In Sky Harbor Hotel Properties v. Patel Properties, the Arizona Supreme Court answered three questions that were certified to it from the Arizona Bankruptcy Court:

1. Does a manager of an Arizona LLC owe a fiduciary duty to the company?
2. Does a member of an Arizona LLC owe a fiduciary duty to the company?
3. Can an Arizona LLC operating agreement limit or eliminate fiduciary duties?

How the Court Ruled:

ASC answered yes and yes, and to that last one, kinda yes. Done…moving on. Wait, you want more? It is a 6-page opinion, so there isn’t much more to the reasoning, but it boils down to agency.

In a unanimous opinion authored by Chief Justice Bales, ASC adopted the Restatement and held that there is a fiduciary duty imposed upon an agent under the common law. These fiduciary duties are basically the type of behavior you would want from someone running your company, such as loyalty, good faith in dealing, and duty of care. ASC defines an agent as a person who has the power to act on behalf of the company. So, ASC holds, if the LLC is run by its members (aka member-managed), then the members are the agent and owe a fiduciary duty to the company. If the LLC is run by a manager (aka manager-managed), the manager is the agent and owes a fiduciary duty to the company, and the members only owe a fiduciary duty when they are acting on behalf of the company.

What about limiting or eliminating these fiduciary duties? ASC holds the LLC can do this for most fiduciary duties, but cannot limit or eliminate the duty of good faith and fair dealing.

As one last note, this opinion has a short shelf-life. Last year, the Arizona Legislature passed new statutes for LLC’s called the ALLCA, and the court notes that this opinion only analyzes the old LLC statute.