Do Members of an Arizona LLC Owe Fiduciary Duties to the Company?

Home / Blog / Business Litigation / Do Members of an Arizona LLC Owe Fiduciary Duties to the Company?
Do Members of an Arizona LLC Owe Fiduciary Duties to the Company?

Arizona’s 1992 LLC Act does not impose fiduciary duties on members or managers. Recent cases have held that members do not owe each other fiduciary duties unless the LLC operating agreement provides otherwise. But the case law has been silent on whether members owe fiduciary duties to the company. The Arizona Supreme Court recently broke that silence in the case of Sky Harbor Hotel Properties v. Patel Properties by answering three questions certified to it from the U.S. Bankruptcy Court for the District of Arizona:

Does a manager of an Arizona limited liability company (“LLC”) owe common law fiduciary duties to the company?

In its unanimous decision, the Arizona Supreme Court applied common-law agency principles to the first question, holding that a manager of an Arizona LLC does owe a common law fiduciary duty to the company. This includes the duties of loyalty, good faith, and care.

Does a member of an Arizona LLC owe common law fiduciary duties to the company?

The Court held that a member of an Arizona LLC owes the same common law fiduciary duties to the company if the member is a designated agent of the LLC or if the LLC is a member-managed company. The Court noted that by default, members of an LLC are agents of the LLC “for the purpose of carrying on its business in the usual way.” A.R.S. § 29-654(A)(1). Members of a manager-managed LLC are considered agents if authority has been delegated to them either by the manager(s) or the LLC’s operating agreement.

Can an Arizona LLC’s operating agreement lawfully limit or eliminate those fiduciary duties?

Citing case law and public policy, the Court found that an Arizona LLC’s operating agreement may limit or eliminate the fiduciary duties owed to the LLC by its manager(s) or members, but may not eliminate the duty of good faith and fair dealing that is implied in every contract.

It is important to note that this decision applies only to LLCs under the 1992 LLC Act. Last year, the Arizona legislature passed the Arizona Limited Liability Company Act (ALLCA) to replace the LLC Act. ALLCA applies first to LLCs formed on or after September 1, 2019; it will apply to all Arizona LLCs beginning September 1, 2020.

Williams Commercial Law Group, L.L.P., is a law firm with decades of experience in commercial litigation, including contract disputes, business divorce, aviation, and high stakes litigation. Contact us at (602) 256-9400 and schedule a time to meet with us today.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us, though doing so does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established. Our description of what we believe to be superior technology and how we win cases reflects our typical approach to litigation, which we believe:  (i) gives us a competitive advantage, and (ii) is responsible for any success we have had. But we do not win every case. Other lawyers may have technology or approaches that they believe gives them an advantage. Also, the results that we have obtained in other cases or that are described in our clients’ testimonials do not guarantee, promise, or predict the outcome of your case, which depends on the law, facts, and evidence specific to it.