Since adoption of the Arizona Limited Liability Company Act (Arizona Act) in 1992, limited liability companies (LLCs) have become the business entity of choice for business people and their lawyers. This popularity is similarly evidenced in all jurisdictions across the United States. Yet, notwithstanding the widespread adoption of the LLC, in Arizona an important question remains unsettled. Namely, what fiduciary duties exist within the LLC?
Corporate and partnership law have long included the concept of fiduciary duties owed among partners, and by officers and directors to a corporation and its shareholders. Both statutes and case law are informative. However, statutes and case law do not similarly provide the same level of certainty regarding LLCs, leaving open the questions of whether managers owe fiduciary duties to the company and its members, and whether members owe fiduciary duties to each other.
Arizona: No Statutory Guidance
By design, the Arizona Act permits flexibility in structuring an LLC. The Arizona Act did not adopt the fiduciary duty language of either the Uniform Partnership Act (UPA) or Uniform Limited Liability Company Act (ULLCA). The Arizona Act does not state whether any fiduciary duties exist in an LLC it is silent and imposes no express fiduciary duties on LLC members or managers. Why this lack of certainty? Arizona law in this area is still relatively new, and thus case law has not developed over time to give much guidance. Some argue that the Legislature intended for LLCs to be governed solely by the operating agreement; thus, if the articles of organization or operating agreement do not provide for a fiduciary relationship, then none exists. Others assert that a fiduciary duty is implied in the statute and exists co-extensively with the law for corporations and partnerships, unless the operating agreement specifically limits or changes a duty.
Case Law and Legislative Intent
Although Arizona case law on this issue is scarce, an unreported Arizona Court of Appeals case from 2008 suggests that Arizona courts may imply duties where the operating agreement is silent.
In the case, the Arizona Court of Appeals recognized and concluded that a co-manager in an LLC could be liable for breaching fiduciary duty. Citing to the Restatement (Second) of Torts ( 874 cmt. a), the court defined when a fiduciary relationship exists: “A fiduciary relation exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.” The court went on to reason that while a co-manager may not be required to exercise fiduciary duties pursuant to a statute and/or an operating agreement, a co-manager by his conduct may nonetheless be required to exercise fiduciary duties if the co-manager assumes such duties.
In addition, an analysis of the legislative intent demonstrates that both the Arizona House and Senate passed the LLC statute with the intent that LLCs have the same liability as a corporation. This provides strong support that a limited liability company manager or member could be liable for failure to observe fiduciary obligations when acting on behalf of the company, just as an officer or director may be liable for failure to act as a fiduciary for a corporation.
Continue reading Part 2: here.