Arizona Court of Appeals
TM2008 INVESTMENTS, INC., an Arizona corporation; BONNIE VANZANT; JAMES VANZANT, Plaintiffs/Counterdefendants/Appellants,
PROCON CAPITAL CORP., an Arizona corporation, Defendant/Counterclaimant/Appellee.
No. 1 CA-CV 12-0648
Appeal from the Superior Court in Maricopa County
Nos. CV2010-009340, CV2010-009350 (Consolidated)
The Honorable Arthur T. Anderson, Judge
REVERSED AND REMANDED
Sanders & Parks, P.C., Phoenix, By G. Gregory Eagleburger; Counsel for Plaintiffs/Counterdefendants/Appellants,
David C. Larkin, P.C., Tempe, By David C. Larkin; Counsel for Defendant/Counterclaimant/Appellee
Judge Lawrence F. Winthrop delivered the decision of the Court, in which Presiding Judge Patricia A. Orozco and Judge Kenton D. Jones joined.
W I N T H R O P, Judge:
¶1 TM2008 Investments, Incorporated, Bonnie Vanzant, and James Vanzant appeal a judgment against them following a jury trial. Appellants identify a number of arguments on appeal, principally that the trial court erred by finding that they necessarily owed fiduciary duties to ProCon Capital Corporation, a fellow member of Doveland Developments, an Arizona limited liability company (“LLC”), and therefore had no liability based on an alleged breach of such duty. For the following reasons, we reverse and remand for a new trial.
FACTS AND PROCEDURAL HISTORY
¶2 In 2007, Bonnie Vanzant and her ex-husband, John Greenbank, owned twenty-two-and-a-half acres of land in Show Low through Silverdove Properties, LLC. The Silverdove land was adjacent to a proposed 54 acre residential development, Eagle Mountain Estates, a project owned and controlled by Steve Tackett. With the goal of developing the land into a cohesive residential community while sharing the costs of marketing, amenities, and off-site construction, Greenbank and Tackett had entered an agreement in 2006 to merge the Silverdove property with Eagle Mountain Estates. Tackett’s Eagle Mountain Estates, LLC, then began work on Silverdove’s infrastructure.
¶3 In December 2007, Steve Tackett and Bonnie Vanzant formed Doveland Developments, LLC, for the purpose of developing the Silverdove property. Steve Tackett signed the agreement on behalf of ProCon Capital Corporation, a company formed to take over the interest of Eagle Mountain Estates. On January 1, 2008, Bonnie Vanzant signed Doveland Developments’ operating agreement on behalf of TM2008 Investments, a company formed to replace her interest in Doveland Developments. These entities are the only members of Doveland Developments.
¶4 In March 2008, Silverdove Properties, LLC, and Doveland Developments, LLC, entered a vacant land purchase agreement. According to this agreement, Doveland Developments would develop the Silverdove property and pay Silverdove a total of $1,890,000; Silverdove would receive payment as Doveland Developments sold the improved lots. The parties also memorialized this agreement by signing a promissory note secured by deed of trust with final payment due on May 1, 2013.
¶5 To further finance the development of Silverdove, Doveland Developments obtained a construction loan from Biltmore Bank. The loan was to be disbursed in stages as Doveland Developments and its contractors completed phases of development and the City of Show Low certified that construction. Biltmore Bank also required Bonnie Vanzant and Steve Tackett to personally guarantee the loan. Vanzant and Tackett then signed an indemnification agreement between one another in the event of default.
¶6 During 2008, Doveland Developments obtained three draws on the loan as it proceeded with the construction of infrastructure. Other corporations owned by Tackett primarily handled the construction and marketing efforts. By January 2009, however, Biltmore Bank had issued its first letter of default, alleging that Doveland Developments had failed to fulfill the terms in the construction loan that required a minimum level of construction. In a second letter of default issued in February 2009, Biltmore Bank also alleged that Doveland Developments was in default because Tackett had provided incorrect information regarding a previous bankruptcy on another credit application for another company.
¶7 Faced with notices of default, the members of Doveland Developments disagreed as to the appropriate course of action. Tackett took the position that the project could be saved, while the Vanzants wanted to avoid getting deeper into debt. Tackett suggested working with Biltmore Bank to re-establish the loan and continue construction. In the alternative, Tackett suggested encouraging the City of Show Low to pressure the bank to provide enough funds to complete the off-site construction, while the parties sought outside financing for the remaining construction. Tackett also continued negotiations with a third-party interested in the lots, producing a proposed letter of intent from the third-party to purchase up to six lots each year for three years.
¶8 Meanwhile, the Vanzants sought to extricate themselves from the project before accumulating more debt. The Vanzants refused to challenge Biltmore Bank on the default, and instead paid the bank not only the amount necessary to cure the default, but the entire sum advanced by the bank to date. Similarly, the Vanzants decided against pressuring the City of Show Low to enforce a disputed assurance letter from Biltmore Bank. The Vanzants also rejected the proposed third-party letter of intent, stating the deal was not sufficiently developed to be profitable. In the confusion surrounding whether ProCon Capital had been administratively dissolved for failing to submit an annual report, the Vanzants attempted to deed the Doveland Developments property back to Silverdove Properties.
¶9 As the project unraveled, litigation ensued. Bonnie Vanzant filed suit against Tackett, pursuant to the loan indemnification agreement, to recover half of the money she paid on the construction loan. TM2008 Investments then filed a petition for dissolution and liquidation of Doveland Developments, citing the inability to conduct business in light of the members’ substantial disagreements. ProCon Capital filed counterclaims against TM2008 Investments for breach of the implied covenant of good faith and fair dealing (count 1) and breach of contract (count 3), and against TM2008 Investments and the Vanzants personally for breach of fiduciary duty (count 2). Footnote 1. In its counterclaims, ProCon Capital sought to recover investment and construction-related expenses as unjust enrichment, plus its share of the potential profit for the project.
¶10 Following consolidation of the suits, the trial court granted Bonnie Vanzant’s motion for summary judgment on the indemnification claim. The trial court denied TM2008 Investments’ motion for summary judgment on the counterclaims. Just prior to trial, ProCon Capital voluntarily dismissed with prejudice counts 1 and 3. After an eight-day jury trial on the claim for breach of fiduciary duty, the jury returned a verdict in favor of ProCon Capital and against TM2008 Investments and the Vanzants personally for a total of $1,039,754.
¶11 TM2008 Investments and the Vanzants filed post-trial motions for judgment as a matter of law and a new trial that the trial court denied. The court also awarded ProCon Capital its attorneys’ fees in the amount of $93,422. TM2008 Investments and the Vanzants filed a timely notice of appeal. We have appellate jurisdiction pursuant to the Arizona Constitution, Article 6, Section 9 and Arizona Revised Statutes (“A.R.S.”) § 12-2101(A)(1) (West 2014). Footnote. 2.
¶12 TM2008 Investments and the Vanzants (collectively “Appellants”) argue that the trial court erred by imputing common law fiduciary duties to the members of Doveland Developments. Appellants also argue that the jury determined damages based on improper evidence. We review the existence of a fiduciary duty de novo. Maxfield v. Martin, 217 Ariz. 312, 314, ¶ 12, 173 P.3d 476, 478 (App. 2007) (citation omitted). We review the trial court’s decision to admit evidence for an abuse of discretion or legal error and resulting prejudice. Belliard v. Becker, 216 Ariz. 356, 358, ¶ 13, 166 P.3d 911, 913 (App. 2007) (citation omitted).
I. Doveland Developments and the Existence of a Fiduciary Duty
¶13 Limited liability companies 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.
¶14 Arizona enacted its Limited Liability Company Act in 1992. See 1992 Ariz. Legis. Serv. Ch. 113 (S.B. 1084) (“the LLC Act”); A.R.S. § 29-601, et seq. Unlike other statutorily-blessed business arrangements, (Footnote 3) the LLC Act does not refer to any baseline fiduciary duties that members of an LLC owe to the LLC or to one another. Appellants contend that, absent clear statutory language to the contrary, members of an LLC, like shareholders in a corporation, do not owe the entity or one another a fiduciary duty. ProCon Capital argues that, of necessity, LLC members must owe one another a fiduciary duty, either because members are like shareholders in a closely-held corporation, see Mims v. Valley Nat. Bank, 14 Ariz. App. 190, 192-93, 481 P.2d 876, 878-79 (1971), or partners in a partnership, Hurst v. Hurst, 1 Ariz. App. 603, 607, 405 P.2d 913, 917 (1965). Faced with these diametrically-opposed arguments, the trial court concluded that the “appellate courts will likely find . . . a fiduciary duty owed by a member of an LLC such as Doveland to another member.”
¶15 We decline in this case to mechanically apply fiduciary duty principles from the law of closely-held corporations or partnerships to a limited liability company created under Arizona law. The legislature did not explicitly outline any such duties for members of an LLC; instead, the LLC Act allows the 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 . . . .”). Footnote 4. The members of Doveland Developments created a written operating agreement (the “Agreement”) which does, as discussed below, outline reciprocal duties the members would owe each other. Therefore, the trial court erred by imputing, without reference to the Agreement, a fiduciary duty on the members of Doveland Developments to each other based solely on principles applicable to closely-held corporations and/or partnerships. Footnote 5.
A. Duty and the Operating Agreement
¶16 We reject as a preliminary matter Appellants’ contention that Article II, Section A of the Agreement necessarily precludes application of closely-held corporation or general partnership principles concerning fiduciary duties to members of this LLC. Article II, Section A reads: “The Members acknowledge this Company shall be operated in a manner consistent with its treatment as a partnership for federal and Arizona income tax purposes. . . .