Members and Managers of Arizona LLCs Owe Common Law Fiduciary Duties to the Company
The Arizona Supreme Court held on Tuesday that members and managers of Arizona limited liability companies (LLCs) owe common law fiduciary duties to the company, but that an operating agreement may limit such duties except for the contractual duty of good faith and fair dealing. Arizona courts had not previously squarely addressed these issues. After several years of confusion created by cases confronting similar issues, two separate bankruptcy proceedings pending in the District of Arizona simultaneously certified three questions of law to the Arizona Supreme Court: (1) whether a manager of an Arizona LLC owes common law fiduciary duties to the company; (2) whether a member of an Arizona LLC owes fiduciary duties to the company, and (3) whether an Arizona LLC's operating agreement can lawfully limit or eliminate those fiduciary duties.
Unlike Arizona's corporate and partnership statutes, the Arizona LLC statute does not delineate any fiduciary duties that members, managers or officers owe to the company or to one another.1 In 2014, the Arizona Court of Appeals overturned a trial court's determination that LLC members owed fiduciary duties to one another based upon comparisons with other business forms and the common law, and not based upon the parties' written operating agreement.2 In that case, the court would not "mechanically apply" principles from other corporate forms to LLCs, but instead would look to the company's operating agreement for direction. The case left open the question of whether "default" fiduciary duties apply to an LLC where the company's operating agreement is silent on the subject. Similar questions have been raised in the LLC context in other jurisdictions in recent years, including Delaware.3
Although the Arizona LLC act does not specifically address fiduciary duties, it does provide that members and managers of LLCs are agents of the company for purposes of carrying on the company's business.4 The statute also provides that agency law applies to LLCs and, where not otherwise provided for, the rules of law and equity govern.5 The Arizona Supreme Court noted that previous cases had not considered whether managers or members owe fiduciary duties to the company based on the common law of agency. The Arizona Supreme Court determined that under the common law, agents owe the fiduciary duties of loyalty, good faith and care. It then found that members in member-managed LLCs are agents of the company, and therefore owe fiduciary duties to the company. If, however, the LLC is manager-managed, then the manager(s) is an agent of the company and would owe common law fiduciary duties to the company. Accordingly, where either a member or a manager of an LLC acts as an agent of the company, that member or manager owes fiduciary duties to the company. The Arizona Supreme Court confirmed, however, that an LLC's operating agreement may lawfully limit or eliminate common law fiduciary duties owed to the LLC except for the covenant of good faith and fair dealing.
While the decision resolves open questions regarding fiduciary duties in the Arizona LLC context, its general applicability may be short-lived. The Arizona legislature has recently revised its LLC Act, which now substantially parallels the Revised Uniform Limited Liability Company Act.6 The new LLC act contains express provisions regarding fiduciary duties for members and managers and clearly delineates how they may be changed by the operating agreement. The new act will apply to new limited liability companies formed or domesticated after September 1, 2019. It will not, however, apply to existing LLCs until September 1, 2020.
1 Ariz. Rev. Stat. § 29-601 et seq.
2 TM2008 Invs., Inc. v. Procon Capital Corp., 323 P.3d 704, 709 (Ariz. Ct. App. 2014).
3 Auriga Capital Corp. v. Gatz Props., 40 A.3d 839 (Del Ch. 2012); Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012).
4 Ariz. Rev. Stat. § 29-654.
5 Ariz. Rev. Stat. §§ 29-854 and 29-856.
6 Ariz. Rev. Stat. § 29-3101 et seq.