Papas v. Tzolis
Citation and Court
Papas v. Tzolis, 20 N.Y.3d 128 (N.Y. 2012)
Facts
Tzolis, Papas, and Ifantopoulos were LLC members who held a lease on commercial property. Tzolis sought to buy out his co-members’ interests and, as part of the transaction, had the co-members sign a release and a certificate stating they had done their own due diligence and were not relying on Tzolis for information about the value of the lease. Tzolis subsequently assigned the lease for a very large profit without disclosing the opportunity to his co-members. They sued for breach of fiduciary duty.
Issue
Whether LLC members owe each other fiduciary duties, and if so, whether those duties can be waived in a buyout agreement where the parties deal at arm’s length and sign explicit disclaimers.
Holding
The New York Court of Appeals held that while LLC members do owe each other fiduciary duties in some circumstances, the explicit arm’s-length disclaimers and certificates signed by the plaintiffs waived their right to rely on Tzolis for full disclosure, and therefore their fiduciary duty claim failed.
Rule / Doctrine
LLC members may owe each other fiduciary duties depending on the nature of their relationship and the LLC agreement. However, sophisticated parties who negotiate at arm’s length and execute express written disclaimers of reliance may waive those fiduciary protections for the specific transaction. Courts will give effect to such waivers where the parties were sophisticated and the transaction was genuinely arm’s length.
Significance
Important for understanding how fiduciary duties in LLCs can be modified or waived by agreement, in contrast to the non-waivable duties that apply in traditional partnerships. Demonstrates the flexibility of LLC structure and the effect of written disclaimers in member buyout transactions.