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Abstract

Prior literature has analyzed the merits of contractual freedom in the LLC, but relatively few recent articles specifically address the duty of care and the unique attributes of the contemporary LLC manager. The cases reviewed in this Article involve LLCs that provide extremely important services ranging from psychiatric care to electrical power. The analysis showcases the inappropriateness of the gross negligence standard of care which has been interpreted as involving a "devil-may-care attitude or indifference to duty amounting to recklessness" -- a standard that seems particularly low for LLCs that provide important services affecting the public health and welfare. Also, this Article offers a fresh and contemporary perspective on the duty of care and takes into account a number of developments that had not yet occurred when LLC statutes were first enacted. Treasury Regulations now permit LLCs to restrict the LLC member's withdrawal rightsincreasing the prospects of a "lock-in" effect that may leave LLC investors at the mercy of entrenched incompetent management-a possibility all too likely if the investor has executed a simple form LLC agreement without seriously studying and negotiating contractual terms, exit rights, or management termination provisions. 9 Also, numerous accounting scandals and duty of loyalty controversies have surfaced that arguably create a need to increase rather than decrease the accountability of management.

This Article raises two major questions. First, should the duty of care be articulated as a duty to refrain from grossly negligent conduct, or is there a need for a more demanding standard such as one based upon negligence and/or reasonable care with perhaps a separate statutory articulation of the business judgment rule? Second, should extensive contractual freedom be granted permitting the LLC operating agreement to indemnify the LLC managers for all types of violations, or should the LLC statute prohibit the LLC operating agreement from indemnifying managers for certain specific types of misconduct (i.e. prohibiting indemnification for intentional wrongful acts or criminal violations, the sustained failure to perform one's duties, or the taking of improper distributions)? Following this introduction in Part I, Part II addresses the policy goals served by the duty of care. Part III explores the advantages and drawbacks of partnership and corporate models of the duty of care and critiques the duty to refrain from grossly negligent conduct-the standard contained in the Revised Uniform Partnership Act. Part IV examines existing LLC duty of care provisions and case law and explores the disconnect between the standard of care one would expect of one discharging highly important services and the gross negligence standard.

Part V of this Article recommends that the duty of care be statutorily defined as a duty to act reasonably, subject to the business judgment rule-the language that the author vigorously supported as a member of the NCCUSL Drafting Committee and the formulation that was ultimately adopted in the Revised Uniform Limited Liability Company Act. This position is endorsed largely because it is particularly appropriate to the LLC manager who may assume operational, officer-like duties as well as policy decision-making responsibilities associated with a corporate board of directors. It is a standard that fulfills the socializing role of the duty of care by conveying the important social cue that responsible managerial conduct is expected of management-a message made all the more important because of the significant role LLCs now play in providing goods and services as well as quasi-governmental functions.3 Also, it holds the promise of providing appropriate equitable remedies on a timely basis, thus enabling investors to intervene to remove entrenched management before the misconduct has deteriorated to the point of becoming reckless or intentionally harmful.

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