Jaburg Wilk

News/Publications

Update: Are There Fiduciary Duties between Members in an Arizona LLC?

Categories: Business & Corporate, Article

AZ LLC fiduciary responsibility between members

A few years ago I wrote an article named Are There Fiduciary Duties between Members in an Arizona LLC? At the time, there were no published decisions in Arizona on this issue.  However, a bankruptcy judge had dismissed my client's claim for breach of fiduciary duty against a fellow member in an LLC because (1) she found the Arizona LLC statutes were silent on duties between members and (2) the operating agreement did not specifically state that the members owed each other fiduciary duties. Since that time, not only does that article continue to be a popular read for people researching this issue on the Internet, but also there is an Arizona case on the issue. 

While the case was published two years ago, it is the only Arizona case law.  The case - TM2008 Investments, Inc. v.ProConCapital Corp., 323 P.3d 704, 234 Ariz. 421 (App. 2014), is a decision from the Arizona Court of Appeals. The Court of Appeals reversed the trial court, which had held that a member of an Arizona LLC owed fiduciary duties to a fellow member. In analyzing whether fiduciary duties exist between members in Arizona LLC, the Court of Appeals first noted that "limited liability companies are statutorily-created entities, designed primarily to provide the personal liability protection found in a corporate structure, while allowing the LLC members the state and federal tax benefits generally provided in a partnership setting." [1] 

The court further noted that the LLC act enacted in Arizona in 1992 did not specifically refer to any fiduciary duties that members owe to the LLC or to other members. [1] It refused to simply apply principles applicable to corporations or partnerships to LLCs. [2] Instead, the court looked at the language in the operating agreement relating to the members' agreements among themselves regarding their liability and dealings with the LLC and other members. It found that language established the scope of the duties between the members, but refused to specifically opine on whether the duties were "fiduciary" in nature. [3] 

The take away from the TM2008 case is that members in an LLC need to discuss the type of duties that will exist between members in the LLC. Part of this consideration will be the level of such duties and whether they reach the level of fiduciary duties. Because of this, it will be important for members to discuss the type of language with attorneys and each other at the time an operating agreement is being drafted to have the best chance that the language used will make it clear what the duties areor are not between members and whether such duties rise to the level of fiduciary duties. Similarly, attorneys will need to speak with their clients about these issues regarding existing operating agreements and whether such agreements may need to be amended based on the state of Arizona law on fiduciary duties between members and LLCs as set forth in the TM2008 case. 


About the author: Neal H. Bookspan is a partner at the Phoenix, Arizona law firm of Jaburg Wilk. He assists clients with business issues, commercial litigation, business divorces, workouts and bankruptcy litigation. You can follow Neal's blog at Business Law Guy's Blog

[1] Id. at 424 

[2]Id. at 424-25 

[3] Id. at 425-26