A unique question was recently posed in Tormino v. Tormino Sash & Glass, Inc., 21 Wash.App.2d 1036 (Wash. Ct. App. 2022). Can an LLC be a director in a Washington corporation?
Tormino v. Tormino Sash & Glass
In Tormino, at a special meeting of the shareholders, the shareholders of Tormino Sash and Glass, Inc. (“TSG”) appointed Northwest Trustee & Management Services, LLC (“NW Trustee”), “by and through Mr. Cam McGillivray” as the sole director. The opinion is a bit confusing on who the Court believed was the director. The Court noted “After the April 20 TSG special meeting, Cam McGillivray and/or Northwest Trustee acted as TSG’s director.” However, the Court went on to note McGillivray said he served as the director and at other times NW Trustee was the director.
A minority shareholder, John K. Tormino (“John”), initiated a lawsuit against TSG, asserting two issues: (1) the Washington Business Corporation Act, RCW 23B.08.030(1), precluded Northwest Trustee from acting as the director of TSG because only an individual may serve, and an LLC is not an individual; and (2) TSG’s bylaws prevented Northwest Trustee from serving as director because the bylaws demanded that the director be twenty-one years of age or older.
Regarding issue (1), the court “decline[d] to decide whether RCW 23B.08.030(1), which demands a director be an individual, permits a limited liability company to serve as a director”.
Regarding issue (2), TSG’s bylaws provided “[t]he business affairs and property of the Corporation shall be managed by a Board of not less than one (1) Director nor more than nine (9) Directors, who are individuals…. Directors shall be twenty-one (21) years of age, or older.” Because TSG appointed NW Trustee as its sole director, the court held that “the TSG bylaw requires that a director be twenty-one years of age… Northwest Trustee is not twenty-one years of age and that, under this bylaw, the director must be a natural person.”
The Court discussed but did not decide whether an LLC is an “Individual” for purposes of RCW 23B.08.030(1), which requires a board of directors to consist of at least one individual. TSG’s bylaws required a director to be at least twenty-one and a “natural person”. The court held that NW Trustee was not 21 years of age, nor a natural person. As a result, NW Trustee could not act as the director. The Court went on to note that the inclusion of Cam McGillivray as an agent of Northwest Trustee could not save the appointment because “[T]he shareholders appointed only one director, not two directors.”
Perhaps the most insightful sentence of the opinion—which gives us some guidance—is the following: “When acting as a director, McGillivray has conducted himself on behalf of and in fulfillment of his fiduciary duties to Northwest Trustee, the director, not on behalf of TSG”. To my way of thinking, the members or managers of an LLC owe fiduciary duties to the LLC, but the LLC would owe fiduciary duties to the corporation as a director. Such a conflict precludes an LLC from acting as a director of a corporation.
Considerations
Unfortunately, the court declined to decide whether an “individual”, under the WBCA, includes LLCs or entities generally. No Washington case has decided this question. RCW 23B.01.400(24) defines individual to “include the estate of an incompetent or deceased individual”; however, there is no express inclusion for entities. RCW 23B.01.400(28) defines person to “means [sic] an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.” The WBCA’s definition of person separates individual and an LLC as different terms. Likely, while both an individual and an LLC are a person pursuant to RCW 23B.01.400(28), an LLC is likely not an individual pursuant to RCW 23B.01.400(24).
For any questions regarding the WBCA, email me at info@beresfordlaw.com or give me a call at (425) 776-4100.