The Arizona Supreme Court Declares That LLC Members and Managers Have a Common Law Fiduciary Duty to Their LLC
On June 25, 2019, the Arizona Supreme Court released its opinion in Sky Harbor v Patel, to answer some long-standing questions about the duties that LLC members and managers have to their LLC under Arizona common law. The Court explained that this ruling only applies to duties under the existing LLC Act (the “Act”), which is silent as to fiduciary duties to the company. The Court did not extend its opinion to fiduciary duties under the new Arizona LLC Act (to be codified at A.R.S. § 29-3101, et seq) which is scheduled to start going into effect for newly-formed LLCs in September 2019.
The opinion first recognized that the existing Act doesn’t expressly impose any fiduciary duties and that, by default, LLC members don’t owe fiduciary duties to other members. But the Court held that Arizona common law does impose a default fiduciary duty on LLC members and managers to the LLC under principles of agency.
The Court answered three questions posed on appeal, holding that:
Managers have a common law fiduciary duty to the LLC;
Members have a common law fiduciary duty to the LLC if it is a member-managed company or if the member is otherwise a delegated agent of the LLC;
The LLC’s operating agreement can eliminate these fiduciary duties, but it cannot limit the implied covenant of good faith and fair dealing, which will still apply.
This ruling applies to all LLCs (and their constituent members) under the existing Act. That means that all existing LLCs and all LLCs created between now and August 31, 2019, are subject to this ruling. The new LLC act will not replace the existing Act for these pre-existing LLCs until September 1, 2020, and this ruling will continue to impose those common law fiduciary duties on those LLC members and managers until that time.