TM2008 Investments, Inc. v. Procon Capital Corp.
323 P.3d 704
Ariz. Ct. App.2014Background
- In 2007–08 Bonnie Vanzant (through TM2008 and Silverdove) and Steve Tackett (through ProCon Capital) formed Doveland Developments, LLC to develop adjacent residential property; the LLC members executed a written operating agreement.
- Doveland obtained a construction loan from Biltmore Bank; members personally guaranteed the loan and signed an indemnity agreement between themselves.
- Project problems and loan defaults in 2009 produced sharp disagreements between the members: Tackett (ProCon) wanted to continue; the Vanzants wanted to stop further exposure and cured defaults by paying the loan advances.
- Litigation followed: TM2008 sought dissolution of Doveland; ProCon counterclaimed for breach of fiduciary duty (and other claims later dismissed). After an eight-day jury trial, jury awarded ProCon $1,039,754 against TM2008 and the Vanzants.
- On appeal, the court reversed and remanded for a new trial, holding the trial court erred by imposing a common-law fiduciary duty without applying the LLC’s operating agreement and by admitting certain damage evidence.
Issues
| Issue | Plaintiff's Argument (ProCon) | Defendant's Argument (TM2008/Vanzants) | Held |
|---|---|---|---|
| Whether members of an Arizona LLC owe common-law fiduciary duties to one another | Members of an LLC necessarily owe fiduciary duties (by analogy to partners or closely‑held corporation shareholders) | LLC members do not automatically owe such duties; the LLC Act lets members define duties in the operating agreement | Court: Trial court erred to impute common-law fiduciary duties without reference to the operating agreement; duties are defined by the Agreement and A.R.S. §29-682(B) |
| Proper standard/instructions for member duties | Jury should be instructed that members owe a fiduciary duty requiring utmost good faith and full disclosure | The operating agreement sets the actual standard (good faith, reasonable business judgment, ordinarily prudent person, best interests of the company) and jury must be instructed accordingly | Court: Jury instruction misstated scope of duties by not incorporating Article V, §F of the Agreement; verdict reversed and new trial ordered |
| Admissibility and use of evidence of debts to related nonparty entities for damages | Evidence of project-related debts and infrastructure value supports ProCon’s damage claim and breach showing | Such debts to separate legal entities are relevant to breach but not properly used to compute damages against members; belong in liquidation proceedings | Court: Admission for breach was not abuse, but using that evidence to calculate damages was error; damages relating to separate entities should be addressed in liquidation |
| Availability/ripeness of unjust enrichment recovery now | ProCon: unjust enrichment available because Vanzants may ultimately gain control of the land, leading to unjust benefit | TM2008: unjust enrichment is improper now because TM2008 does not own the improved land; recovery premature | Court: Unjust enrichment claim is not ripe until liquidation of Doveland Developments; reversed as to unjust enrichment-based damages |
Key Cases Cited
- Maxfield v. Martin, 217 Ariz. 312 (App. 2007) (existence of fiduciary duty reviewed de novo)
- Flooring Sys., Inc. v. Radisson Grp., Inc., 160 Ariz. 224 (1989) (limits on restitution/unjust enrichment and when claim is ripe)
- Mims v. Valley Nat. Bank, 14 Ariz. App. 190 (App. 1971) (authority cited regarding fiduciary duties in closely-held corporation context)
- Hurst v. Hurst, 1 Ariz. App. 603 (App. 1965) (authority cited regarding fiduciary duties in partnership context)