Sky Harbor Hotel Props., LLC v. Patel Props., LLC (In Re Sky Harbor Hotel Props., LLC)
443 P.3d 21
Ariz.2019Background
- Two consolidated matters were certified by the U.S. Bankruptcy Court to the Arizona Supreme Court concerning alleged breaches of fiduciary duty in Arizona LLCs.
- Certified questions: (1) whether a manager of an Arizona LLC owes common-law fiduciary duties to the LLC; (2) whether a member owes such duties; and (3) whether an LLC operating agreement can limit or eliminate those duties.
- Arizona’s existing LLC Act (A.R.S. § 29-601 et seq.) does not expressly impose fiduciary duties, but it incorporates the law of agency (A.R.S. § 29-854(B)).
- By statute, members are agents "for the purpose of carrying on its business in the usual way" unless management is vested in managers; if managers run the LLC, managers are agents by law (A.R.S. § 29-654).
- The court relied on common-law agency principles (Restatement (Second) of Agency) to define fiduciary duties (loyalty, good faith, care) for agents acting on behalf of the LLC.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Do LLC managers owe common-law fiduciary duties to the LLC? | Managers act on behalf of the LLC and therefore owe fiduciary duties. | Managers’ duties are not expressly set by the LLC Act; fiduciary duties are not implied absent express agreement. | Yes — managers are agents by statute and owe common-law fiduciary duties to the LLC. |
| Do LLC members owe common-law fiduciary duties to the LLC? | Members generally act as agents and thus owe fiduciary duties. | If management is vested in managers, members are not automatically agents and owe no duties unless delegated. | Yes, but only when the member is an agent of the LLC (e.g., when management is not delegated to managers, or authority is delegated to the member). |
| Can an operating agreement limit or eliminate fiduciary duties? | Operating agreements should be able to define or limit duties among parties. | Fiduciary duties are fundamental and should not be fully waivable by contract. | Yes — operating agreements may limit or eliminate common-law fiduciary duties under the LLC Act, except they cannot eliminate the implied covenant of good faith and fair dealing. |
| Scope of the implied covenant of good faith and fair dealing | Covenant is inherent and cannot be removed. | Parties may contractually define their obligations broadly. | The covenant is implied in every contract and cannot be eliminated by operating agreement. |
Key Cases Cited
- Butler Law Firm, PLC v. Higgins, 243 Ariz. 456 (Arizona 2018) (discussed differences between LLCs and other business entities regarding fiduciary duties)
- TM2008 Investments, Inc. v. Procon Capital Corp., 234 Ariz. 421 (App. 2014) (refused to mechanically import fiduciary rules from corporations/partnerships to LLCs)
- CSA 13-101 Loop, LLC v. Loop 101, LLC, 236 Ariz. 410 (Arizona 2014) (endorsing reliance on the Restatement where sound legal policy supports it)
- Ghiz v. Millett, 71 Ariz. 4 (Arizona 1950) (describing fiduciary duty as obligation of loyalty)
- DeSantis v. Dixon, 72 Ariz. 345 (Arizona 1951) (fiduciary duty requires utmost good faith)
- Master Records, Inc. v. Backman, 133 Ariz. 494 (Arizona 1982) (fiduciary duty requires a high degree of care)
- Monterey Water Co. v. Voorhees, 45 Ariz. 338 (Arizona 1935) (fiduciary duties of corporate officers)
- Rawlings v. Apodaca, 151 Ariz. 149 (Arizona 1986) (the covenant of good faith and fair dealing is implied in every contract)