Also known as: obligations of loyalty · duty of loyalty
Written by attorneys · grounded in primary & secondary sources — see below
A fiduciary duty requiring a partner, member, or agent to account to the entity for any property, profit, or benefit derived in the conduct of its activities, to refrain from dealing with the entity on behalf of an adverse interest, and to refrain from competing with the entity before dissolution.
Odilia Okamura and Oswald Orozco formed a member-managed LLC to pursue renewable energy contracts. A client approached the LLC about a solar installation. Odilia later secured the contract for her separate company using the same site and specifications. The LLC sued Odilia to recover the profits she obtained from the project.
Oswald Orozco and Odin Obeng formed a limited partnership to operate charter vessels. Their agreement purported to eliminate any liability for self-dealing by general partners. When Oswald diverted a partnership opportunity to his own entity, Odin sued to enforce the statutory duty. The court refused to give effect to the attempted elimination.
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Otto Osman and Owen Ortega formed a general partnership to develop software. Their agreement attempted to eliminate the duty of loyalty for outside activities. Otto accepted a paid role with a direct competitor while managing the partnership. The other partner sued, and the court held the waiver ineffective.
Orlando Okafor retained counsel to defend him on fraud charges. During preparation, Okafor insisted on testifying falsely about key documents. Counsel refused to present the testimony and informed Okafor that disclosure to the court would follow if necessary. Okafor later claimed ineffective assistance based on divided loyalty.
Osprey Aviation, a limited partnership, received an offer to lease additional hangar space. General partner Odilia Okamura instead leased the space through her own entity and retained the profit. The limited partners sued for an accounting of the benefit. The court required Odilia to disgorge the proceeds to the partnership.
Oswald Orozco and Odin Obeng operated a general partnership selling aviation parts. Oswald proposed selling inventory to his own corporation at a below-market price. After full disclosure of the terms and his interest, both partners voted to approve the sale. A later dispute arose over whether the transaction violated the duty of loyalty.
Uniform acts prohibit alteration or elimination of the duty of loyalty except in narrowly defined circumstances involving good faith standards. Any attempt to waive the duty entirely is unenforceable.
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All partners must authorize or ratify the transaction after full disclosure of all material facts. Partial or misleading disclosure prevents valid ratification.
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Yes. A member in a member-managed LLC must account to the company for any profit derived from the appropriation of a company opportunity or use of company property.
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Counsel's duty of loyalty does not extend to assisting a client in committing perjury. Counsel may refuse to present false testimony and may disclose it to the court after attempting to dissuade the client.
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…a director's duty to exercise an informed business judgment is in the nature of a duty of care, as distinguished from a duty of loyalty. Here, there were no allegations of fraud, bad faith, or self-dealing, or proof thereof. Hence, it is presumed that the directors reached their business judgment in good faith, Allaun v.…