Redefining Loyalty: A Case for Fiduciary Duties from Managers to Transferees under the Arizona Limited Liability Company Act
| December 8, 2025
What have we learned about the rights of a transferee, a concept first introduced in the revised Arizona Limited Liability Act (the “LLC Act”). Owner disputes, business divorce, and member relations with transferees suggest to the author that reform is needed. The transferees’ interests are mostly overlooked in the LLC Act but experience suggests that protections are needed as transferees remain vulnerable to decisions that prioritize the interests of others. The law remains strikingly silent when it comes to protecting transferees. Shouldn’t those entrusted with the entity’s trajectory—the managers—owe a duty to those who are entitled to share the profits with no vote or say in management who inherit risks and opportunities amiable in the LLC?
I. DEFINING THE TRANSFEREE: THE OVERLOOKED PARTY IN LLC LAW
A. What is a Transferrable Interest?
A “transferee” is “a person to which all or part of a transferable interest has been transferred, whether or not the transferor is a member.”1 A “transferrable interest” is “the right, as initially owned by a person in the person’s capacity as a member, to receive distributions from a limited liability company, whether or not the person remains a member or continues to own any part of the right, and applies to any fraction of the interest, by whomever owned.”2
Under A.R.S. 29-3401, a “transferable interest” may be held by two or more natural persons as joint tenants with right of survivorship or by a married couple as community property with right of survivorship.3 All co-owners of a transferable interest held as joint tenants with right of survivorship, as community property or as community property with right of survivorship own an equal undivided interest in the transferable interest.4
Each co-owner of a transferable interest shall have only the rights of a transferee with respect to the interest, both during the lifetime and following the death of any other co-owner, unless and until the co-owner becomes a member.5 In other words, the holders of a transferrable interest may be full LLC members that vote and manage.
B. What Rights Does a Transferee have?
Under A.R.S. 29-3502, a transfer of a transferrable interest does not entitle the transferee to participate in the management or conduct of the company’s activities and affairs.6 A transferee does have the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled.7 Solely for a purpose that is reasonably related to the transferee’s right to receive distributions, a transferee has the rights to information under section 29-3410, subsection B.8 Moreover, in a dissolution and winding up of a limited liability company, a transferee is entitled to an account of the company’s transactions only from the dissolution date.9
The LLC Act explicitly recognizes duties of loyalty and care to members by managers.10 Unlike transferees, members are entitled to vote and participate in management, or the full rights of membership. Under A.R.S. 29-3409, the duty of loyalty includes prohibiting self-dealing, misappropriation of LLC assets, and competing against the LLC.11 Further, the duty of care requires managers to act in good faith, exercise reasonable business judgment, and avoid grossly negligent or reckless conduct.12
However, the statute is silent on whether transferees of LLC interests are owed similar obligations. While managers are bound by fiduciary principles,13 transferees—who may acquire significant economic interests in the company—are treated primarily as passive recipients of distributions with limited rights. unless given additional rights by the operating agreement.14
II. THE REVISED UNIFORM LIMITED LIABILITY COMPANY ACT: A HINDRANCE FOR TRANSFEREE PROTECTIONS?
The Revised Uniform Limited Liability Company Act (RULLCA) Article 5, Section 501 defines transferrable interests and rights of transferees.15 The LLC Act closely follows RULLCA, even mimicking its numbering system. Absent an operating provision or consent, a transferrable interest is the only LLC interest which can be transferred to a person not already a member.16 Section 502 states that a transferee is not entitled to participate in the management or conduct of the company’s activities and affairs; or to have records or other information concerning the company’s activities and affairs, subject to a few exceptions.17 Notably, RULLCA Section 502 is the same provision as A.R.S. § 29-3502.18 Moreover, under RULLCA, a transferee has the right to receive distributions to which the transferor would otherwise have been entitled.19 Under the LLC Act, a transferee likewise also has the rights to receive distributions to which the transferor would otherwise be entitled.20 In a dissolution, a transferee is entitled to an account of the company’s transactions only from the dissolution date.21 Further, bifurcating the rights into economic rights and governance rights furthers the fundamental principles of LLC law: to “pick your partner.”22
III. HOW OTHER STATES ADDRESS TRANSFEREE RIGHTS
State statues generally follow the Revised Uniform Limited Liability Company Act, asserting that transferees have the right to receive distributions, but they do not have the right to participate in management or conduct of the LLC’s activities and affairs. Some states including Arizona provide that a transferee may become a member of the LLC if all other members consent.23 However, a transferee who does not become a member generally may not participate in management of the company’s business, nor be entitled to a vote.
A. Statutory Law
Fiduciary duties in LLC law generally run from managers to members within the LLC, but there is no clear indication that any state explicitly establishes fiduciary duties to transferees.
- Delaware
Delaware, a leading jurisdiction for business entities, does not extend fiduciary duties to transferees.24 The Delaware Limited Liability Company Act allows for the transfer of economic interests without conferring membership rights or fiduciary obligations.25 Transferees in Delaware are generally considered passive investors without the rights or responsibilities of members.26 - California
California law also maintains a clear distinction between members and transferees. The California Revised Uniform Limited Liability Company Act provides that fiduciary duties are owed by managers to members but not to transferees.27 Transferees in California are limited to economic benefits without management rights or fiduciary obligations.28 - Nevada
Nevada, known for its business-friendly laws, does not extend fiduciary duties to transferees.29 The Nevada Limited Liability Company Act allows for the transfer of economic interests without conferring membership rights or fiduciary obligations on transferees.30
In summary, no state surveyed, has been found to extend fiduciary duties to transferees f/n 31-39. This approach reflects a common belief that fiduciary obligations stem from the management and control of the LLC, its finances and its profits distributions to full members only which are not afforded to transferees. As such, transferees are generally regarded as passive investors with limited rights and responsibilities. But transferees depend on management to produce distributions of profits like members, so shouldn’t they have protections?
IV. FIDUCIARY DUTY FOUNDATIONS
A fiduciary duty is owed when one party is under a duty to act for or give advice for the benefit of another within the scope of their relationship.31 A fiduciary duty can be created expressly through a formal commitment to act for the benefit of another, or it may arise from special circumstances imposing a duty.32 Courts have recognized fiduciary duties in various contexts where one party is in a position of power or influence over another.33 The specific duties vary depending on the relationship, but generally, fiduciaries have duties of loyalty, honesty, fidelity, good faith, and the duty to act for the benefit of others in the relationship.34 Fiduciaries are required to act with the highest degree of loyalty, honesty, and fair dealing.35
A. Recognized Fiduciary Relationships
Under Arizona law, fiduciary duties are recognized as a matter of law in certain types of relationships, including principal and agent, trustee and beneficiary, attorney and client, guardian and ward, and partners.36
B. Special Relationships
Fiduciary duties can also arise in “special relationships” where one party is obliged to pursue the other party’s best interests.37 This typically involves situations where one party places trust in the faithful integrity of another, great intimacy between the parties, or entrusting of power.38 Fiduciary duties can also be defined and imposed by statutes and regulations, such as those governing mortgagees and fiduciaries in financial transactions.39
- Corporations
In corporations, fiduciary duties may be imposed if there is an agency relationship or if “one [party] is bound to act for the benefit of the other.”40 Corporate directors owe fiduciary duties to the company and shareholders, including the duty of care and the duty of loyalty.41 These duties are based on the directors’ control over corporate affairs and the shareholders’ reliance on directors to manage the company effectively.42.43 Like a shareholder, transferees, who may be acquiring significant distributions, similarly depend on the manager’s honest and competent conduct, warranting a fiduciary duty. Failing to impose a fiduciary duty to transferees may result in managers taking advantage of the transferee. - Trusts
In a trustee-beneficiary relationship, the trustee is obligated to manage the trust assets in the best interest of the beneficiary.44 This duty is grounded in the beneficiary’s reliance on the trustee’s expertise and integrity.45 Similarly, transferees rely on the transferor’s representations and actions during the transfer process, necessitating a fiduciary duty from managers to protect their interests. - Attorney and Client
Attorneys owe a fiduciary duty to their clients, which includes maintaining confidentiality, avoiding conflicts of interest, and acting with undivided loyalty.46 This duty arises from the client’s dependence on the attorney’s legal expertise and the trust placed in the attorney to act in the client’s best interest.Transferees, like clients, place trust in the manager to ensure a fair and transparent transaction, justifying a similar fiduciary obligation. Transferees often rely on the manager’s representations and disclosures during a transaction.Just as trustees, attorneys, and directors are required to act in the best interest of their respective beneficiaries, clients, and shareholders, managers should be obligated to prioritize the transferee’s interests. This duty ensures that the transferee receives accurate information and fair treatment, fostering trust and confidence in corporate transactions and proper distributions.
V. CLOSING THE GAP: A VISION FOR FIDUCIARY DUTIES TO TRANSFEREES
Overall, a fiduciary duty should be owed by LLC managers to transferees to further the principles of fairness and justice under the law. Ensuring transferees receive the same fiduciary requirements as members would maintain trust and integrity within the LLC. Moreover, establishing a fiduciary duty would incentivize managers to be diligent in their duties. The fiduciary duty would complement the duty owed by managers to the LLC and the members; the transferee is in the same position as members regarding their monetary interest. Further, given that transferees bear the losses and successes of a business, establishing a fiduciary duty is fundamental to effective corporate governance and protecting transferee interests. A fiduciary duty would result in legal consistency, aligning the responsibilities of transferees with those of members to avoid legal ambiguities. Failing to establish a fiduciary duty to transferees creates potential risks, including conflicts of interest, self-dealing, and disruptive behavior that may undermine the LLC’s stability and purpose. Therefore, courts should protect the transferee by enforcing a fiduciary duty.
VI. COUNTERARGUMENTS AND RESOLUTIONS
Opponents of imposing a fiduciary duty on transferees may argue that imposing a fiduciary duty imposes on the parties’ autonomy to negotiate and structure their transactions as they see fit. Further, managers may face increased liability and legal costs, potentially discouraging asset transfers and stifling economic activity. They may argue that current legal frameworks, such as contract law and fraud statutes, already provide sufficient protection for transferees, making additional fiduciary duties unnecessary.
Nevertheless, while autonomy is important, it should not come at the expense of fairness and protection. Fiduciary duties do not eliminate autonomy but rather ensure that it is exercised responsibly and ethically. Further, the potential for increased liability is outweighed by the benefits of enhanced protection for transferees. Because transferees share in both the gains and losses of a company, they should be afforded the duty of care and the duty of loyalty. Moreover, clear guidelines and standards for fiduciary duties can mitigate the risk of excessive litigation. Lastly, while existing legal frameworks offer some protection, they are often reactive rather than proactive. Fiduciary duties provide a proactive safeguard, ensuring that transferees are treated fairly from the outset of a transaction.
All in all, imposing a fiduciary duty by LLC managers to transferees is a necessary and justified measure to protect transferee interests. By ensuring that managers act with loyalty and care, fiduciary duties enhance trust and fairness with transferees.
VII. CONCLUSION
LLC frameworks provide critical protections for members and managers, but fall short in addressing transferee rights. Thus, A.R.S. 29-3409 should be modified to establish a fiduciary duty owed to members, managers, and transferees alike. By imposing fiduciary duties on transferees in appropriate circumstances, LLC law would promote equity, protect LLC transferee monetary rights to distributions, and ensure business stability. A fiduciary duty framework for transferees would not only bring consistency to the LLC but would lessen the chance of managers taking advantage of their positions to the economic detriment of the transferee.
2 Id. at § 29-3102(29).
3 Id. at § 29-3401.
4 Id.
5 Id.
6 Id. at § 29-3502 (2019).
7 Id.
8 Id.
9 Id.
10 S.B. 1353, 2018 Leg., 53rd Sess. (Az. 2018).
11 ARIZ. REV. STAT. ANN. § 29-3409 (2019).
12 Id.
13 Id.; see also ARIZ. REV. STAT. ANN. § 29-3502 (2019).
14 S.B. 1353, 2018 Leg., 53rd Sess. (Az. 2018); see also ARIZ. REV. STAT. ANN. § 29-3107 (2019).
15 UNIF. BUS. ORG. CODE § 5-501 (2011).
16 Id.
17 Id. at § 5-502 (2011).
18 See ARIZ. REV. STAT. ANN. § 29-3502(A)(3)((a)-(b)) (2019)(“[d]oes not entitle the transferee to either of the following: (a) Participate in the management or conduct of the company’s activities and affairs. (b) Except as otherwise provided in subsections B and C of this section, have access to records or other information concerning the company’s activities and affairs.”)
19 UNIF. BUS. ORG. CODE § 5-502 (2011).
20 ARIZ. REV. STAT. ANN. § 29-3502(B) (2019).
21 Id.
22 See id. at Comment.
23 See id.
24 In re S. Canaan Cellular Inv., LLC, 427 B.R. 85 (2010).
25 See id.
26 Id.
27 CAL. REV. UNIF. LTD. LIAB. ACT § 17704.09 (2016).
28 In re Mervyn’s Holdings, LLC, 426 B.R. 488 (2010).
29 NEV. REV. STAT. ANN. § 87A.475 (West. 2007).
30 JPMorgan Chase Bank, N.A. v. KB Home, 632 F.Supp.2d 1013 (2009).
31 See generally Amerco v. Shoen, 907 P.2d 536 (Ariz. Ct. App. 1995).
32 In re Naarden Tr,, 990 P.2d 1085, 1088 (Ariz. Ct. App. 1999).
33 See generally id.
34 See In re Sky Harbor Hotel Properties, LLC, 443 P.3d 21, 23 (Ariz. 2019).
35 Amerco v. Shoen, 907 P.2d at 543 (Ariz. Ct. App. 1995).
36 See generally In re Sky Harbor Hotel Properties, LLC, 443 P.3d 21, 23 (Ariz. 2019); In re Estate of Fogleman, 3 P.3d 1172 (Ariz. Ct. App. 2000); Shriners Hosp. for Crippled Child. v. Gardiner, 733 P.2d 1110 (Ariz. 1987); Dooley v. O’Brien, 244 P.3d 586 (Ariz. Ct. App. 2010).
37 Quiroz v. ALCOA Inc., 416 P.3d 824, 827 (Ariz. 2018).
38 Standard Chartered PLC v. Price Waterhouse, 945 P.2d 317, 335 (Ariz. Ct. App. 1996).
39 See generally Arizona Tile, L.L.C. v. Berger, 224 P.3d 988 (Ariz. Ct. App. 2010).
40 See Cook v. Orkin Exterminating Co., Inc. 258 P.3d 149, 152 (Ariz. Ct. App. 2011).
41 ARS §10-830; Dooley v. O’Brien, 244 P.3d 586, 590 (Ariz. Ct. App. 2010).
42 Id.
43 In re Sky Harbor Hotel Properties, LLC, 443 P.3d at 23 (Ariz. 2019).
44 ARIZ. REV. STAT. ANN. § 14-10802 (2009).
45 See generally Wilcox v. Waldman, 744 P.2d 444 (Ariz. Ct. App. 1987); see also Shriners Hosp. for Crippled Child. v. Gardiner, 733 P.2d 1110, 1111 (Ariz. 1987).
46 See generally In re Estate of Fogleman, 3 P.3d 1172 (Ariz. Ct. App. 2000).