AZAPP Blog Your resource for news and analysis of cases in Arizona's appellate courts.

In re Sky Harbor Hotel Props. - 6/25/2019

Arizona Supreme Court holds that the manager of a limited liability company owes a common law fiduciary duty to the company, as does a member acting as an agent of the company, but that the company’s operating agreement may eliminate these duties.

In a set of consolidated cases, the United States Bankruptcy Court for the District of Arizona certified three questions to the Supreme Court of Arizona:  (1) whether a manager of an Arizona limited liability company (“LLC”) owed common law fiduciary duties to the LLC; (2) whether a member of an Arizona LLC owed common law fiduciary duties to the LLC; and (3) whether an Arizona LLC’s operating agreement could eliminate these fiduciary duties.  The Arizona Supreme Court accepted the certification.

The Supreme Court answered each question in the affirmative but added caveats to the answers of the second two questions.  The Supreme Court only answered these questions under a 1992 law, codified at A.R.S. § 29-601 et seq (the “LLC Act”), which is scheduled to be repealed and replaced for all LLCs on September 1, 2020 by a 2018 law.  The law of agency applies to the entire LLC Act under A.R.S. § 29-854(B).  An agent has a fiduciary duty when acting within the scope of their agency.  By default, members of an LLC are agents of the LLC for the purpose of carrying on its business under A.R.S. § 29-654(A)(1).  However, they cease to become agents if authority is vested in a manager under the operating agreement, except to the extent authority is delegated to them under the operating agreement or by the manager.  A manager is always an agent, and therefore always owes fiduciary duties.  If there is no manager, or if the operating agreement vests a member with authority, or if the manager delegates authority to a member, that member is an agent of the LLC and thus owes it a fiduciary duty.

Under A.R.S. § 29-682(B), however, an operating agreement (if the LLC has one) “may contain any provision not contrary to law and that relates to . . . the rights, duties or powers of its members [or] managers.” This provision allows the operating agreement to eliminate any fiduciary duties, though not the implied covenant of good faith and fair dealing.  

Chief Justice Bales delivered the unanimous opinion of the court.

Posted by: Emma J. Cone-Roddy

Posted On: 7/10/2019