(The New) Arizona Limited Liability Company Act

By Jack N. Rudel, Member, Jennings, Strouss & Salmon, P.L.C.

Arizona has enacted a new Limited Liability Company Act (the “New LLC Act”). See A.R.S. § 29-3101, et seq. The stated purpose of the New LLC Act is to provide default provisions governing the relationships between the Company, its Members, and, if applicable, its Managers (collectively, the “Interested Parties”) as to matters that are not addressed in the operating agreement of the Company.  When the original statutes authorizing limited liability companies (LLCs) were enacted, it was thought that these entities would be used primarily for special circumstances and that the Interested Parties would adopt comprehensive operating agreements by which the critical provisions concerning such relationships are agreed to and confirmed by them.  In fact, LLCs became the entity of choice in most instances, and many of these entities did not adopt comprehensive operating agreements. The drafters of the New LLC Act intended to plug the holes with provisions that, in their judgment, represented outcomes that would have been selected by the Interested Parties had they considered the issues.

So, as to existing LLCs, if the parties are completely satisfied with their operating agreement, no action need be taken. Except as to a few select provisions, which cannot be overridden by agreement of the parties (some of which are identified below), the provisions of the operating agreement of the Company will prevail over the default provisions of the New LLC Act.

The provisions that cannot be altered by agreement of the Interested Parties (the “Immutable Terms”) include:

  1. Invoking the laws of a state other than Arizona;
  2. Eliminating the contractual obligation of good faith and fair dealing, or conduct involving willful or intentional misconduct;
  3. Unreasonably restricting the rights of Interested Parties to obtain information concerning the Company;
  4. Varying the default causes for dissolution of the Company (but the adding of additional causes is permitted);
  5. Unreasonably restricting the rights of Members to maintain derivative actions in the Company’s name;
  6. Varying the content of organizational or structural change documents;
  7. Restricting the rights of persons other than Interested parties; and
  8. Reducing or eliminating distribution restrictions.

Best practices suggest that the Interested Parties should review the operating agreement of their company periodically to confirm that the company and the Interested Parties are adhering to the operative provisions thereof, and to confirm that the significant provisions are still representative of the intent and desires of the Interested Parties. In light of the New LLC Act, that review should also include an analysis as to whether provisions of the LLC operating agreement that purport to alter the default provisions of the New LLC Act are sufficiently specific so as to effectuate that override, and that any provisions of the operating agreement that do not attempt to alter any of the Immutable Terms, and as to matters not addressed in the operating agreement, whether the default provisions of the New LLC Act are adequate and appropriate under the prevailing circumstances. The assistance of your advisor will likely be required for such analysis, and particularly as to the default provisions of the New LLC Act, the listing of which would be voluminous, and is beyond the scope of this Alert.

The New LLC Act applies to any Arizona limited liability company that is formed on or after September 1, 2019. It also applies to any Arizona limited liability company that exists prior to such date, but only effective as of September 1, 2020, and provided further that any existing company can elect to be governed by the New LLC Act prior to that date.

Disclaimer:  This Alert is for informational purposes only, and is not intended to substitute for the reader obtaining and acting upon legal advice that is specific to the circumstances of the reader as obtained from the reader’s own professional.

What happens when your financial advisor directs you to an investment in a “senior secured promissory note” that will pay a handsome rate of interest over a short period of time? You may be told that this is better than the stock market because these are private real estate investments that are not subject to the volatility of the stock market. The best advice:  look before you leap. What might seem like a good idea to diversify from the stock market can lead to substantial losses. This is true even if your financial advisor is a trusted friend. A prime example is the Aequitas Income Opportunity Fund II, an “alternative investment” that attracted the interest of many investors. One of Christopher Lonn’s clients invested a substantial amount of money into this “senior secured promissory note” and soon learned that his investment would catapult him into a legal odyssey to recover his invested funds.

After some investigation of IOF II Mr. Lonn learned that the Securities and Exchange Commission (SEC) had filed a civil suit against Aequitas, its affiliates, and its principles for operating a “Ponzi-like” scheme. In this arbitration case filed in 2017, Mr. Lonn represented Charles Irion as the trustee of the Charles Irion Profit Sharing Plan. As it turned out, Mr. Irion’s money was some of the last money in to this “Ponzi-like” scheme before Aequitas was raided by federal agents and the SEC brought its civil action. Mr. Irion brought his claims against a registered investment advisory firm, Concert Wealth Management, Inc. and its independent investment advisor representative, John William Aitchison. Among others, Mr. Irion brought claims for breach of fiduciary, negligence, negligent misrepresentations, Arizona securities fraud and Arizona investment-advisory fraud. Prior to the arbitration hearing, Mr. Irion settled his claims against Concert Wealth Management.

In February 2019, Mr. Lonn proceeded to arbitrate Mr. Irion’s claims against the sole respondent, John William Aitchison. During the three day arbitration hearing, Mr. Irion alleged that Mr. Aitchison was negligent in performing his duties in connection with the IOF II investment. Mr. Irion offered considerable proof that Aitchison was negligent in connection with the due diligence that he was contractually and legally bound to perform on the IOF II investment before recommending and selling the private investment to Mr. Irion. Investment advisors owe a fiduciary duty to their clients. Following the three day arbitration hearing, the arbitrator found that Aitchison was liable to Mr. Irion for breach of fiduciary duty, professional negligence and negligent misrepresentation. The arbitrator awarded compensatory damages to Mr. Irion.

For more information on this topic or other commercial litigation matters, please contact Jack N. Rudel.

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