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A Summary of Liability and Litigation from the New Arizona Limited Liability Company Act 2018

Robert A. Royal, ,  |  September 5, 2018

The Governor recently signed into law the new Arizona Limited Liability Act that which represents a major overhaul.  The Act is effective for limited liability companies formed after August 31, 2019 and all existing limited liability companies after August 31, 2020.  Here is a brief look at important parts of the new Act affecting substantive liability and litigation including procedural devices.

I. CONTRIBUTION LIABILITY

  1. A.R.S. §29-3403. Liability for Contribution to the LLC. A person’s obligation to make a contribution to the LLC is not enforceable unless in writing. It is not excused by death, disability, termination or other liability to perform personally.

II. DISTRIBUTION LIABILITY

  1. A.R.S. §29-3406. Liability for Improper Distributions.  A person that receives a distribution that was wrongful is personally liable to the LLC but only to the extent the distribution is improper.

III.   MANAGEMENT

  1. A.R.S. §29-3407. Management of the LLC.
    If a Member is disassociated from the LLC they may not serve as a Manager.  A person ceasing to be a Manager does not discharge any debt they owe to a Member or the company.  A person that wrongfully causes dissolution of the company loses the right to participate in management as a Member and a Manager and that person may not be included in determining whether a majority in interest of the Members has voted for or consented to any matter or action.

IV. INDEMNIFICATION

  1. A.R.S. §29-3408. Indemnification.  An LLC shall reimburse a present or former Member of a member managed LLC or Manager of a manager managed LLC for any payment made by such person in the course of the Members’ or Managers’ activities on behalf of the company if they have complied with the sections on distributions, fiduciary duty, and management.

An LLC may advance reasonable expenses including attorney fees and costs but the person must repay the company if the person is ultimately determined not to be entitled to be indemnified.

V. FIDUCIARY DUTIES

  1. A.R.S. §29-3409. Standards of Conduct. A Member of a member managed LLC owes to the company and the other Members the duty of loyalty.

A Member of a member managed LLC owes a duty of care in the conduct or winding up of the company’s activities to refrain from engaging in grossly negligent or reckless conduct or willful or intentional misconduct.

A Member should discharge the duties of loyalty and care and all other duties under the Operating Agreement and the Act consistently with a contractual obligation of good faith and fair dealing.

It is a defense to a claim for breach of the duty of loyalty for acting adversely to the company or failing to disclose such a transaction if the transaction or decision was fair to the LLC.

The Manager of a manager-managed LLC owes to the company and its Members the duty of loyalty.

A Manager of a manager-managed LLC has a duty of care in winding up the company  or in the conduct of its activities to refrain from and engaging in grossly negligent or reckless conduct or willful or intentional misconduct.  A Manager shall discharge the duties and obligations under the Act and the Operating Agreement consistently with a contractual obligation of good faith and fair dealing.

It is a defense to the adverse interest or competition claims that the transaction or decision was fair to the LLC./p>

VI. RECORDS AND RECORD INSPECTION

  1. A.R.S. §29-3410. Records.  During reasonable business hours and at a reasonable location, a Member or Manager may inspect and copy specified records and other company records regarding the activities, affairs, financial condition and other circumstances of the company as is just and reasonable if all the following conditions apply:
    1. A person seeks the records for a purpose reasonably related to their rights and duties,
    2. They make a written demand describing with reasonable particularity the records sought and a purpose for seeking them; and
    3. The records sought are directly connected to the Members or Managers purpose.

     

    If a dispute arises regarding a Member’s or Manager’s right to obtain or inspect or regarding any restriction imposed by the LLC a court may award the successful party reasonable expenses and costs including attorney’s fees and costs.

VII.   THE OPERATING AGREEMENT AND MEMBER RELATIONS

    1. A.R.S. §29-3105 Operating Agreement.

 

The Operating Agreement may without affecting the ability to eliminate or limit the contractual obligation of good faith and fair dealing or willful or intentional misconduct may expand, limit, or eliminate in the Operating Agreement a Member or a Manager’s duty of care, the duty of loyalty, and any other fiduciary duty, to an LLC, Member or Manager or to any other party that is bound by the Operating Agreement.

An Operating Agreement may provide for the limitation or elimination of any or all liabilities for breach of the Operating Agreement or breach of duties including the duty of care, loyalty, and other fiduciary duty as expanded, limited or eliminated in the Operating Agreement, of a Member, Manager, or other person that is bound by the Operating Agreement.  The Operating Agreement may specify a method by which a specific act, omission or transaction would otherwise violate a duty, including the duties of care, loyalty and other fiduciary duty as expanded, limited or eliminated in the Operating Agreement, which may be authorized or ratified.

The Operating Agreement may specify a method by which a Member, Manager or other person may be reimbursed, indemnified, or held harmless or by which the liability of any Member, Manager or other person may be limited or eliminated for a specific act, omission or transaction that would otherwise violate a duty, including the duty of care, loyalty and other fiduciary duty as expanded, limited or eliminated in the Operating Agreement.

An Operating Agreement may define some or all the fiduciary duties of a Member, Manager or other person that is bound by the Operating Agreement to be the same as fiduciary Duties of a director, officer or shareholder of the corporation formed under the laws of this state.

VIII.   LIABILITY REGARDING ACTIONS WITH THE ACC

  1. A.R.S. §29-3204 Filing per Judicial Order. A person who has been aggrieved by a person who is required by the Act to sign a record or deliver it to the Commission for filing and does not do so, can petition the court to order the person to sign, or deliver to the Commission to file the record unsigned.  A record filed under this section is effective without being signed.
  1. A.R.S. §29-3205 Liability for inaccurate information. A person who suffers loss by reliance on information filed with the ACC may recover damages for the loss from the person that signed the record or caused another to sign it and knew the information to be inaccurate at the time the record was signed.

A person relying on the information may also recover damages from a Member serving as a Manager or a Manager if the record was delivered for filing on behalf of the Company and such Member or Manager knew or had notice of the inaccuracy for a reasonably sufficient time before the information was relied on so that it could have done an amendment.A person that signs a record or causes another to sign it on that person’s behalf knowing that the record contains inaccurate information at the time it was signed is liable to the LLC and to each Member of the Company for damages resulting from the inaccurate information.

IX. AGENCY LIABILITY

  1. A.R.S. §29-3301, Agency Power of a Member and Manager. In a member-managed LLC each Member is an agent who can bind the Company in conducting the Company’s activities and affairs in the ordinary course unless the acting Member has in fact no such authority and the person with whom they are dealing has knowledge of the fact the Member has no such authority.

Each Manager in a Manager managed LLC is an agent and binds the Company for conducting the Company’s activities and affairs in the ordinary course unless the acting Manager has in fact no such authority in that particular matter and the person with whom they are dealing knows that fact.

X. PERSONAL LIABILITY

  1. A.R.S. §29-3304 Liability of Members and Managers. A debt obligation or other liability of the LLC is solely the LLC’s responsibility.  Nor is a Member or Manager liable for the acts or omissions of any other Member, Manager, agent or employee of the Company solely by reason of being or acting as a Member or Manager. 

XI. DISASSOCIATION 

  1. A.R.S. §29-3601 Dissociation as Member; Wrongful Disassociation. A person has the power to disassociate as a Member at any time by withdrawing by express will, unless that disassociation is wrongful.  Any person that wrongfully disassociates as a Member is liable to the LLC and subject to §29-3806(d) to the other Members for damages caused by such disassociation.  That liability is in addition to any debt obligation or other liability of the Member to the Company or other Members.
  1. A.R.S. §29-3602 Events Causing Disassociation.  On the application of the LLC or Member in a direct action under §29-3801 a person may be expelled by judicial order; (1) because the person has engaged or is engaging in wrongful conduct that materially affects adversely or will do so the Company’s activities; (2) has committed willfully or persistently, or is currently doing so, a material breach of the Operating Agreement or a duty or obligation under §29-3409; or, (3) has engaged or is engaging in conduct relating to the Company’s activities and affairs that makes it not reasonably practicable to carry on the activities and affairs with the person as a Member.

XII.   DISSOLUTION

  1. A.R.S. §29-3701 Events Causing Dissolution. On application of a Member, the court may enter an order dissolving the Company on any of the following grounds that may apply; (1) the conduct of the Company’s activities is unlawful; (2) it is not reasonably practicable to carry on the Company’s affairs in conformance with the Articles or Operating Agreement; (3) the Members or Managers are deadlocked in the management of the Company and irreparable injury is threatened or being suffered; (4) or the activities and affairs of the Company cannot be conducted to the advantage of the Members because of the deadlock. Grounds also exist if the Managers or those Members who control the Company have acted in a manner that is illegal, or fraudulent with respect to the activities of the Company causing or threatening a material and adverse effect on the Company. Further, if the Managers or those Members in control have willfully or persistently breached the Operating Agreement or the duty of loyalty under §29-3409 causing or threatening a material and adverse effect on the Company or the applicant. Finally if those in control have wasted, misapplied or diverted substantial assets of the Company for purposes not related to the activities and affairs of the Company or causing or threatening a material and adverse effect on the Company. In a proceeding brought in court, the court may order a remedy other than dissolution.
  1. A.R.S. §29-3702 Winding Up. In addition to discharging the Company’s debts and closing down the Company’s activities and distributing assets, a court of competent jurisdiction may hold a judicial supervision of the winding up of a dissolved LLC including the appointment or replacement of a person as the liquidating agent to wind up the Company’s activities and affairs.
  1. A.R.S. §29-3706 Court Proceedings (Dissolution) (Claims). A dissolved LLC that has filed and published a notice regarding creditors may file an application with the Superior Court for a determination of the amount and form of security to be provided for the payment of claims that are reasonably expected to arise after the date of dissolution that are either contingent or have not been made known to the Company, or based on an event occurring after the date of dissolution. If a dissolved LLC that provides security in the amount ordered by the court under this section and satisfies the Company’s obligations with respect to claims that are contingent, have not been made known to the Company, or are based on an event occurring after the date of dissolution; then such claims may not be enforced against a Member or transferee on account of assets received in liquidation.

XIII.  DIRECT ACTION BY A MEMBER

  1. A.R.S. §29-3801 Direct Action by a Member. A Member may maintain a direct action against another Member, a Manager or a limited liability company to enforce the Member’s rights and protect the Member’s interest, including rights and interest under the Operating Agreement, the Act, or rising independently of the membership relationship.

XIV.   DERIVATIVE ACTION BY A MEMBER

  1. A.R.S. §29-3802 Derivative Action. A Member may maintain a derivative action to enforce a right of an LLC if either (1) the Member first makes a demand on the other Members in a member managed LLC or the Managers of a manager managed LLC and request that the Members or Managers cause the Company to bring action to enforce the right, and ninety days have expired from the date the demand was made unless the Member has earlier been notified the demand has been rejected, or (2) the statute of limitations will expire within ninety days, or irreparable injury to the Company would result by waiting for the expiration of the ninety day period. The derivative action may be maintained without a demand if the demand would be futile.
  1. A.R.S. §29-3805 Special Litigation Committee. If an LLC is named or made a party in a derivative proceeding the Company may appoint a special litigation committee to investigate the claims and determine whether pursuing the action is in the best interests of the Company.

After appropriate investigation a special litigation committee may determine that it is in the best interests of the LLC that the proceeding (1) continue under the control of the plaintiff, (2) continue under the control of the committee, (3) be settled on terms approved by the committee, or (4) be dismissed.

  1. A.R.S. §29-3806 Proceeds, Expenses; Voluntary Dismissal or Settlement of Derivative Proceedings. Any proceeds or other benefits of the derivative proceeding whether by judgment or settlement belong to the LLC. If a derivative proceeding is successful in whole or in part the court may award the plaintiff reasonable expenses including attorney fees and costs from the recovery of the LLC.
  1. A.R.S. §29-3807 Other Remedies in Direct and Derivative Action. The court in its discretion at any stage may treat a direct action as a derivative action. The court may also treat a derivative action as a direct action subject to or exempt from any provisions of this article the court chooses and order recovery to be paid to the plaintiff if the court finds that justice so requires.

XV. FOREIGN LLC LIABILITY

  1. A.R.S. §29-3902 Foreign LLC Registration to do business. A foreign LLC or a foreign series doing business in the state may not maintain an action or proceeding in the state unless the foreign LLC or foreign series is registered to do business in the state.

XVI.  APPRAISAL RIGHTS

  1. A.R.S. §29-4002 Appraisal Rights. An interest holder in a domestic LLC that is merging, converting, domesticating or dividing an entity or acquiring an entity in an interest or exchange is entitled to contractual appraisal rights under the Act or to the extent provided in the Operating Agreement or the Plan.

XVII. PROFESSIONAL LIMITED LIABILITY COMPANY

  1. A.R.S. §29-4104 Professional Limited Liability Company. This entity shall be governed by the LLC Laws except as limited by other provisions of the professional limited liability company statutes.
  2. A.R.S. §29-4107 Professional Relations and Responsibility. The Act does not alter any law applicable to the relationship between a person performing professional services and a person receiving those services including liability.

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