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Victory for Schian Walker Client: Arizona Supreme Court Affirms Fiduciary Duties for Managers and Member-Agents of an Arizona LLC

In its June 25 decision in MorrisAnderson & Associates v. Redeye II, LLC, the Arizona Supreme Court unanimously ruled on alleged breaches of fiduciary duties concerning managers and members of an Arizona limited liability company (LLC).

Schian Walker attorneys Dale Schian and Scott Goldberg successfully represented plaintiff MorrisAnderson & Associates, Ltd., litigation trustee for reorganized debtor Redeye II, LLC, in one of four consolidated cases collectively referred to as Sky Harbor Hotel Properties LLC v. Patel Properties LLC (in re Sky Harbor Properties LLC).

Background. Swift Air, LLC, an Arizona limited liability company, filed a Chapter 11 petition in June 2012, listing general unsecured claims totaling over $19 million. Swift Air had been in the business of maintaining and operating aircraft for charter to sports teams and other companies. Some of the aircraft were owned by companies owned and controlled by Mr. & Mrs. Moyes and their family trust (collectively, “Moyes”). Moyes also owned the companies that owned Swift Air until those companies sold their interest in Swift Air before the bankruptcy filing.

Swift Air filed a Plan of Reorganization in August 2013, and the Bankruptcy Court confirmed the Plan in October 2013. As a part of the Plan, MorrisAnderson & Associates was appointed Trustee and retained Swift Air’s claims and causes of action to pay creditors’ claims.

The Trustee sued Moyes, claiming Moyes breached their fiduciary duties to Swift Air by failing to collect receivables owed by Moyes to Swift Air and running up millions of dollars in debt. The Trustee also claimed that Moyes breached their fiduciary duties to Swift Air by entering into a series of agreements that resulted in certain debts to Swift Air being settled, to the detriment of Swift Air’s other creditors. It also claimed Moyes sold their interest in Swift Air to an unrelated third party for a nominal amount of money, which left Swift Air with much debt and few assets. Moyes argued they owed no fiduciary duties to Swift Air under the Arizona Limited Liability Act.

Questions for the Supreme Court. Judge Daniel P. Collins of the U.S. Bankruptcy Court for the District of Arizona entered an Order Certifying a Question to the Supreme Court of Arizona. The Certified Questions (paraphrased):

1. Does a manager or member of an Arizona LLC owe common law fiduciary duties to the company?

2. Can an Arizona LLC’s operating agreement lawfully limit or eliminate those fiduciary duties?

In addressing those allegations, the Court determined that:

(a) a manager of an Arizona LLC owes a common-law fiduciary duty to the company;

(b) a member of an Arizona LLC owes a common-law fiduciary duty to the company if the member is an agent of the LLC; and

(c) an Arizona LLC’s operating agreement can lawfully limit or eliminate those fiduciary duties but cannot lawfully eliminate the implied contractual duty of good faith and fair dealing.

As a result of the Supreme Court’s ruling, an Arizona LLC receives the protections afforded to other principals when their affairs are conducted by or through an agent. Unless altered by the operating agreement, members of an LLC — and those who extend credit to an LLC — know that the persons managing the LLC are required to act in the LLC’s best interest. Likewise, individuals managing an LLC know that their conduct is governed by the operating agreement and traditional principals of agency.

Aftermath. In the case of Swift Air, the Trustee’s claims against the former insiders for preferences, intentional fraudulent conveyances, and breaches of fiduciary duty were tried in February 2019.

The decision paves the way for the bankruptcy court to rule on all matters as the Trustee seeks to recover for creditors.