What Is a Breach of Fiduciary Duty Between Business Partners?

Where the Duty Comes From

For Arizona LLCs, A.R.S. § 29-3409 imposes a fiduciary duty of loyalty and a duty of care on members of a member-managed LLC, and on managers of a manager-managed LLC. General and limited partnerships have analogous duties under Arizona’s partnership statutes. These duties exist by default, whether or not your operating or partnership agreement mentions them, though the agreement can modify some (not all) of their scope.

It is worth pausing on why this matters so much practically: these duties exist independent of any specific promise in a contract. A partner does not need to have signed something explicitly promising not to steal a business opportunity, the law imposes that obligation automatically because of the trust-based nature of the relationship itself.

The Duty of Loyalty

The duty of loyalty is the core of a fiduciary relationship. Under A.R.S. § 29-3409, it generally requires a member or manager to:

• Account to the company for any property, profit, or benefit derived from company business, from using company property, or from a company opportunity
• Refrain from dealing with the company on behalf of someone with interests adverse to the company
• Refrain from competing with the company before it dissolves

In plain terms: a partner cannot secretly divert a deal that belonged to the company, cannot use company funds or assets for personal benefit, and cannot start a competing business on the side while still a member.

The “company opportunity” concept trips up a lot of business owners. If a deal, client, or opportunity came to a member because of their role in the company, not through some entirely separate, unrelated channel, it generally belongs to the company first. A member who wants to pursue it personally instead typically needs to disclose it and get the company’s consent, not just quietly take it for themselves.

The Duty of Care

The duty of care is a lower bar than perfection. It generally requires a member or manager to act in good faith and to avoid grossly negligent, reckless, intentional, or knowingly unlawful conduct. Ordinary business mistakes or bad outcomes from reasonable decisions do not usually breach the duty of care. Ignoring obvious red flags, or making decisions with reckless disregard for the company’s interests, can.

This distinction matters because not every business disagreement or bad outcome is a fiduciary duty claim. A manager who makes a reasonable business decision that does not pan out is generally protected, the law does not punish ordinary business risk. What it does punish is a manager who makes decisions carelessly, without basic diligence, or in reckless disregard of obvious warning signs.

Common Scenarios We See

Self-dealing (a manager awarding a lucrative contract to their own side business), misappropriation (using the company credit card or bank account for personal expenses), competing ventures (starting a rival business while still an active member), and freeze-outs (majority members cutting a minority member out of information, distributions, or decision-making) are among the most common fiduciary duty disputes we litigate.

Freeze-out situations deserve particular attention because they are often less obvious than outright theft. A majority member who stops sharing financial information, excludes a minority member from key decisions, or manipulates distributions to pressure someone out of the company can be breaching their fiduciary duty just as much as someone who directly misuses company funds.

What You Can Recover

Remedies for a breach of fiduciary duty can include disgorgement of the profit the breaching party improperly obtained, compensatory damages for the harm caused to the company, an accounting of company funds and transactions, and in some cases removal of the breaching member through the judicial expulsion process under A.R.S. § 29-3602.

An accounting can be a powerful early remedy in its own right, it forces transparency about company finances that a breaching member may have been actively obscuring, and often reveals the true scope of the problem before the case even gets to the damages stage.

Proving a Fiduciary Duty Claim

These cases usually turn on documents: financial records, emails, bank statements, and company communications that show where money and opportunities actually went. Early preservation of records, and a forensic look at company finances, is often what separates a strong fiduciary duty claim from a weak one.

Because the breaching party often controls the company’s books, getting an independent look at the financial records early, before they can be altered or destroyed, matters enormously. This is one of the situations where moving quickly, rather than waiting to see if things improve, genuinely protects your position.

Steps to Take if You Suspect a Fiduciary Breach

1. Gather what records you already have access to, financial statements, bank access, emails, before raising concerns openly.
2. Document specific instances of the suspected conduct, dates, amounts, and how you learned about it.
3. Request a formal accounting if you do not already have full visibility into company finances.
4. Avoid confronting the other party informally before understanding your legal position, this can prompt them to alter or destroy records.
5. Talk to a litigation attorney about whether to pursue an accounting, damages, removal, or some combination of remedies.