Mind the Comma - Porter v Jacobson and Fiduciary Duties

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MIND THE COMMA:

Porter v. Jacobson and Fiduciary Duties

BY CARMEN FONDA, ESQ., LAUREN FIELDS, ESQ., AND SAMANTHA JONJO, ESQ.

In Porter v. Jacobson, No. 1861, Sept. Term, 2021, 2026 Md. App. LEXIS 372 (Md. App. Mar. 31, 2026) (unreported), following decisions in Wasserman v. Kay, 197 Md. App. 586 (Md. App. 2011), and Plank v. Cherneski, 469 Md. 548 (Md. 2020), the Appellate Court of Maryland reaffirmed a core principle of Maryland LLC law: that Maryland agency law remains the primary source of duties of managers and managing members of Maryland LLCs. In Porter, the court applied the Maryland common law agency duty of candor to the actions of a board of managers of a Maryland LLC, held that the plaintiff must not have independent knowledge of the undisclosed information in order to be entitled to recovery for breach of the duty of candor, and declined to apply a Delaware-style “entire fairness” review of the board’s decisions.

Porter arose from an internal dispute among the managers of a Maryland LLC managing a cannabis business. Plaintiff Porter, a founding member and manager of the company, failed to disclose on the company’s cannabis license application past disciplinary action by the Financial Industry Regulatory Authority. After concluding that Porter’s past conduct would jeopardize the company’s ability to obtain a cannabis license, the remaining managers expelled Porter as a member and manager of the company in accordance with its operating agreement, triggering a requirement that Porter offer his units for purchase to the other members. Porter, however, claimed that he had pre-emptively transferred his units to his mother to repay outstanding loans and therefore owned no units subject to the remaining members’ purchase right. After a largely unfavorable trial decision, Porter appealed several facets of the judgment, including that (i) the remaining board members did not breach duties of candor or entire fairness by failing to inform Porter in advance of their intent to consider the effects of his past conduct and (ii) Porter’s purported transfer to his mother violated the company’s operating agreement and was ineffective.

Duty of candor is in; “entire fairness” is out Porter appears to be the first Maryland LLC case to analyze a duty of candor claim as a distinct duty. The opinion suggests that any candor obligation under Maryland law would arise from Maryland agency law, opposed to the approach seen in Delaware corporate doctrines, where the duty of candor is generally understood to be a component of the duty of loyalty. Under Maryland agency law, the

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The lesson for drafters is straightforward: a qualifying phrase placed after a list and set apart by a comma should, under reported Maryland appellate precedent, be read to modify each listed item. If a limitation is meant to apply only to one subpart, punctuate accordingly. duties of disclosure and candor require agents to disclose to their principals any information that the principal may reasonably want to know and any information material to the agency.1 The Restatement (Third) of Agency provides that agents must use reasonable efforts to provide the principal with facts the agent knows, has reason to know, or should know that are material to the agent’s duties to the principal and where there is no superior duty owed to another person.2 Although Porter supports the proposition that managers may be liable when they withhold material information from members in breach of an agency-based duty of candor, Porter also demonstrates that, in order to be harmed by (and therefore recover for) a breach of the duty of candor, the claimant must not have independent knowledge of the undisclosed information.

While at least assuming arguendo the existence of an independent duty of candor, the court specifically refused to apply the “entire fairness” doctrine, a Delaware fiduciary duty concept that requires defendants accused of a breach of fiduciary duty to prove both fair process and fair price of a transaction involving a conflict of interest. Maryland courts have previously declined to apply the entire fairness doctrine to Maryland corporate disputes, and the court in Porter noted that Maryland appellate courts had not applied that doctrine to LLC managers.3 As a result, the court concluded that in the absence of a provision of an LLC’s operating agreement requiring application of the entire fairness doctrine, the doctrine does not apply to breaches of duties by members or managers of a Maryland LLC. Bonus grammar tip: Providing a rare practical drafting tip for practitioners, the Appellate Court of Maryland offered some definitive guidance for the use of commas in operating agreements. To determine whether Porter’s

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purported transfer of his membership interest to his mother in satisfaction of a debt, and not for estate planning purposes, was effective, the court examined the operating agreement’s permitted transfers clause, which permitted transfers to: (a) an Affiliate of such Member; (b) the equity owners or partners of such Member; (c) any member of such Member’s family . . . , or (d) any trust for the benefit of such Member and/or such Member’s family members (collectively, a “Permitted Transferee”), for estate planning purposes . . . (emphasis added). Porter at *25, n. 15. Citing a 2005 decision of the Supreme Court of Maryland, the court stated definitively that a qualifying clause following a list that is set apart by a comma, such as “for estate planning purposes” in the subject operating agreement, modifies every element of the list, and, therefore, all permitted transfers must be for estate planning purposes only.4 The lesson for drafters is straightforward: a qualifying phrase placed after a list and set apart by a comma should, under reported Maryland appellate precedent, be read to modify each listed item.

If a limitation is meant to apply only to one subpart, punctuate accordingly.

What’s next for Maryland LLCs The Porter decision represents a relatively straightforward application of Plank to a dispute among members of a Maryland LLC and continues the trend in Maryland business-entity cases of declining to impose Delaware’s shifting standards of review on breach-of-duty claims. Although appellate decisions involving the duties of managers and managing members of Maryland LLCs remain infrequent, members and managers of Maryland LLCs can take some comfort that, in Porter, the court applied existing standards in a manner consistent with Maryland precedent.

Impala Platinum v. Impala Sales, 283 Md. 296, 324 (Md. 1978); Green v. H&R Block, Inc., 355 Md 517, 518 (Md. 1999); Restatement (Second) of Agency § 381.

Restatement (Third) of Agency § 8.11.

See Lerner v. Lerner, 306 Md. 771, 790 (Md. 2000) (declining to adopt the entire fairness test set forth in Weinberger v. UOP, Inc., 457 A.2d 701, 715 (Del. 1983) in the context of a freeze-out dispute).

See Kane v. Bd. of Appeals of Prince George’s Cnty., 390 Md. 145, 164 (Md. 2005).

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Carmen Fonda represents public and private sector companies in issues involving entity formation, governance, public and private offerings, and mergers and acquisitions.

Fonda’s work focuses on Maryland corporate and business entity law as it relates to real estate investment trusts, investment companies, and unincorporated entities, as well as securities law compliance and capital markets transactions for REITs and other public companies.

Lauren Fields advises clients on complex corporate matters, including corporate governance and investment fund formation.

Fields brings experience in bankruptcy law and mergers and acquisitions to the Corporate Practice Group. Prior to joining Venable, she worked as a law clerk for Chief Judge Mary Ellen Barbera of the Supreme Court of Maryland, where she prepared judicial opinions and bench memoranda on a variety of business, criminal, and civil procedure-related matters.

Samantha Jonjo advises clients on a wide range of corporate transactions, with a focus on entity formation, governance, and structured finance. Samantha draws on her background in counseling businesses on matters involving Delaware corporations and alternative entities. Her practice includes reviewing and drafting core deal documents such as loan agreements, pledge agreements, and purchase and sale agreements. Before joining Venable, Jonjo held several roles at the Social Security Administration (SSA), where she developed and implemented acquisition policies, managed multi-milliondollar procurement contracts, and served as a primary point of contact for resolving regulatory and procurement issues.

Preserve Benefits Eligibility with Expert Special Needs Trust Management Professional fiduciary services for individuals with disabilities.

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