The Arizona Court of Appeals just issued a decision relating to the duties that members of an LLC owe to each other. TM2008 Investments, Inc. v. Procon Capital Corp.., No.1 CA-CV 12-0648 involves a complicated web of transactions and claims between various real estate investment and development entities. The main issue relates to the fiduciary duties owed between TM2008 and Procon, who were the only two members of Doveland Developments, LLC.
In the web of transactions and claims, Procon filed a counterclaim against TM2008 for breach of fiduciary duty, claiming that members of a closely held limited liability company owed each other fiduciary duties. The jury returned a verdict in favor of Procon and TM2008 appealed. TM2008 argued that the trial court erred by finding that they owed common law fiduciary duties to their fellow member of Doveland Developments. The Court of Appeals reversed and remanded for a new trial.
The Court of Appeals examined the purpose of limited liability companies, or “LLC’s,” which 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. It noted that Arizona’s LLC statutes do not refer to any baseline fiduciary duties that members of an LLC owe to the LLC or its members.
The Court 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.” Rather, the Court noted that by Arizona law, members of an LLC may create an operating agreement, and “delineate in that agreement the duties members owe one another.” In this case, the members of Doveland Developments created such a written operating agreement that outlines their reciprocal duties. For this reason, the Court of Appeals held that the trial court erred by imputing, without reference to Doveland Developments’ operating agreement, a fiduciary duty on its members to each other based solely on principles applicable to closely-held corporations and/or partnerships. The trial court failed to inform or guide the jury concerning the nature and extent of the duties the parties owed each other pursuant to the specific parameters established by their Operating Agreement.
This case is instructive on the importance of carefully crafting an LLC operating agreement. It also makes clear that claims of duties and obligations among members must start with reference to the operating agreement and its terms.