Arizona has finally resolved the issue of whether managers and members of an Arizona Limited Liability Company (LLC) owe a common law fiduciary duty to the LLC and whether an operating agreement can lawfully limit those fiduciary duties.
In the recent consolidated case of Sky Harbor Hotel Props. v. Patel Props.; MorrisAnderson v. Redeye, the Arizona Supreme Court applied common law agency principles and held that a manager of an Arizona LLC owes a common law fiduciary duty to the company. This would include the duty of loyalty, duty of good faith and duty of care.
A member of the LLC also owes these common law fiduciary duties to the company, but only if the member is an agent of the LLC. 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.
The Court’s opinion in Sky Harbor did not discuss the instances or circumstances under which a member of a manager-managed LLC is an agent. Therefore, the focus of litigation going forward will likely be whether the LLC member acted in such a way that it is an agent for the LLC.
Finally, the Court held that an Arizona LLC's operating agreement may lawfully limit or eliminate those fiduciary duties, but it may not eliminate the implied contractual duty of good faith and fair dealing. The Court expressed no opinion regarding whether the provisions of any specific operating agreement limited the fiduciary duties. Therefore, whether an operating agreement successfully limited the fiduciary duties is another area ripe for future litigation.
It is unclear whether the Court’s opinion will apply to disputes after September 1, 2020. The Court’s opinion 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. See 2018 Ariz. Sess. Laws 833 (2d Reg. Sess.). 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.
Read opinion here.