Both Managers and Members of an Arizona LLC May Owe a Fiduciary Duty to the LLC

The question of whether managers and/or members of an LLC owe fiduciary duties to the LLC and/or other members of the LLC varies greatly from state to state.  Unlike Colorado’s LLC Act, Arizona’s LLC Act does not expressly impose any fiduciary duties on a  manager.  Therefore, in the recent consolidated case of Sky Harbor Hotel Props. v. Patel Props.; Morris Anderson v. Redeye, the Arizona Supreme Court turned to common law agency principles to hold:

  1. a manager of an Arizona LLC owes a common-law fiduciary duty to the company.
  2. a member owes a common-law fiduciary duty to the company, but only if the member is an agent of the LLC; and
  3. an LLC’s operating agreement can lawfully limit or eliminate those fiduciary duties but cannot lawfully eliminate the implied contractual duty of good faith and fair dealing.

As recognized by the Court, a member of a member-managed LLC is by default an agent of the LLC “for the purpose of carrying on its business in the usual way.” A.R.S. § 29-654(A)(1). In the case of a manager-managed LLC, members are considered its agents to the extent they have been delegated authority by the managers or the operating agreement under A.R.S. § 29-654(B)(1). Thus, a member would owe common law fiduciary duties to the LLC if the member acts as an agent of the LLC.  Because the Court did not discuss the circumstances under which a member of a manager-managed LLC is an agent, future litigation will likely focus on whether the LLC member acted in such a way that it is an agent for the LLC.

It is unclear, however, whether the Court’s opinion will apply to disputes after September 1, 2020. The decision was based solely on Arizona’s LLC Act that was enacted in 1992. In 2018, the Arizona Legislature enacted a new Arizona Limited Liability Company Act (ALLCA) to eventually replace the 1992 LLC Act.  The ALLCA will first apply only to LLCs formed on or after September 1, 2019, but will apply to all LLCs starting September 1, 2020.

This recent decision highlights that both managers and members of LLCs should be familiar with duties imposed upon them by statute, by common law, and by the language of the LLC’s operating agreement.

Read the opinion at https://www.azcourts.gov/Portals/0/OpinionFiles/Supreme/2019/Sky%20Harbor%20v.%20Patel%20Opinion.pdf

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