Unless Fiduciary Duties Among LLC Members in Arizona Is In the Operating Agreement, There May Not Be Any
Are there fiduciary duties among LLC members? For years it was taken as nearly given that members of limited liability companies owed one another fiduciary duties. The logic was that partners in a partnership have fiduciary duties; members of limited liability companies are essentially partners; so members have the same fiduciary duties to one another that partners would have. In a case that signals a trend in Arizona away from recognition of common law duties in favor of statutory rights and remedies, the Court of Appeals in TM2008 Investments, Inc. v. Procon Capital Corp., 234 Ariz. 421, 424, 323 P.3d 704, 707 (App. 2014) held that unless the members of a company create fiduciary duties in their operating agreement, there is no fiduciary duty among members of limited liability companies.
Arizona limited liability companies, are governed by the Arizona Limited Liability Act, A.R.S. §§ 29-601 et. seq. While the Act contemplates that members may contract to be bound by fiduciary duties via an operating agreement, it does not require that such a duty is imposed or owed by one LLC member to another. A.R.S. § 29-682(B). Absent a provision in an operating agreement, the Act does not create any fiduciary duties. LLC’s are creatures of statute and contract. Arizona’s LLC statutes do not create fiduciary duties among members, so if no contractual operating agreement creates such a duty, none exists. “Limited liability companies are statutorily created entities . . . [T]he LLC Act does not refer to any baseline fiduciary duties that members of an LLC owe to the LLC or one another.” The trial court in TM2008 Investments was deemed to have “erred by imputing, without reference to the [Operating] Agreement, a fiduciary duty . . .” Id. at 708, 323 P.2d at 425.
For individuals who become members of an LLC, planning the relations among members is essential. In small companies, where employment is one of the benefits of membership, it is important to draft an operating agreement that defines the obligations of the members to perform services, and what remedies the members have if one of the other members is not performing. Operating agreements should address whether to limit members’ ability to compete with the company, or limiting members’ ability to take business opportunities that should be company opportunities. If there is dispute, it may be too late. The ability to use common law fiduciary duties to fill in where the operating agreement is silent has been limited in Arizona. If you have a dispute involving your membership in a limited liability company in Arizona, Maricopa County, Mesa or the east Valley contact the civil litigation group at Udall Shumway PLC.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Fiduciary Duties Among LLC Members, or any other commercial litigation matters, please feel free to contact Joel E. Sannes at 480.461.5307, or log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.