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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 91961
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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Does deliberately stopping a business from opening constitute

Resolved Question:

Does deliberately stopping a business from opening constitute a breach of fiduciary duty?

We are a 4 member LLC (in CA) working on building a preschool. One of the members of the LLC who is handling the daycare license application is putting the licensing on hold.
The business is losing several thousand dollars every day as we can't open the preschool.
Does this constitute a breach of fiduciary duty?
The relationship among members have gone bad over the last few months.We suggested opening the business and then selling the business if we don't want to operate together.
But they don't want to sell the business as well.
Submitted: 1 year ago.
Category: Business Law
Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your question. I look forward to working with you to provide you the information you are seeking for educational purposes only.

If one member of the LLC is failing to perform their obligation to the LLC and that is causing harm to the business, then this is what is considered breach of fiduciary duty to the LLC. One member cannot act in a manner that causes harm to the LLC, which is the definition of fiduciary duty. As they are causing harm to the LLC, they are breaching their duty and you can seek to remove them from the LLC and if they refuse, then the LLC needs an attorney to sue the member on behalf of the LLC to remove them and for damages caused by their breach of fiduciary duty.




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Customer: replied 1 year ago.

But the issue is our LLC is deadlocked - with each member owning 50%. How can we remove him from the LLC?

Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your response.

Unfortunately, the only way to do this in a deadlock is a suit on behalf of the LLC against him for breach of fiduciary duty.
Customer: replied 1 year ago.

If this happens, what happens to his investment in the LLC? Does the other member try to buyout the share?

Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your response.

The court would order some type of buyout of the member, such as the return of their investment, but you would also be seeking damages from him for his breach of duty which could offset the amount he is due and may even make him liable to pay the LLC for the damages, depending on how much damage he caused.
Customer: replied 1 year ago.

The same member is also alleging breach of fiduciary duty against me.


The reason is that he is alleging that I didn't provide the partnership tax returns on time. I did provide the K1s on time but forgot to send the partnership returns on time. Does this constitute a breach of fiduciary duty?

Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your response.

That is not a breach of fiduciary duty. It may be negligence, but it did not cause harm to the company nor did it cause the company to lose money like his actions are causing according to you.
Customer: replied 1 year ago.

Yes. It didn't cause any harm to the company. But he says that the tax returns prepared by our CPA were incorrect and since I signed the return, I am responsible for the errors. Since we have already amended the tax returns, does this still constitute a breach of fiduciary duty?

Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your response.

That is not a breach of duty it is simply an error made by the accountant and not you. He is grasping at straws to defend his refusal to perform.
Customer: replied 1 year ago.

Does this change if the margin of error was large and that I didn't review the return before signing?

Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your response.

It depends on whether you knew or should have known looking at the returns that they were wrong, but generally this would be negligence on the accountant who would be liable and this would not really be breach of duty, especially if it was corrected as opposed to his continued refusal to perform.
Customer: replied 1 year ago.

When you say accountant, do you mean the CPA who prepared the original returns? My partner claims that I should know that there are errors?


 


Actually the returns were amended by another CPA.

Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your response.

The CPA is liable, this is not a breach of fiduciary duty by you unless you intentionally caused the CPA to make a mistake. The other member is trying to use this to excuse his refusal to perform.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 91961
Experience: All corporate law, including non-profits and charitable fraternal organizations.
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