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

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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.

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