Objective memorandum · 90 minutes
Predict whether an LLC manager breached fiduciary duties and what relief the members can seek. You have 90 minutes. To: Associate. Use the File and the Library only, then compare your draft with the rubric and the model answer below.
To: Associate. From: Rafael Okonkwo, Partner. Re: Crestline Logistics LLC. Our client, Nina Patel, owns 40 percent of Crestline Logistics, LLC. Its manager, Gordon Hale, owns 60 percent. Ms. Patel believes Mr. Hale took a business opportunity that belonged to the LLC. Please write an objective memorandum on (1) whether Mr. Hale breached a fiduciary duty and (2) what relief Ms. Patel may seek and how she must proceed. Use only the Library.
Article 4: The Company shall be managed by its Manager, Gordon Hale. Article 6: The Manager shall devote reasonable time to the Company's business and may engage in other business ventures. The Manager shall not be liable to the Company or Members for good-faith decisions. Article 9: Nothing in this Agreement eliminates the Manager's obligations under Franklin law to act in good faith.
Crestline ships refrigerated goods to grocery chains. In May, a grocery chain called Mr. Hale and offered Crestline a three-year contract to ship frozen goods from a new depot, which Crestline could handle with its trucks. Mr. Hale told Ms. Patel nothing. He formed Hale Cold Freight LLC in June and took the contract for it, using two Crestline drivers on Crestline's time and the customer's contact list from Crestline's files. Ms. Patel learned of this in October. The contract is worth about $900,000 a year in revenue. Crestline had cash and trucks available.
(a) A manager owes the company and its members the duties of loyalty and care. (b) The duty of loyalty includes refraining from usurping a company opportunity, competing with the company, or using company property or information for the manager's own benefit, unless the operating agreement or the members, after full disclosure, authorize it. (c) An operating agreement may define but may not eliminate the duty of loyalty or the obligation of good faith and fair dealing. (d) A member may bring a derivative action on behalf of the company after written demand on the manager unless demand would be futile.
A member of a company took a contract that the company had been offered, arguing that the company lacked funds. The court applied a four-part test: the opportunity is in the company's line of business, the company has an interest or expectancy in it, the company has the financial ability to take it, and taking it puts the fiduciary in conflict with the company. If the test is met, the fiduciary must give the company the opportunity or account for the profits, and disclosing it and obtaining the company's rejection is the only defense. A general clause allowing outside business does not authorize taking a specific opportunity offered to the company.
The court held that a member of an LLC who wants to recover for harm to the company must proceed derivatively, because the recovery belongs to the company, unless the member has an injury separate from that of the company. The remedy for usurpation is disgorgement of profits and a constructive trust for the company, and a demand on the manager is futile where the manager is the wrongdoer and controls the company.
Graders score a response against these criteria, and every one of them depends on using only the facts in the File and only the rules in the Library, so treat the list as a check for your draft after the first pass and again before you stop writing.
Next task: A motion to dismiss for lack of personal jurisdiction. MPT document library