Archives for August 2013

Are there fiduciary duties between members in an Arizona LLC??

Posted on: August 22, 2013, in:

In 1992, the Arizona legislature enacted the Arizona Limited Liability Company Act. Since that time the LLC has become the entity of choice for many individuals, businesses, partners and investors. While there obviously are differences between corporations and LLCs, attorneys in Arizona have always believed that there were many similarities.

For instance, when you form a corporation Articles of Incorporation must be filed with the Arizona Corporation Commission. When you form a LLC Articles of Organization containing generally the same type of information must be filed with the Arizona Corporation Commission. Shareholders in a corporation may enter into Bylaws that govern the shareholders, directors, officers and their various dealing with and among each other. Similarly, members in a LLC may enter into an Operating Agreement that governs the members and management of the LCC.

Based on the similarities and the abundance of Arizona case law on corporations, attorneys have looked to that law when dealing with issues between members of LLCs for the past twenty-one years. Part of the reason for this is that there still is, after so many years, little published case law on LLCs regarding issues between members and or managers.

When issues of wrongdoings have arisen between members in a LLC, breach of fiduciary duty claims have been brought in state court lawsuits. Recently, in a lawsuit I am involved with in bankruptcy court, these issues were dealt with in a surprising manner by the bankruptcy judge.

The bankruptcy judge dismissed claims based on breach of fiduciary duty based on the belief that there are no fiduciary duties between members of a LLC unless they are specifically provided for in an operating agreement. This was shocking to me, as well as to other attorneys at my firm and other firms who I spoken with about this issue. The bankruptcy judge specifically said the Arizona Limited Liability Company Act does not state that there are fiduciary duties between members, there is no Arizona case law on the issue and declined to impose fiduciary duties on members unless specifically set forth in the operating agreement.

As always, whether the potential lack of fiduciary duties is good or bad depends on the position of you or your client. There are situations where you or your client will or won’t want there to be fiduciary duties between LLC members. Because of this, the important takeaways include the following:

  1. At the time LLCs are being formed if you or your client want there to be fiduciary duties between members put it in the operating agreement to be safe.
  2. If you don’t want there to be fiduciary duties between members specifically state there are no fiduciary duties on the operating agreement.
  3. It is impossible to know what other Arizona state, federal or bankruptcy judges will find on this issue in any given case based on my recent experience.
  4. Attorneys need to be speaking with their clients about this issue to determine whether an existing operating agreement needs to be amended.

If you or your clients have concerns with this type of issue, please let me know if I may be of assistance in discussing and analyzing the issues so educated decisions can be made about either existing relationships between members or where there have been actions that appear to support a claim for a breach of fiduciary duties between LLC members.

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Not All Customer Lists Are Trade Secrets

Posted on: August 14, 2013, in: , , ,

In a case decided this past April, the Arizona Court of Appeals found that whether a business’s customer list is a trade secret requires a factual inquiry. Calisi v. Unified Financial Services, LLC, Case No. 1 CA-CV-0812.  The court’s holding requires a two part inquiry to determine whether a customer list is, in fact, a trade secret.

First, a trial court must determine whether the customer list has been kept secret and there have been reasonable efforts to keep the customer list secret. If the facts show this to be the case, courts then must consider four factors to determine whether a customer list is a trade secret: (1) whether the customer list contains a selective accumulation of detailed, valuable information about customers; (2) whether substantial efforts were expended to identify and cultivate the customer base such that it would be difficult for a competitor to acquire or duplicate the same information; (3) whether the information in the customer list derives independent economic value from its secrecy and gives the business a demonstrable competitive advantage over others in the industry; and (4) whether the business divulged its customer list externally or internally. If a business cannot provide and present evidence to a court to support these four factors its customer list is not a trade secret.

The takeaway from this case is that  it is important to keep your customer list secret, and clearly never provide the list to people outside of your business, and to be able to clearly provide background on the list to support the four factors enunciated by the Court of Appeals.

As a side note, two of my partners represented the plaintiff and were successful on all issues in the appeal.

If you or anyone you know needs advice or assistance on either side of a customer list or trade secret case, please call me for assistance at (602) 248-1009 or email me at nhb@jaburgwilk.com.

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Thoughts on Arizona corporations

Posted on: August 07, 2013, in: , ,

Many attorneys and business owners look to the Arizona statutes and disillusion has swords for minority shareholders to potentially break deadlock, but do not look at the down side of such actions based on the same statutory framework. Other statutory provisions allow a corporation to, after the filing of a judicial dissolution action, purchase the shares of the dissenting shareholder for fair value, which is decided by the judge, who is entitled to set the price and the terms of sale. This makes the filing of a judicial dissolution action potentially problematic for minority shareholders. There are strategies and ways to structure corporations in their bylaws to avoid this issue.

The point is that whether you’re dealing with majority owners or minority owners in a corporation that sophisticated planning can be done either in forming the corporation or amending his bylaws depending on your clients position. If you have clients who may need assistance either selecting the proper form of organization for their business or drafting documents for a new or existing business to protect their specific interests, please keep me and my firm, Jaburg Wilk, in mind.

If you have any questions or want to discuss these type of issues, please call me at 602-248-1009.

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