The short answer is, it depends. In Arizona, at the time of writing this post, fiduciary duties are not implied as a matter of law between members and/or managers and the LLC. However, fiduciary duties may nonetheless exist if the LLC’s operating agreement specifies that fiduciary duties apply. Consequently, to ensure members / managers in an LLC are held to the highest duty recognized by law – a fiduciary duty – then the LLC operating agreement should include such language.
Why aren’t fiduciary duties applied as a matter of law in LLCs like they are in other business organizations? An underlying rationale of the LLC Act is to provide members with broad discretion in drafting the LLC agreements and to furnish default provisions when the agreement is silent. In the case of fiduciary duties, the LLC Act permits LLC parties to expand, restrict, or eliminate duties, including fiduciary duties owed by members and managers to each other and to the LLC.
In an unreported decision from 2008, the Arizona Court of Appeals upheld a jury’s verdict that found a co-manager in an LLC liable for breaching a fiduciary duty. In upholding the jury’s verdict, the Arizona Court of Appeals reasoned that while a co-manager may not be required to exercise fiduciary duties pursuant to a statute and/or an operating agreement, a co-manager may nonetheless be required to exercise fiduciary duties if the co-manager “assumes” the duties.
In a 2009 Delaware opinion (Delaware courts are considered a leading authority on corporate law by many courts and scholars), the Delaware Court of Chancery held, “. . .in the absence of a contrary provision in the LLC agreement, the manager of an LLC owes the traditional fiduciary duties of loyalty and care to the members of the LLC.” Bay Ctr. Apartments Owner, LLC v. Emery Bay PKI, LLC, CIV. A. 3658-VCS, 2009 WL 1124451, *8 (Del. Ch. Apr. 20, 2009). The Court of Chancery revisited the issue in 2010 and reaffirmed its 2009 holding and further held that “. . .controlling members in a manager-managed LLC owe minority members ‘the traditional fiduciary duties’ that controlling shareholders owe minority shareholders.” Kelly v. Blum, CIV.A. 4516-VCP, 2010 WL 629850, *12 (Del. Ch. Feb. 24, 2010) (internal citations omitted). These opinions evidence a possible shift in the way Arizona courts may one day interpret the duties of members and/or managers in an LLC.
UPDATE – 8.11.10 – On July 23, 2010, the Delaware Court of Chancery issued another opinion providing insight on fiduciary duties in LLCs. That opinion, Related Westpac, LLC et al. v. JER Snowmass, LLC, et al., C.A. No. 5001-VCS, can be found here. In this most recent opinion, the Court of Chancery refused to apply fiduciary duties among members in an LLC when application of the fiduciary duties would undermine the LLC’s operating agreement. Put another way, if applying fiduciary duties would “nullify the parties’ express bargain,” (terms, promises, etc…) outlined in the LLC’s operating agreement, then the Delaware Court will not impose fiduciary duties among the members. In this case, the Court found that defendant, JER Snowmass, could act in a manner that served its own interests and not be liable for breach of fiduciary duty because the LLC’s operating agreement permitted JER Snowmass to act in such a manner. In sum, where the use of “default” fiduciary duties would intrude upon the contractual rights or expectations of the parties – as typically outlined in an LLC operating agreement – the court will “eschew” fiduciary concepts and focus on a purely contractual analysis of the dispute. See opinion at p. 20 n.47.
Notably, the Related Court did not answer the often-asked question as to whether fiduciary duties can or will be used as “gap-fillers” (default principles) when an operating agreement does not specify / is silent as to whether fiduciary duties apply. The Court’s opinion, however, does contain language that supports an argument that fiduciary duties can or will be used as “gap fillers” in certain situations. See p. 20 at ln 3. Until this unsettled area of the law is resolved, if parties are seeking clarity regarding fiduciary duties in LLCs before a problem arises, they can take affirmative steps to create / amend / revise an operating agreement to specify whether fiduciary duties apply.
UPDATE 4-11-12: See this newer post (click here) for an update on a Delaware Court opinion that may provide further insight.
If you have any questions, comments, or concerns on this issue, please feel free to contact me at email@example.com.
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