§ 7.4.1

• Jurisdiction: Arizona

§ 7.4.1 In General

Arizona law imposes heightened duties of honesty, care, fair dealing, and disclosure on persons who occupy a fiduciary²¹¹⁷ or other special relationship with another.²¹¹⁸ In professional relationships, some of these duties may extend not only to clients but to foreseeably injured third parties.²¹¹⁹

The requirements for fraud are reduced in fiduciary relationships. The nine elements of common-law fraud are inapplicable.²¹²⁰ In the usual case, the plaintiff need show neither intent to defraud, reliance, nor a right to rely.²¹²¹ But in a case involving a creditor of an insolvent corporation, the Court of Appeals held that the plaintiff was required to prove justifiable reliance.²¹²² In some instances of fiduciary fraud, damages are also unnecessary.²¹²³

These relaxed standards for fiduciary fraud govern a sizeable spectrum of business. For example, fiduciary duties are commonly imposed in joint ventures,²¹²⁴ partnerships,²¹²⁵ and closely held corporations.²¹²⁶ Fiduciary duties may also be found where the defendant has superior knowledge "of a kind beyond the fair and reasonable reach of the alleged beneficiary and inaccessible to the alleged beneficiary through the exercise of reasonable diligence."²¹²⁷

In Arizona, LLCs are a prominent form of business organization. Legislation that went into effect in 2019 and 2020 clarifies the fiduciary duties of LLC members and managers.²¹²⁸ By statute, members in a member-managed LLC²¹²⁹ and managers in manager-managed LLC²¹³⁰ owe the company and its member duties of loyalty and care. These statutory duties, as well as those under the operating agreement, must be exercised consistent with the contractual duty of good faith and fair dealing.²¹³¹

Because ownership interests in LLCs and other business ventures and entities frequently are securities, investors often are protected by both securities law and fiduciary law.²¹³² During the formation stage, the participants in these business associations may be unusually dependent on one another for honest information. To ensure fair dealing, fiduciary duties are sometimes imposed.²¹³³ Disclosure duties may thus apply during the incipient stages of business capitalization when investments are commonly solicited.²¹³⁴ They may also apply when a member's equity interest is purchased.²¹³⁵

In addition to the relationships just discussed, heightened duties are imposed in relationships where investors are dependent on the integrity and discretion of others. Securities professionals and corporate officers, directors, and promoters are notable examples. These are discussed below in §§ 7.4.2 and 7.4.3.

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Notes:

^[2117] See Gemstar, Ltd. v. Ernst & Young, 185 Ariz. 493, 504-05, 917 P.2d 222, 233-34 (1996) (affirming directed verdict that accountants were fiduciaries); Shriners Hosps. for Crippled Children v. Gardiner, 152 Ariz. 527, 528-30, 733 P.2d 1110, 1111-13 (1987) (applying fiduciary standards to trustee's conduct in investing trust assets); Stewart v. Phx. Nat'l Bank, 49 Ariz. 34, 44-46, 64 P.2d 101, 106 (1937) (upholding allegations that bank which acted as financial adviser to customer was a fiduciary); Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 23-26, 945 P.2d 317, 334-37 (Ct. App. 1996) (concluding that auditors were not fiduciaries).

^[2118] See Burkons v. Ticor Title Ins. Co. of Cal., 168 Ariz. 345, 355, 813...