decisions. 48-3a-407. Management of limited liability company.

(1) A limited liability company is a member-managed limited liability company unless

the operating agreement:

(a) expressly provides that:

(i) the limited liability company is or will be "manager-managed";

(ii) the limited liability company is or will be "managed by managers"; or

(iii) management of the limited liability company is or will be "vested in managers"; or

(b) includes words of similar import.

(2) In a member-managed limited liability company, the following rules apply:

(a) Except as otherwise provided in this chapter, the management and conduct of the

limited liability company are vested in the members.

(b) Each member has equal rights in the management and conduct of the limited liability

company's activities and affairs.

(c) A difference arising among members as to a matter in the ordinary course of the

activities of the limited liability company shall be decided by a majority of the members.

(d) An act outside the ordinary course of the activities and affairs of the limited liability

company may be undertaken only with the affirmative vote or consent of all members.

(e) The affirmative vote or consent of all members is required to approve a transaction

under Part 10, Merger, Interest Exchange, Conversion, and Domestication.

(f) The operating agreement may be amended only with the affirmative vote or consent of

all members.

(3) In a manager-managed limited liability company, the following rules apply:

(a) Except as expressly provided in this chapter, any matter relating to the activities and

affairs of the limited liability company is decided exclusively by the manager, or, if there is more

than one manager, by a majority of the managers.

(b) Each manager has equal rights in the management and conduct of the limited liability

company's activities and affairs.

(c) The affirmative vote or consent of all members is required to:

(i) approve a transaction under Part 10, Merger, Interest Exchange, Conversion, and

Domestication;

(ii) undertake any act outside the ordinary course of the limited liability company's

activities and affairs; or

(iii) amend the operating agreement.

(d) A manager may be chosen at any time by the consent of a majority of the members

and remains a manager until a successor has been chosen, unless the manager at an earlier time

resigns, is removed, or dies, or, in the case of a manager that is not an individual, terminates. A

manager may be removed at any time by the consent of a majority of the members without notice

or cause.

(e) A person need not be a member to be a manager, but the dissociation of a member

that is also a manager removes the person as a manager. If a person that is both a manager and a

29

member ceases to be a manager, that cessation does not by itself dissociate the person as a

member.

(f) A person's ceasing to be a manager does not discharge any debt, obligation, or other

liability to the limited liability company or members which the person incurred while a manager.

(4) An action requiring the vote or consent of members under this chapter may be taken

without a meeting, and a member may appoint a proxy or other agent to vote, consent, or

otherwise act for the member by signing an appointing record, personally or by the member's

agent.

(5) The dissolution of a limited liability company does not affect the applicability of this

section. However, a person that wrongfully causes dissolution of the limited liability company

loses the right to participate in management as a member and a manager.

(6) A limited liability company shall reimburse a member for an advance to the limited

liability company beyond the amount of capital the member agreed to contribute.

(7) A payment or advance made by a member which gives rise to an obligation of the

limited liability company under Subsection (6) or Subsection 48-3a-408(1) constitutes a loan to

the limited liability company which accrues interest from the date of the payment or advance.

(8) A member is not entitled to remuneration for services performed for a member-

managed limited liability company, except for reasonable compensation for services rendered in

winding up the activities of the limited liability company.

Enacted by Chapter 412, 2013 General Session