Litigation Client Alert – Changes to Florida LLC Law

In 2013, the Florida Legislature adopted a new LLC act that created Chapter 605 of the Florida Statutes. The revised law became effective for all Florida limited liability companies on Jan. 1, 2015, regardless of when they were organized. The Florida Legislature adopted amendments to Chapter 605 that became effective on July 1, 2015.

Many disputes to which the revised law will apply have only recently begun litigation. Some of the common issues giving rise to disputes that I have seen in my practice involve a company’s operating agreement (or lack thereof), the duties that the members and managers owe to each other and the company, the company’s obligation regarding records that must be kept, a member’s rights regarding inspection of the records and what judicial recourse members have if their right of inspection is denied.

I view the changes to the law through the lens of a litigator whose goal is to advise clients on how to avoid LLC disputes and place them in a position to prevail if a dispute leads to a lawsuit.

Here are my takeaways as a litigator.

Operating agreements are not necessarily formal, written documents. An operating agreement is the governing document of an LLC that directs its business and the relationships between the members, the managers and the company. Under the revised law, the term “operating agreement” refers not only to written or oral agreements, but also to agreements that may exist in other forms, such as “implied, in a record, or in any combination thereof” (Fla. Stat. § 605.0102[45] [2015]).

Section 605.0102(59) defines “record” as any information that can be inscribed in a tangible medium or stored in electronic or other medium, so long as it can be retrieved in perceivable form. Accordingly, the definition of an operating agreement is extremely broad under the revised law, and anyone becoming a member of an LLC needs to perform due diligence and obtain representations regarding the operating agreement.

Under no circumstances would I recommend that any client rely on an implied or oral operating agreement, but if you don’t have a written agreement, note that this may be the evidence that will help you win your case.

The default rules for operating agreements have changed. The revised law provides that an operating agreement may not “eliminate the duty of loyalty or the duty of care under section 605.04091, except as otherwise provided in subsection (4)” (§ 605.0105[e]). Section 605.0105(4)(b) provides that to the extent the operating agreement of a member-managed LLC expressly relieves a member of responsibility that he or she otherwise would have under Chapter 605 and imposes the responsibility on one or more other members, the operating agreement may also eliminate or limit a duty or obligation that would have pertained to the responsibility, to the benefit of the member relieved of the responsibility. However, such a provision may not relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law, according to section 605.0105(3)(g).

The revised law also provides that an operating agreement may not “eliminate the obligation of good faith and fair dealing under section 605.04091, but the operating agreement may prescribe the standards by which the performance of the obligation is to be measured if the standards are not manifestly unreasonable” (§ 605.0105[f]).

Under Section 605.0105(4)(c), if not manifestly unreasonable, the operating agreement may alter or eliminate the aspects of the duty of loyalty under Section 605.04091(2) and identify specific categories of activities that do not violate the duty of loyalty or alter the duty of care. However, they may not authorize willful or intentional misconduct or a knowing violation of law, or alter or eliminate any other fiduciary duty.

The revised law provides standards of conduct for members in member-managed LLCs and for managers in manager-managed LLCs (§ 605.04091). Each manager of a manager-managed LLC and member of a member-managed LLC owes fiduciary duties of loyalty and care to the company and its members (§ 605.04091[1]).

The duty of loyalty includes: accounting to the limited liability company and holding as trustee for it any property, profit, or benefit derived by the manager or member in the conduct or winding up of the company’s activities and affairs, from the use by the member or manager of the company’s property or from the appropriation of a company opportunity; refraining from dealing with the company in the conduct or winding up of the company’s activities and affairs as, or on behalf of, a person having an interest adverse to the company, except to the extent that a transaction satisfies the requirements of section 605.04092; and refraining from competing with the company in the conduct of the company’s activities and affairs before the dissolution of the company (§ 605.04091[2]). The duty of care in the conduct or winding up of the company’s activities and affairs is to refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law (§ 605.04091[3]).

Address non-competes in operating agreement. Because the revised law contains a statutory non-compete as part of the fiduciary duty of loyalty that applies to managers of a manager-managed LLC and to all members of a member-managed LLC, and the terms of the statutory non-compete are far from clear, the operating agreement should expressly set out the company’s specific terms and conditions related to non-competes in order to avoid any uncertainties.

Law clarifies access to LLC records. The revised law provides the list of specific records that are required to be maintained by an LLC and sets forth the different rights granted to members to inspect records, depending on whether the LLC is member-managed or manager-managed (§ 605.0410[1]).

In a member-managed LLC, the members are allowed unlimited access to specified records, but they have access rights to other records maintained by the company only to the extent that the other records are “material to the members’ rights and duties under the operating agreement or this chapter” (§ 605.0410[2]).

In a manager-managed LLC, the managers have the same access rights as those of members in a member-managed LLC. If a member of a manager-managed LLC seeks access to information, the member must make a demand in a record received by the company describing the information, why the information is sought and whether the information is directly connected to the member’s purpose. The standard for receiving access to information requires that the information be for a purpose “reasonably related to a member’s interest as a member.”

This differs from a member-managed LLC, in which members do not have to make such a record, and the information sought must only be “material to” the members’ rights and duties under the operating agreement (§ 605.0410[30]).

The revised law also provides for a court-ordered inspection of records. If an LLC does not allow a member, manager or other person who complies with section 605.0410(2)(a), (3)(a), (3)(b) or (4) to inspect and copy any records required by that section to be available for inspection, a circuit court may order inspection and copying of the records demanded, at the LLC’s expense (§ 605.0411[1]).

Review your operating agreement. Members and managers of Florida LLCs should review their operating agreements to determine whether they wish to make any changes in light of the revisions to the default rules set out in the revised law. There are a number of issues that commonly give rise to disputes, either because an LLC lacks a written operating agreement, or the existing operating agreement is insufficient or vague.

Additionally, it is not uncommon for disputes to arise from actions taken by principals of Florida LLCs relating to the fiduciary duties contained in the revised law. Similarly, disputes often arise from the interference – real or perceived – of a member’s or manager’s rights regarding the LLC’s record-keeping obligations and the member’s or manager’s rights to inspect the records.

If you believe that there may be a violation of Florida law regarding the management or operation of an LLC, you should seek the advice of legal counsel to help you understand your rights and determine the best course of action. As with most legal issues, being proactive is key. Consulting with an attorney early may make the difference in keeping the dispute from going to court or in winning your case at trial.

A. Felipe Guerrero is a shareholder in the Orlando office of Dean Mead, where he focuses his practice on commercial and real estate litigation. He is a past president of the Hispanic Bar Association of Central Florida. Contact him at 407.428.5165 or fguerrero@www.deanmead.com.