A Rare Washington Fiduciary Duty Case

Aug 12, 2020

The sale of an interest in an LLC and fiduciary duties in the context of such a sale were the subject of a recent Washington Court of Appeals decision Tersuli Construction Services, LLC v. Miletich, No 78906-6-I, 2020 WL 3268044 (Wn. App. May 18, 2020).

The LLC and Membership Buy-Out

Tersuli is a dispute between Ryan Miletich (“Miletich”) and Trent Gabel (“Gabel”), two equal members of Tersuli Construction Services, LLC (the “LLC”). Miletich and Gabel formed the LLC—a licensed general contracting business—in 2009 and successfully operated the business until a disagreement over its management arose in 2015.

To resolve the disagreement, Gabel agreed to buy out Miletich’s 50% interest for $350,000. The price would be paid in two installments—the first ($200,000) due two days after execution of the Purchase and Sale Agreement (the “Agreement), and the second ($150,000) due before December 31, 2016. The parties executed the Agreement on May 18, 2016, and Gabel timely delivered the first payment. However, Gabel ultimately refused to make the second payment as a dispute arose over whether Miletich’s actions before and after execution of the Agreement constituted a breach of the Agreement and Miletich’s fiduciary duties.

The Agreement and Dispute

In the Agreement, Miletich made several representations and warranties. In particular, Miletich represented and warranted that he never solicited customers from the LLC. Additionally, the Agreement contained future non-solicitation terms restricting Miletich from directly or indirectly soliciting business from the LLC’s existing customers or employees for 12 months after the execution of the Agreement.  Significantly, while the parties executed the Agreement on May 18, 2016, the effective date of the transfer of Miletich’s rights and interests under the Agreement was backdated to January 1, 2016.

On May 4, 2016, Miletich formed Armata Construction Services, LLC (“Armata”). Apparently, even before forming Armata, Miletich “undertook extensive and continuing efforts to funnel certain business relationships away from Tersuli to Armata” Tersuli Construction Services, LLC, slip op. at 5.

Gabel caught wind of Miletich’s actions and sent a written demand in December 2016 outlining Miletich’s various breaches and stating that Gabel would not pay the remaining balance as required by the Agreement due to Miletich’s breach. Miletich did not respond, and Gabel sued Miletich for, inter alia, breach of the Agreement and breach of fiduciary duty.

At trial, the court ruled in Gabel’s favor. The Court awarded Gabel a judgment for lost profits, prejudgment interest on the lost profits, and reasonable attorney fees and costs.


There were several different arguments made by Miletich on appeal—this blog is most interested in his arguments regarding his liability for the breach of fiduciary duty.  On appeal, Miletich argued that he did not owe fiduciary duties to Gabel starting in 2016 as the Agreement had an effective date of January 1, 2016.

The Court of Appeals rejected the argument. The Agreement contained a provision stating that Miletich’s “representations and warranties shall be true and correct as of the date of mutual execution of the” Agreement. Given that Miletich’s representations and warranties within the Agreement were not “true and correct” as of May 18, 2016, Miletich’s argument failed. (Unfortunately, this is the extent of the Court of Appeals discussion on this issue. You can find the brief discussion on pages 11 and 12 of the slip opinion.)


I found the case interesting, but short on analysis.  For example, Washington’s LLC Act is not cited at all in the case, despite the Court’s inclusion of an “analysis” of fiduciary duties of members.  Instead, the Court relied upon the 2007 decision Bishop of Victoria Corp. Sole v. Corporate Business Park, LLC,  138 Wn. App. 443, 158 P.3d 1183 (2007) to identify the fiduciary duties owed.  Is Bishop of Victoria still good law after Washington’s new LLC Act?  The facts of Tersuli arose after Washington’s new LLC Act became effective in January 2016, yet the Court chose to ignore the statute in its opinion.

The court also identified, without discussing, “employee fiduciary duties”, which raises an interesting question:  does a member who provides services to an LLC akin to an employee also owe “employee fiduciary duties”?  According to RCW 25.15.038, the answer to that question is a resounding “no”:

The only fiduciary duties that a member in a member-managed limited liability company or a manager has to the limited liability company and its members are the duties of loyalty and care under subsections (2) and (3) of this section.

However, the Court does not discuss this issue.

Within these issues are considerations for practitioners counseling members through LLC interest sales. If you ultimately determine an LLC purchase ought to be backdated for tax or other purposes, it may be prudent to reserve claims for breach of fiduciary duty that may have occurred between the “effective date” and the execution of the agreement. Alternatively, the agreement should clearly specify the effect of the “effective date” on the LLC and the member’s obligations to each other.

LLC interest transactions are rarely simple affairs.   Care must be taken in the drafting process with respect to transfer issues, identification of what is being transferred, past and future actions of the LLC and its members and releases.  In addition, tax implications are everywhere.  As Sgt. Esterhaus said (repeatedly) in Hill Street Blues: “Let’s be careful out there.”

For more Washington business entity law considerations, refer to this blog every Wednesday at 12 PM, noon.

BERESFORD BOOTH has made this content available to the general public for informational purposes only. The information on this site is not intended to convey legal opinions or legal advice.