340 Ga. App. 378
Ga. Ct. App.2017Background
- Practice Benefits, originally intended to hold two votes among four founders of Entera Holdings, LLC, alleges Entera and manager M. Clark Fain, III wrongfully stripped it of voting power, withheld return of its initial capital contribution, and excluded it from 2014 distributions.
- Entera's manager Fain refused to amend governing documents to reflect Practice Benefits’ two votes after becoming manager in 2013.
- Entera returned the initial capital contributions of the other members but not Practice Benefits and made distributions to all members except Practice Benefits, allegedly violating the operating agreement’s pro rata distribution requirement.
- Practice Benefits sued for breach of contract (against Entera) and breach of fiduciary duty (against Fain), seeking injunctive relief, an accounting, and damages.
- Entera moved to dismiss for failure to state a claim arguing it was not a party to the operating agreement; Fain moved to dismiss arguing the fiduciary claims were derivative and Practice Benefits failed to satisfy statutory demand/90-day requirements.
- The trial court granted both motions. Practice Benefits appealed and the Court of Appeals reversed as to both defendants.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an LLC can be bound by its operating agreement for breach-of-contract claims | Practice Benefits: Entera is bound by the operating agreement and can be sued even if it did not sign it | Entera: Not a signatory; therefore not a party to the operating agreement and cannot be liable for breach | Reversed trial court — under OCGA § 14-11-101(18) an LLC is bound by its operating agreement even if it did not execute it |
| Whether fiduciary-duty claims against the manager are derivative or direct | Practice Benefits: Alleged special injuries (unique denial of votes, non-returned capital, exclusion from distributions) supporting a direct claim | Fain: Claims are derivative affecting the company and all members; Practice Benefits failed to allege statutory demand/90-day waiting period | Reversed trial court — the complaint sufficiently alleged separate and distinct injuries under the "special injury" exception, so dismissal for lack of subject-matter jurisdiction was improper |
Key Cases Cited
- Barnett v. Fullard, 306 Ga. App. 148 (discussing de novo review on motion to dismiss)
- ULQ, LLC v. Meder, 293 Ga. App. 176 (affirming breach-of-contract claims involving operating agreements)
- James E. Warren, M.D., P.C. v. Weber & Warren Anesthesia Svcs., 272 Ga. App. 232 (operating agreement entitles member to certain post-resignation payments)
- Internal Medicine Alliance v. Budell, 290 Ga. App. 231 (managing members owe fiduciary duties under OCGA § 14-11-305)
- Phoenix Airline Svcs. v. Metro Airlines, 260 Ga. 584 (explaining general rule that fiduciary-breach claims are derivative)
- Thomas v. Dickson, 250 Ga. 772 (reasons supporting derivative-suit rule)
- Grace Bros. v. Farley Indus., 264 Ga. 817 (special-injury exception allows direct action where controlling shareholders cause singular economic injury)
- Crittenton v. Southland Owners Assn., 312 Ga. App. 521 (member may have direct action when injury is distinct from other members)