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In its recent Opinion in Sky Harbor Hotel Properties, LLC v. Patel Properties, LLC, the Supreme Court of Arizona stated that, under agency law, members and managers of an Arizona limited liability company owe fiduciary duties[1], subject to limitations eventually established in the operating agreement.

The Supreme Court answered questions certified to it by the United States Bankruptcy Court for the District of Arizona by applying common law agency principles to questions involving fiduciary duties between members and managers of a limited liability company.

Previous to this decision, Arizona courts have refused to “mechanically apply fiduciary duty principles from the law of closely-held corporations or partnerships to a limited liability company created under Arizona law”, absent any specific provision in the operating agreement, because the Arizona Limited Company Act, unlike the statute governing corporations, does not impose fiduciary duties among members and managers. See TM2008 Invs., Inc. v. Procon Capital Corp., 323 P.3d 704, 709 (Ariz. Ct. App. 2014).

The Supreme Court based its decision by applying common law principles of agency law[2]. Because agents are fiduciaries with respect to matters within the scope of his agency, likely members and manages owe fiduciaries duties when they act as agents of the company[3].

However, it is important to point out that this decision will have a limited application. In fact, the new Arizona Limited Liability Act, which will be effective September 1, 2020, incorporates fiduciaries duties among members and managers, provided different provisions in the operating agreement of the LLC.

If you believe there was a breach of duty of loyalty or care among members or managers of your LLC, you may have a cause of action under the Supreme Court decision.

Contact our firm for a consultation. We will be able to advise you about your position and any available remedies.

[1] A fiduciary manages another party’s assets and has a legal and ethical obligation to put the other party’s interests ahead of his or her own. A fiduciary duty is the highest standard of care to which an individual can be held. In a business setting, fiduciary duties help ensure that each owner is acting in a manner that is consistent with the entity’s business objectives and the interests of investors and the other owners.

[2] By statute, “the law of agency” applies to the entire LLC Act. See A.R.S. § 29-854(B).

[3] By default, the members of an LLC are agents of the LLC “for the purpose of carrying on its business in the usual way.” A.R.S. § 29- 654(A)(1)