When can a member, manager, director, or officer of a Tennessee limited liability company (“LLC”) expect the LLC to pay attorney’s fees when the member, manager, director, or officer becomes a defendant in a lawsuit or arbitration proceeding? If the individual is ultimately held individually liable in the lawsuit or arbitration proceeding, under what circumstances can he or she expect the LLC to provide indemnity for any judgment? The answers to those questions can be found in at least one place — §48-249-115 of the Tennessee Revised Limited Liability Company Act (the “Act”). If the LLC has an operating agreement, the answers might also be found in its provisions.
If an LLC has no operating agreement, then a member, manager, director, or officer must look exclusively to §48-249-115 to determine his or her rights to be advanced and reimbursed money for attorney’s fees and to indemnification for liability. If the LLC has an operating agreement that provides terms and conditions for indemnification and for the advancement and reimbursement of attorney’s fees, then those terms will supplant the provisions of the Act. The LLC’s operating agreement might provide terms and conditions that cover some situations, but not others, in which event the terms of the Act might apply along with the terms of the operating agreement.
While LLC members have the absolute right to provide, in an operating agreement, for terms and conditions related to the payment for attorney’s fees and to indemnification for liability which differ from the terms of the Act, the Act provides that an operating agreement can never waive certain provisions of the Act. The provisions that cannot be waived, T.C.A. §48-249-115(i)(1)(A)(B) and (C), prohibit an LLC from indemnifying a “responsible person” for a judgment which establishes that the responsible person breached a duty of loyalty to the LLC or its members; for a judgment for “acts or omissions not in good faith, or that involve intentional misconduct or a knowing violation of the law;” or for a judgment for an unlawful distribution under T.C.A §48-249-307. “Responsible person” includes a director of a director-managed LLC, a manager of a manager-managed LLC or a member of a member-managed LLC. That term does not include an officer of an LLC. (Officers’ rights, as distinguished from the rights of members, managers and directors, are discussed below).
The non-waivability of T.C.A. §48-249-115(i)(1)(A)(B) and (C) prevents, among other situations, a majority member who has been found liable in an LLC derivative action from using LLC assets to pay the judgment against him or her. Obviously, the non-waivability of those provisions is a critical protection for minority members.