SALE OF ASSETS BY MANAGERS OR MAJORITY MEMBERS OF LLC TO THEIR OWN PRACTICE AT BELOW MARKET VALUE IS A CLASSIC CASE OF OPPRESSION
Trial court erred in sustaining appellees’ preliminary objections in appellants’ action asserting breach of fiduciary and other duties in sale of LLC assets by majority members of LLC to other entity of which they were members because §8943(b)(2) of the LLC law gave the courts the flexibility to analogize to corporate and partnership law to bar a member from engaging in oppressive conduct.
A limited liability company contracted with hospital to provide its physicians with special privileges at hospital’s facilities. Each member of the LLC owned an equal interest in the LLC and member managers ran the LLC. Fifteen LLC members adopted a resolution for the LLC to sell substantially all its assets to Mid Atlantic and then liquidate and dissolve. Two appellant physicians did not vote on the resolution and another was not given notice of it. Mid Atlantic acquired the LLC’s assets including its rights under contracts and the agreement with hospital for a price that allegedly was below fair market value. Appellants sued alleging breach of fiduciary duties and asserting that Mid Atlantic controlled the majority of interest in the LLC and engaged in self-dealing and failing to act in the best interests of all LLC’s owners. Mid Atlantic filed preliminary objections and the trial court sustained them in part, dismissing the breach of fiduciary duty claim. Six years later, appellants voluntarily dismissed their remaining claims and appealed the order sustaining Mid Atlantic’s preliminary objections.
Appellants argued that the trial court erred in finding as a matter of law that appellees owed no duty to appellants under the LLC law either as managers of the LLC or as majority members. The complaint alleged that Mid Atlantic physicians dissolved the LLC and sold its assets to their own practice (Mid Atlantic) at a price below market value. Appellants asserted a “classic case of oppression by the majority owner…through the freeze out of the minority owners.” The court noted that the 1994 LLC law applied to this case and §8943 listed the duties applicable to managers and members. The trial court had relied on §8943(b)(2) to find that appellees had no duties to appellants. Appellants relied on the comment to §8943(b)(2) to argue that the courts had the flexibility to analogize to corporate and partnership law to bar a member from engaging in oppressive conduct. The court found that the plain language of the section stated that a member had no duty to another member “solely by reason of acting is his capacity as a member.” The court found that the word “solely” suggested that a member could have duties to other members if he or she was held to account for reasons other than or in addition to his mere status as a member. The court looked to the comments and to legislative history and determined appellants’ allegations were sufficient to go forward on the understanding that appellees may have breached some type of duty to the LLC’s minority members. The court avoided a definitive characterization of the type of duty that was at issue and determined that the precise nature of the duty could be determined as the case progressed on remand.
Appellees also argued that appellants’ claims against them as managers of the LLC failed because the complaint made no specific allegations regarding any breach of duties by managers. The court found that the complaint was not legally deficient in failing to name the managers since it named all of the members and the complaint averred that defendants were liable under both the member and manager standard.
Reference: Retina Assoc. of Greater Philadelphia, Ltd. V. Retinovitreous Assoc., Ltd., PICS Case No. 17-1892 (Pa. Super. Dec. 7, 2017), Digest of Recent Opinions, Pennsylvania Law Weekly, 41 PLW 13, (January 2, 2018).
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