LLCs are either “member-managed” or “manager-managed.” Determining which management structure applies is significant—it impacts everything from fiduciary duties to the authority to act on behalf of the LLC. The easiest way to determine management structure is to look at the LLC agreement. However, when the LLC agreement is silent on this issue (or does not exist), the management structure may be determined by practicalities of the situation—this is where the theory of a “de facto manager” applies, as demonstrated by Von Heydt v. Ebert, No. 82304-3-I, 2022 WL 3714617 (Wn. App. Aug. 29, 2022).
Von Heydt involves an unfortunate intrafamily dispute between a mother (von Heydt) and daughter (Ebert). Ebert owned a night club in Seattle and the building where the nightclub operated. Ebert owned the building through her wholly owned LLC, MRAE LLC.
In 2014, Ebert began dating Bruers, who had construction experience and wanted to work with Ebert to expand the business ventures. Eventually, Ebert and Bruers built out an extra space in the building for a restaurant called the Dog House Bar and Grill. Ebert and Bruers knew the restaurant needed a liquor license, but were not confident the Washington State Liquor Control Board would issue a license if either of them applied. As such, they asked von Heydt, Ebert’s mother, to apply, and she ultimately applied and was approved for a liquor license on behalf of the restaurant. In exchange for applying for the liquor license, von Heydt received a 90% membership interest in the entity, TDH LLC, that owned the restaurant. Bruers owned the remaining 10%.
Despite not owning any interest in TDH LLC, Ebert was heavily involved in the management of TDH LLC. Specifically, Ebert (i) hired a lawyer to draft the LLC agreements and complete the liquor license application, (ii) drafted lease addendums on behalf of TDH LLC, (iii) signed the signature cards for the LLC business accounts, and (iv) otherwise “took care of everything” for the business.
Unfortunately, as with all lawsuits, what started as a positive and mutually beneficial relationship soon devolved for various reasons, including allegations that Ebert misappropriated funds of TDH LLC for the benefit of MRAE LLC.
Ebert’s Breach of Fiduciary Duty
At trial, von Heydt presented significant evidence related to Ebert’s misappropriation of TDH LLC’s funds. Specifically, Ebert (i) doubled TDH’s rent due to MRAE from year one to year two without any basis for the increase and (ii) caused TDH to pay her a monthly fee for TDH’s equipment. These actions rendered TDH insolvent, when it should have been making over $100,000 per year in profit.
While there are independent causes of action for this misconduct, the significant cause of action for this blog’s purpose is the breach of fiduciary duty. Von Heydt had a problem to prove this claim because it first requires a showing that a duty is owed. Unfortunately, Ebert was not a member of TDH, and it is inferred that Ebert was not identified as a manager in TDH’s LLC agreement. Therefore, Ebert would not owe any fiduciary duty to von Heydt.
Fortunately, Washington law provides that a “manager of the limited liability company…[n]eed not be a member of the limited liability company.” RCW 25.15.154(b)(ii). In light of this, von Heydt alleged that Ebert’s conduct constituted “de facto” management of TDH such that Ebert was the “de facto manager” of TDH. As such, Ebert owed a fiduciary duty to von Heydt.
In its analysis, the Court of Appeals expressly did not analyze whether this theory was permissible under Washington law, since Ebert did not challenge that on appeal. Rather, the Court examined whether there was enough evidence to support a finding that Ebert acted as the de facto manager. In affirming the trial court, the Court of Appeals noted Ebert’s control over the drafting of TDH’s LLC agreement and lease addendums, signatory power of TDH’s accounts, and “taking care of everything” for the TDH. These facts amounted to management of TDH, which imposed fiduciary duties on Ebert as the manager, and Ebert’s conduct breached her fiduciary duties.
Best practice always dictates that parties “get it in writing.” Members in an LLC should have a written LLC agreement that defines everyone’s role, including the identity and responsibility of the manager. But, if the parties’ obligations are left unwritten, the “de facto manager” theory presents a significant risk that a court may impose obligations on a party that they never believed they held.
To learn more about a De Facto LLC Manager, please contact Beresford Booth at email@example.com or by phone at (425) 776-4100.