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Arizona’s Limited Liability Company Act does not subject members of Arizona LLCs to any fiduciary duties, but members of an LLC can elect to institute such duties in the LLC’s operating agreement

Arizona’s Limited Liability Company Act does not subject members of Arizona LLCs to any fiduciary duties, but members of an LLC can elect to institute such duties in the LLC’s operating agreement

TM2008 Investments, Inc., et al., v. ProCon Capital Corp., 234 Ariz. 421 (App. 2014).

HELD: The Operating Agreement of a Limited Liability Company Determines Which Duties the Members of that Limited Liability Company Owe Each Other

            This case is important because it sets forth the standard for fiduciary duties of members of an LLC. The court indicated that neither Arizona’s LLC statutes nor any Arizona appellate court opinions subject members of Arizona LLCs to any fiduciary duties. But the court held that an LLC’s operating agreement can include language establishing one or more fiduciary duties on members.  The facts of the case are as follows:

            In 2007, Bonnie Vanzant (“Vanzant”) and her ex-husband, John Greenbank (“Greenbank”), owned twenty-two-and-a-half acres of land in Show Low through Silverdove Properties, LLC (“Silverdove”). The Silverdove land was adjacent to a proposed 54 acre residential development, Eagle Mountain Estates, a project owned and controlled by Steve Tackett (“Tackett”). In 2006, Greenbank and Tackett entered into an agreement to merge the Silverdove land with the Eagle Mountain Estates.

            In December 2007, Tackett and Vanzant formed Doveland Developments, LLC (“Doveland”) for the purpose of developing the property. Tackett signed the agreement on behalf of ProCon Capital Corporation (“ProCon Capital”), a corporation formed to take over the interest of Eagle Mountain Estates. On January 1, 2008, Vanzant signed Doveland’s operating agreement on behalf of TM2008 Investments (“TM2008”), a corporation formed to replace her interest in Doveland. These entities are the only members of Doveland.

            In March 2008, Silverdove and Doveland entered a vacant land purchase agreement, wherein Doveland would develop the Silverdove property and pay Silverdove a total of $1,890,000. In January 2009, Doveland’s lender issued Doveland a letter of default, alleging that Doveland had failed to fulfill the terms in the construction loan. In a second default letter issued a month later, the lender also alleged that Doveland was in default because Tackett had provided incorrect information on a credit application for another company. Vanzant and Tackett disagreed as to the appropriate course of action and, as the project unraveled, litigation ensued. 

            Vanzant filed suit against Tackett to recover half of the money she paid on the construction loan. TM2008, the entity through which Vanzant held her membership interest in Doveland, then filed a petition for dissolution and liquidation of Doveland.  ProCon Capital ProCon Capital, the entity Tackett formed to own his membership interest, filed counterclaims against TM2008 Investment for breach of the implied covenant of good faith and fair dealing (count 1), and breach of contract (count 3) and against TM2008 Investments and the Vanzants personally for breach of fiduciary duty (count 2).

            Following consolidation of Vanzant’s suit and the counter-claims, the trial court granted Vanzant summary judgment on her claims but denied TM2008 Investments’ motion for summary judgment on the counterclaims. After an eight-day trial, the jury returned a verdict in favor of ProCon Capital and against TM2008 Investments and Vanzant personally for a total of $1,039,754. The court also awarded ProCon Capital its attorneys’ fees in the amount of $93,422. TM2008 Investments and Vanzant filed a timely notice of appeal.

            The Arizona Court of Appeals reversed, concluding that the trial court erred by imputing a fiduciary duty on the members of Doveland without reference to Doveland’s operating agreement. In Arizona, limited liability companies (“LLCs”) are statutorily-created entities, designed primarily to provide the personal liability protection found in a corporate structure, while allowing the LLC members the state and federal tax benefits generally provided in a partnership setting. Arizona’s Limited Liability Company Act does not set forth any fiduciary duties that members of an LLC owe to the LLC or to one another. Instead, the Act allows members of an LLC to not only create an operating agreement, but also to specify in that agreement the duties the members owe to one another. See A.R.S. § 29-682(B) (“An operating agreement governs relations among the members and the managers . . . and may contain any provision that is not contrary to law and that relates to . . . duties or powers of its members . . . .”). Thus, the Court of Appeals declined to mechanically apply fiduciary duty principles from the law of closely-held corporations or partnerships to a limited liability company created under Arizona law without looking at the operating agreement.

            In applying the facts of the case to this law, the Court of Appeals stated that the members of Doveland created a written operating agreement (the “Agreement”) that expressly outlined reciprocal duties the members would owe each other. The Court of Appeals held that the trial court erred by imputing a fiduciary duty on the members of Doveland without reference to the operating agreement. The trial court also erred by failing to advise the jury of the parameters specifically outline in the operating agreement. Specifically, Article V, Section F of the Agreement established the duties owed and the liability yardstick by which the claims and defenses of this case were measured. The Court reversed the verdict and judgment and remanded for a new trial.

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