The Arizona Limited Liability Act does not delineate what fiduciary duties LLC members owe to each other, and the Arizona Court of Appeals has declined to impose fiduciary duties on LLC members. TM2008 Invs., Inc. v. ProCon Capital Corp., 234 Ariz. 421, 323 P.3d 704, 2014 Ariz. App. LEXIS 53, 683 Ariz. Adv. Rep. 26, 2014 WL 1257134 (Ariz. Ct. App. 2014).
In TM2008 Investments, there was a dispute among the two members of Doveland Developments, LLC. The LLC members included TM2008 Investments and ProCon Capital. Bonnie Vanzant was the agent of TM2008 Investments, while Steve Tackett represented ProCon Capital.
During the construction of their real estate development project, Doveland received several notices of default from Biltmore Bank. Doveland had failed to complete the minimum level of construction, and Biltmore Bank discovered that Tackett had provided incorrect information about a previous bankruptcy.
Vanzant, as a guarantor on the construction loan, eventually ended up paying back the bank the entire amount advanced by the bank. Vanzant sought to receive one half of this amount from Tackett, pursuant to a loan indemnification agreement. Tackett counterclaimed with a breach of fiduciary duty claim, along with other claims against TM 2008 Investments.
The Arizona Court of Appeals noted that the Arizona Limited Liability Act did not expressly state what baseline fiduciary duties LLC members owed to each other or to the LLC. TM2008 Investments attempted to show that LLC members were similar to shareholders in a corporation, which did not owe fiduciary duties to each other or to the corporation. ProCon Capital stated that the relationship between LLC members is more analogous to shareholders in a closely-held corporation, or partners in a partnership, which do owe fiduciary duties to each other.
The Court agreed with TM 2008 Investments, noting that LLCs are statutorily-created entities, and that the legislature had declined to create fiduciary duties between LLC members. Rather, the LLC members had the option to create an Operating Agreement that clearly stated what duties were owed by members to each other and to the LLC.
Members of an LLC should think carefully about what duties each member should have when drafting the Operating Agreement. If you believe that a fellow LLC member has breached a fiduciary duty owed to you or your LLC, consult with a business attorney.
Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your real estate matters.