TM2008 Investments, Inc. v. ProCon Capital Corp. (3/27/2014)
Arizona Court of Appeals Division One Holds That The Operating Agreement of a Limited Liability Company, not Fiduciary Duty Principles from the Law of Closely-Held Corporations or Partnerships, Determines What Duties the Members of the Limited Liability Company Owe Each Other.
Bonnie Vanzant and her ex-husband, John Greenbank, owned twenty-two-and-a-half acres of land adjacent to a proposed residential development owned and controlled by Steve Tackett. In 2006, Greenbank and Tackett entered into an agreement to merge the two properties. The following year, Tackett and Vanzant formed Doveland Developments, LLC (“Doveland”) for the purpose of developing the property.
In January 2009, Doveland’s lender issued Doveland a letter of default, alleging that Doveland had failed to fulfill the terms in the construction loan. In a second default letter issued a month later, the lender also alleged that Doveland was in default because Tackett had provided incorrect information on a credit application for another company. Vanzant and Tackett disagreed as to the appropriate course of action and, as the project unraveled, litigation ensued.
Vanzant filed suit against Tackett to recover half of the money she paid on the construction loan. TM2008 Investments, Inc. (“TM2008 Investment”), the entity through which Vanzant held her membership interest in Doveland, then filed a petition for dissolution and liquidation of Doveland. ProCon Capital Corporation (“ProCon Capital”), the entity Tackett formed to own his membership interest, filed counterclaims against TM2008 Investment for breach of fiduciary duty.
Following consolidation of the suits, the trial court granted Vanzant summary judgment on her claims but denied TM2008 Investment’s motion for summary judgment on the counterclaims. After an eight-day trial, the jury returned a verdict in favor of ProCon Capital and against TM2008 Investments and Vanzant personally for a total of $1,039,754. The court also awarded ProCon Capital its attorneys’ fees in the amount of $93,422. TM2008 Investments and Vanzant filed a timely notice of appeal.
The Arizona Court of Appeals reversed, concluding that the trial court erred by imputing a fiduciary duty on the members of Doveland without reference to Doveland’s operating agreement. In Arizona, limited liability companies (“LLCs”) are statutorily-created entities, designed primarily to provide the personal liability protection found in a corporate structure, while allowing the LLC members the state and federal tax benefits generally provided in a partnership setting. Unlike other statutorily-blessed business arrangements, Arizona’s Limited Liability Company Act does not refer to any baselines fiduciary duties that members of an LLC owe to the LLC or to one another; choosing instead to allow members of an LLC to not only create an operating agreement, but also delineate in that agreement the duties members owe one another. See A.R.S. § 29-682(B) (“An operating agreement governs relations among the members and the managers . . . and may contain any provision that is not contrary to law and that relates to . . . duties or powers of its members . . . .”)
In this case, the members of Doveland created a written operating agreement that expressly outlines reciprocal duties the members would owe each other. The Court of Appeals held that the trial court erred by imputing a fiduciary duty on the members of the without reference to the operating agreement. The trial court also erred by failing to advise the jury of the parameters specifically outline in the operating agreement. The Court reversed the verdict and judgment and remanded for a new trial.
The Court also concluded that ProCon Capital’s claim of unjust enrichment is not ripe until after Doveland is liquidated.
Judge Winthrop authored the opinion; Judges Orozco and Jones concurred.