TM2008 Investments, Inc., vs. Procon Capital Corp.

[H]owever, it is acknowledged under Arizona law that the entity is a limited liability company and specifically not a general partnership.” This section of the Agreement merely restates one of the twin aims of forming an LLC: Doveland Developments will be taxed as a partnership. See, e.g., Ronold P. Platner, A New Alternative—the Arizona Limited Liability Company, Ariz. Att’y, Jan. 1993, at 23 (“The LLC resembles the traditional corporation on owner liability issues but is treated like a partnership for federal and Arizona income tax purposes. This means the owners of an LLC can enjoy the benefits of the ‘corporate shield’ plus the tax benefits of partnerships.” (footnote omitted)). In short, the cited language of the Agreement does not preclude the court from determining whether and to what extent the Agreement establishes that members owe each other a fiduciary duty.

¶17 Article V, Section A of the Agreement provides that “[t]he Members shall direct, manage, and control the business of the Company to the best of the Members’ ability and[] subject only to those restrictions set forth in the Act or this Agreement.” (Emphasis added). In Article V, Section F, the Agreement states:

It is agreed any Member shall not be liable to the Company or any other Member for any damages or the like relating to any vote, decision, action, inaction or the like taken on behalf of the Company in accordance with these provisions and other provisions of this Agreement if such is done in good faith and with reasonable business judgment including the duty to make management decisions with the care of an ordinarily prudent person in a like position and similar circumstances and in a manner believed to be in the best interests of the Company. (Emphasis added).

This provision unquestionably establishes, pursuant to A.R.S. § 29-682(B), the existence and scope of the duties owed by and between TM2008 Investments and ProCon Capital as members of Doveland Developments. We need not reach the issue of whether these duties are “fiduciary” in nature; that label may evoke different concepts and applications in different settings. We do note, however, that in this Agreement: (1) the obligation to act in good faith explicitly acknowledges what is generally implied at law in any contractual relationship; (2) the obligation to utilize reasonable business judgment and to act as an ordinarily prudent person in making decisions seems to establish an applicable standard of care; and (3) the obligation to act in a manner believed to be in the best interests of the Company appears consistent with the general concept of a duty of loyalty to the business entity, here Doveland Developments.

B. The Operating Agreement and the Jury Instructions

¶18 Appellants argue that the jury instructions misstated the nature of the duty owed by the members of Doveland Developments to each other. “We review jury instructions as a whole to determine whether the jury has been given the proper rule of law to apply when coming to a decision.” Dawson v. Withycombe, 216 Ariz. 84, 105, ¶ 63, 163 P.3d 1034, 1055 (App. 2007) (citation omitted). “A jury verdict will not be overturned because of the jury instructions that were given unless there is a substantial doubt as to whether or not the jury was properly guided in its deliberations.” Durnin v. Karber Air Conditioning Co., 161 Ariz. 416, 419, 778 P.2d 1312, 1315 (App. 1989).

¶19 In relevant part, the jury was instructed on duty as follows:

Defendant, TM2008 Investments, Inc., and Plaintiff, Procon Capital Corporation, were Members in Doveland [Developments], L.L.C.

Members in an L.L.C. owe a special duty to one another, which is called a fiduciary duty. This duty requires Members to deal in utmost good faith with one another and fully disclose to one another all material facts relating to the L.L.C.‘s affairs within their knowledge.

Plaintiff, Procon Capital Corporation, claims that Defendant, TM2008 Investments, Inc., breached this fiduciary duty. To establish this claim, Plaintiff must prove:

1. TM2008 Investment breached this duty;

2. TM2008 Investments’ breach was a cause of Procon Capital Corporation’s damages; and

3. Procon Capital Corporation’s damages.

¶20 As previously noted, the trial court concluded in summary judgment proceedings that a fiduciary duty between the members existed, not based upon the parties’ written Agreement, but rather based upon comparison with other business forms and the common law. Article V, Section F of the Agreement, however, establishes the duties owed and the liability yardstick by which the claims and defenses of this case are measured. By failing to advise the jury of the parameters specifically outlined in Article V, Section F of the Agreement, the trial court did not inform or guide the jury concerning the nature and extent of the duties TM2008 Investments owed ProCon Capital. We therefore reverse the verdict and judgment in favor of ProCon Capital and remand for a new trial. Footnote 6.

II. Damages

¶21 Appellants argue that recovery predicated on unjust enrichment is not available to ProCon Capital because “TM2008 [Investments] did not and does not now own the [improved] land and therefore cannot legally or practically be ‘enriched’ by such ‘enhancement.’ The only party enriched was Doveland [Developments] . . . .” Appellants also argue that ProCon Capital improperly introduced and relied on evidence of the construction and other project-related debt owed by Doveland Development to legally distinct entities owned by Steve Tackett.

A. Unjust Enrichment

¶22 At oral argument, ProCon Capital asserted that unjust enrichment is available because the Vanzants will ultimately gain control of the land through the note and deed of trust between Doveland Developments and Silverdove Properties, LLC, leading the Vanzants to be unjustly enriched. For the following reasons, we conclude that a claim of unjust enrichment is not yet ripe for adjudication at this stage in the judicial process.

¶23 Flooring Systems, Inc. v. Radisson Grp., Inc., 160 Ariz. 224, 772 P.2d 578 (1989), illustrates why unjust enrichment is not yet applicable at this stage of the proceedings. Flooring Systems was a subcontractor that performed flooring work in a Radisson hotel on a contract with a separate general contractor. Id. at 225, 772 P.2d at 579. When the general contractor refused to pay Flooring Systems, Radisson refused to pay the general contractor the remainder of the balance, but also refused to pay Flooring Systems for the work performed. Id. at 225-26, 772 P.2d at 579-80.

¶24 Flooring Systems then sued Radisson and Radisson’s agent on a theory of unjust enrichment. Id. The trial court granted the defendants’ motions for summary judgment after the defendants argued that they could not be held liable because they contracted with the general contractor, not Flooring Systems. Id. at 226, 772 P.2d at 580. This argument rested on a line of cases based on the Restatement of Restitution § 110 (1937), which states:

§ 110 Restitution from Beneficiary of a Contract with Third Person Who Has Failed to Perform.

A person who has conferred a benefit upon another as the performance of a contract with a third person is not entitled to restitution from the other merely because of the failure of performance by the third person.

See Flooring Systems, Inc., 160 Ariz. at 226, 772 P.2d at 280; see also Stratton v. Inspiration Consol. Copper Co., 140 Ariz. 528, 683 P.2d 327 (App. 1984); Advance Leasing & Crane Co. v. Del E. Webb Corp., 117 Ariz. 451, 573 P.2d 525 (App. 1977).

¶25 On appeal, however, the supreme court rejected that defense, relying on the principle that:

In determining whether it would be unjust to allow the retention of benefits without compensation, a court need not find that the defendant intended to compensate the plaintiff for the services rendered or that the plaintiff intended that the defendant be the party to make compensation. This is because the duty to compensate for unjust enrichment is an obligation implied by law without reference to the intention of the parties. What is important is that it be shown that it was not intended or expected that the services be rendered or the benefit conferred gratuitously, and that the benefit was not conferred officiously.

Flooring Systems, Inc., 160 Ariz. at 227, 772 P.2d 578, 581 (citations and quotations omitted).

¶26 Viewing our case through this lens, the arguments of both sides come into focus: TM2008 argues that the principle from the Restatement of Restitution § 110 governs the situation; conversely, ProCon Capital argues that Flooring Systems, Inc. should apply.

¶27 Comparing this case to Flooring Systems, Inc., we conclude that any claim of unjust enrichment here is not ripe for adjudication until the liquidation of Doveland Developments occurs. This conclusion allows the liquidation process to settle the debts owed by Doveland Developments after liquidation and affords the parties in any potential post-liquidation suit the opportunity to advocate for the application of the proper rule at that time.

B. Evidence of Damages

¶28 Appellants contend that the trial court erred by admitting evidence of debts owed by Doveland Developments to legally distinct entities owned by Steve Tackett. The trial court admitted the disputed evidence because it was relevant to establish a breach of the fiduciary duty owed by Appellants and the infrastructure value added to the Silverdove property. The trial court did not abuse its discretion in admitting the evidence on the issue of breach of duty; however, the court did err in allowing the jury to utilize this evidence to calculate any damage award in favor of Appellants against ProCon Capital. The debts owed by Doveland Developments to separate legal entities that are not parties to this suit are more appropriately directed to the liquidation proceedings for Doveland Developments.

III. Attorneys’ Fees

¶29 Appellants appeal the trial court’s award of attorneys’ fees. Because we have reversed the judgment, we also reverse the award of attorneys’ fees.

¶30 ProCon Capital requests attorneys’ fees on appeal pursuant to Arizona Rule of Appellate Procedure 21 and A.R.S. § 12-341.01(A). However, § 12-341.01(A) requires that a party be successful to be entitled to an award of attorneys’ fees. Because ProCon Capital is not yet successful, we deny its request.

¶31 Appellants request attorneys’ fees on appeal pursuant to A.R.S. § 12-2101, Arizona Rule of Civil Appellate Procedure 21(a) and (c) and the Operating Agreement. Section 12-2101 is a jurisdictional statute, and neither that statute nor Rule 21, ARCAP, provides a substantive basis for an award of attorneys’ fees. The Agreement does authorize payment of “attorney fees incurred because of [a] breach”; however, Appellants have not pursued any breach of contract claim in this action.  Footnote 7. We therefore deny their request.

¶32 We take no position with regard to the basis for or propriety of an attorneys’ fees award for either party following the resolution of the underlying merits of this case. Accordingly, we reserve the question of attorneys’ fees without prejudice to the sound discretion of the trial court.

CONCLUSION

¶33 We reverse and remand the case for a new trial consistent with this decision.

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Footnotes

1  ProCon Capital also sought declaratory and injunctive relief regarding TM2008 Investments’ attempt to deed the property back to Silverdove Properties. The trial court later determined that this counterclaim was moot because TM2008 Investments agreed the document was null and void, and this claim is not a subject of this appeal except as it relates to the alleged breach of fiduciary duty.

2  We cite the current Westlaw version of the applicable statutes and rules because no revisions material to this decision have since occurred.

3  See, e.g., A.R.S. § 10-830(A) (establishing fiduciary duties for director of corporation); A.R.S. § 10-842(A) (establishing fiduciary duties for officer of corporation with discretionary authority); A.R.S. § 29-1034(A) (“The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections B and C.”).

4 For a similar principle in the common law, see Restatement (Third) of Agency § 8.06(1) (2006) (permitting the principal to consent to “[c]onduct by an agent that would otherwise constitute a breach of duty”). But see Restatement (Third) of Agency § 8.06(1) cmt. b (2006). At oral argument, ProCon Capital suggested that interpreting the LLC Act to permit members of an LLC to establish the existence and scope of duties would lead to operating agreements that condone “cheating and stealing” under the guise of contract law. As the plain text of the LLC Act makes clear, however, the operating agreement “may contain any provision that is not contrary to law.” A.R.S. § 29-682(B). Because cheating and stealing would clearly be contrary to law, ProCon Capital’s public policy concerns are unfounded.

5 ProCon Capital urges us to consider the legislative history of the LLC Act for the proposition that members of an LLC have the same obligations (i.e., fiduciary duties) as officers of a corporation. See Ariz. State Sen. Final Revised Fact Sheet for S.B. 1084 (limited liability company act), at 7 (noting amendments adopted by senate committee “[c]larif[y] that members, managers, employees, officers, or agents of limited liability companies have the same liability as similar corporate officers and directors”) (emphasis added). However, this reference to “same liability” in the legislative history sheds no light on the more specific fiduciary duty members of an LLC might owe to each other. Absent clear reference to fiduciary duties, and given the text of the LLC Act, a more considered reading of the legislative history suggests “same liability” refers to the limitation on liability owed to third parties. See also Minutes of Comm. on Commerce and Labor, S. 40, 2d Sess., at 4 (Ariz. 1992) (statement of analyst Patrice Kraus) (summarizing that the LLC Act “provides that members of a limited liability company generally are not personally liable for the debts and obligations of the company.”).

6 We note the mandatory alternative dispute resolution provisions set forth in the Agreement at Article XIV, but do not in this decision determine whether, on remand, the claims in this case are subject to mediation and/or binding arbitration.

7 Appellants have explicitly argued in their briefing to this court that an attorneys’ fee award based on a claim of breach of fiduciary duty sounding in tort, as the claim was prosecuted below, is improper.