Claim for Breach of Fiduciary Duty Might be Subject to the “Internal Affairs Doctrine”
In a prior LLC Jungle post — Think Carefully Before Forming an “Out of State” LLC — we reviewed a published opinion (Boschetti v. Pacific Bay Investments Inc.) holding that a claim for Judicial Dissolution of an LLC was subject to the “internal affairs doctrine” and would therefore be governed by the law of the state in which the LLC was formed.
Under the internal affairs doctrine, the laws of a business entity’s state of formation will govern matters concerning its internal affairs — i.e., matters peculiar to the relationships among or between the entity and its stakeholders. As stated in California Corporations Code section 17708.01(a), the law of the state in which an LLC is formed governs “its internal affairs, and the authority of its members and managers.” Judicial Dissolution, the Boschetti court held, was a “quintessential internal governance” issue.
A recent federal case in California’s Northern District — Gill v. Marsh USA, Inc. — applied the internal affairs doctrine to a different type of claim common in LLC and partnership litigation: Breach of Fiduciary Duty.
Facts: Employer LLC sues former employee for Breach of Fiduciary Duty based on solicitation of clients
The plaintiff Manpreet Gill filed claims against his former employer, Defendant Marsh USA, LLC, an insurance and risk management company formed as an LLC under Delaware law. Marsh filed several cross-claims against Gill, including one for Breach of Fiduciary Duty.
Gill worked at Marsh for nearly 20 years. His last role was Managing Director of Communications/Media and Technology Practice Leader for the Western United States Region. After he resigned from Marsh, Gill accepted a similar role with a Marsh competitor, Lockton. Marsh alleged that Gill breached fiduciary duties by soliciting Marsh’s clients to join Gill at Lockton and by saving certain business opportunities (renewing client contracts) for Lockton.
Gill filed a Motion to Dismiss.
Court: motion to dismiss granted based on the internal affairs doctrine
Marsh argued that the internal affairs doctrine did not apply to its claim for Breach of Fiduciary Duty, and that California (not Delaware) law governed because the claim was unrelated to a matter of “actual governance” of the company, and instead concerned Gill’s “purported diversion of corporate opportunities.”
The court disagreed with Marsh, holding that section 17708.01 “does not limit the internal affairs of a company to matters related to its actual governance.” Instead, “the weight of authority counsels that breach of fiduciary duty claims are typically considered within the ambit of a company’s internal affairs.”
The court saw no grounds to apply a recognized exception to the internal affairs doctrine for claims implicating a different state’s “vital statewide interests.” The court found that Marsh had not shown why California would have any “vital interest” in the claim. The fact that the alleged misconduct occurred in California was not enough. “The site of the alleged misconduct cannot alone form the basis for deciding which state’s law applies — following that logic would collapse the internal affairs doctrine entirely.”
Applying Delaware law, the court found the claim deficient as alleged by Marsh because it was not clear that under Delaware law Gill owed any fiduciary duties to Marsh. The court observed that “Delaware courts have typically imposed no fiduciary duties on non-managing, non-controlling members of LLCs.” The court further held: “Marsh has failed to aver whether Gill was a manager or controlling member at Marsh or if a contractual provision imposing fiduciary duties on Gill exists. Absent specific averments resolving these questions, Marsh’s breach of fiduciary duty claim fails under Delaware law.”
The court granted Gill’s Motion to Dismiss on the claim for Breach of Fiduciary Duty, with leave to amend.
Lesson
Under the prior Boschetti opinion, a claim for Judicial Dissolution of an LLC is subject to the internal affairs doctrine and should be governed by the law of the state in which the LLC was formed.
Under the federal Gill case (which is not necessarily binding on California state courts), most claims for Breach of Fiduciary Duty will also be subject to the internal affairs doctrine.