Retina Associates of Greater Philadelphia, Ltd. v. Retinovitreous Associates, Ltd.Retina Associates of Greater Philadelphia, Ltd. v. Retinovitreous Associates, Ltd.
Douglas J. Smillie, Center Valley, for appellant.
Michael J. Torchia, Huntingdon Valley, for Benson, Federman, Brown, and Fineman, appellees.
BEFORE: DUBOW, J., SOLANO, J., and FORD ELLIOTT, P.J.E.
Appellants Retina Associates of Greater Philadelphia, Ltd. (“Retina”), and two of its physicians—its President, Jonathan B. Belmont, M.D. and Vice President, Robert C. Kleiner, M.D. (together, “Retina Physicians”)—appeal from the order sustaining preliminary objections in the nature of a demurrer filed by Appellees William Benson, M.D., Jay L. Federman, M.D., Gary C. Brown, M.D., Mitchell S. Fineman, M.D., David H. Fischer, M.D., Sunir J. Garg, M.D., Allen C. Ho, M.D., Richard Kaiser, M.D., Alfred C. Lucier, M.D., Joseph I. Maguire, M.D., J. Arch McNamara, M.D., Carl H. Park, M.D., Arunan Sivalingam, M.D., William Tasman, M.D., James F. Vander, M.D., and Jason Hsu, M.D. (collectively, “Mid Atlantic Physicians”), all of whom are alleged to be “members and/or employees” of Appellee Retinovitre-ous
Because the trial court disposed of this case on preliminary objections, we adopt the facts as alleged in Appellants’ amended complaint and its exhibits. Khawaja v. RE/MAX Central, 151 A.3d 626, 630 (Pa. Super. 2016).
Retina and Mid Atlantic are competing practices of retina specialists who have staff privileges at Wills Eye Hospital in Philadelphia. In 2000, several retina specialists formed Retina Diagnostic & Treatment Associates, LLC (“RDTA”), a limited liability company that entered into contracts with Wills Eye to provide its members—who ultimately included both the Retina Physicians and the Mid Atlantic Physicians—with special privileges at Wills Eye’s facilities.1 Pursuant to RDTA’s operating agreement, each RDTA member owned an equal 5.263% interest in the company. The operating agreement pro-vided that RDTA would be run by up to six managers,2 each of whom had to be a member of RDTA and one of whom had to be “the physician who is the then Director of the Retina Service of Wills Eye Hospital.” Third Am. and Restated Limited Liability Co. Operating Ag. of RDTA, 1/1/2006, at 10. Appellants alleged that at the time the amended complaint was filed, Appellee Brown held the position of Director and Appellees Fischer and Sivalingam were Co-Directors of the Wills Eye Retina Service. Am. Compl. ¶¶ 14-15.
Although the operating agreement provided that RDTA would be run exclusively by its managers, it contained provisions for some extraordinary decisions to be made by RDTA’s members. Section 6.06 of the agreement stated:
Certain Company Matters Requiring Member Approval.
(a) Specific Matters. Notwithstanding anything in this Agreement to the con-
trary,
the approval of the following matters shall require the affirmative vote of the Members by a Majority Vote: ...
(v) The sale, exchange or transfer of all, or substantially all, of the assets of the Company.
...
(viii) The dissolution of the Company pursuant to Section 10.01(i)....
Third Am. and Restated Limited Liability Co. Operating Ag. of RDTA, at 15.
On March 31, 2009, fifteen of the Mid Atlantic Physicians (all but Appellees Benson and Park), acting as members of RDTA, adopted a resolution titled “Written Consent of the Members Holding a Majority of the Percentage Interests.” Am. Compl. ¶ 27 & Ex. D. The fifteen signers “collectively held a majority of the percentage interests in RDTA.” Id. ¶ 27. By their resolution, the signers provided for RDTA to sell substantially all of its assets to Mid Atlantic and then to liquidate and dissolve. The two Retina Physicians did not vote on the resolution (which did not contain signature lines for either of them), and Appellant Belmont was not given notice of it. Id. ¶¶ 27-28 & Ex. D.
Pursuant to the resolution, Mid Atlantic then acquired RDTA’s assets, including its rights under contracts, leases, and other agreements with Wills Eye, for $353,494, a price that allegedly is below the assets’ fair market value. Am. Compl. ¶¶ 31-35. RDTA also entered into agreements to purchase services from Mid Atlantic in connection with winding up RDTA’s affairs, the cost of which, $107,829, would be offset against the purchase price owed to RDTA by Mid Atlantic. Id. ¶¶ 37-39.
Appellants instituted this action by filing a complaint on October 7, 2009. In an amended complaint, Appellants purported to state a claim for, among other things, breach of fiduciary duties by the Mid Atlantic Physicians, who “in the aggregate controlled the majority interest in RDTA.” Am. Compl. ¶ 43. They alleged that, “[a]s controlling majority members, the [Mid Atlantic Physicians] owe [Appellants] a duty of utmost good faith and fair dealing” and “a quasi-fiduciary duty ... not to use their power for selfish or personal interests or in such a way as to exclude [Appellants] from their due share of the benefits accruing from the existence and operation of RDTA.” Am. Compl. ¶¶ 43-45. The pleading continued:
46. Despite these duties and obligations of utmost good faith and fair dealing imposed upon them by law, some or all of the [Mid Atlantic Physicians] breached these duties and acted exclusively in their self-interests by:
a. Excluding [Appellants] from meaningful participation in the decisions related to the [asset purchase agreement with Mid Atlantic], sale of RDTA’s assets to [Mid Atlantic], and termination of [Retina’s agreements with Wills Eye];
b. Self-dealing and directly or indirectly making a profit at [Appellants’] financial and professional expense by transferring and selling RDTA’s assets to [Mid Atlantic] of which all [Mid Atlantic Physicians] are members and/or employees, thereby excluding [Appellants] from the benefits they enjoyed through their ownership or relationship to RDTA;
c. Failing to act in good faith and for the benefit of [Appellants], Belmont and Kleiner, and RDTA in all matters involving the sale of RDTA’s assets to [Mid Atlantic];
d. Excluding [Appellants] from their rightful participation in and enjoyment of the benefits of their ownership in RDTA, including, but not limit-ed
to, the agreements with Wills Eye and the profits derived therefrom; e. Causing [Appellants] to suffer and to continue to suffer substantial financial harm by terminating [Retina’s agreements] with Wills Eye and depriving [Appellants] of sufficient access to Wills Eye to treat patients at the Wills Eye facility; and
f. Failing to act solely in the best interests of all owners and RDTA, which has caused [Appellants] to suffer and continue to suffer financial harm.
47. The actions of the [Mid Atlantic Physicians] ... constitute a breach of their duty of utmost good faith and fair dealing owed to [Appellants], as well as a breach of their quasi-fiduciary duty owed to [Appellants], as minority, or de facto minority owners of RDTA.
48. Further, the actions of the [Mid Atlantic Physicians] ... constitute a breach of their fiduciary duties to RDTA by entering into a sales transaction for, upon information and belief, substantially less than fair market value.
49. Some or all of the [Mid Atlantic Physicians] harmed [Appellants], Belmont and Kleiner, by acting in derogation of [Appellants’] rights in RDTA, including [Appellants’], Belmont and Kleiner, rights to their respective share of the benefits accruing from the existence and operation of RDTA.
50. Moreover, Defendants’ substantial undervaluation of RDTA has deprived [Appellants of] their fair market share of the assets, contracts, agreements, equipment, inventory, supplies, and goodwill.
51. Some or all of [Mid Atlantic Physicians’] intentional and self-serving conduct is outrageous in that it represents a wanton and willful disregard of [Appellants’] interests and rights as well as blatant self-dealing of the most egregious kind.
52. Some or all of [Mid Atlantic Physicians] purposefully transferred all assets to [Mid Atlantic] with a reckless indifference and wanton and willful disregard of [Appellants’] financial and beneficial interests in RDTA without justification or privilege.
Am. Compl. at ¶¶ 46-52.
The trial court described the subsequent procedural history as follows:
[Mid Atlantic Physicians] filed preliminary objections to the amended complaint. Their arguments included that they did not owe a fiduciary duty to [Appellants]. They cited
15 Pa.C.S.A. § 8943(b)(2) for the proposition that members of limited liability companies do not owe fiduciary duties to each other.After briefing and oral argument, this court issued an Order dated July 2, 2010, sustaining the preliminary objections in part and overruling them in part. Specifically, this court dismissed the breach of fiduciary duty claim against the [Mid Atlantic Physicians] and permitted the remaining claims to move forward.
[Appellants] filed a motion for partial reconsideration, which this court denied in an Order dated August 9, 2010. Approximately six years later the case was ordered on the standby trial list for the month of October 2016. [Appellants] voluntarily dismissed their remaining claims on September 29, 2016.
Trial Ct. Op., 12/6/16, at 2-3. Appellants then filed this timely appeal from the order sustaining the Mid Atlantic Physicians’ preliminary objection to the breach of fiduciary duty claim. See
2. The Trial Court erred in determining, as a matter of law and/or based on the averments of the Amended Complaint and Exhibits attached thereto, that managers of a manager-managed Pennsylvania LLC do not owe a fiduciary duty to the minority members of said LLC and dismissing Count I (Breach of Fiduciary Duty) of the Amended Complaint as to the Physician Defendants/Appellees.
...
4. The Trial Court erred in determining, as a matter of law and/or based on the averments of the Amended Complaint and Exhibits attached thereto, that it is not a breach of fiduciary duty for the managers of a manager-managed Pennsylvania LLC to intentionally and willfully sell substantially all of the assets and contractual rights of said LLC to a separate entity owned or controlled by the majority members of the LLC that excludes the minority members of the LLC and dismissing Count I (Breach of Fiduciary Duty) of the Amended Complaint as to the Physician Defendants/Appellees.
On December 6, 2016, the trial court issued a Rule 1925(a) opinion that explained its decision as follows:
The issues raised by [Appellants], when read together, challenge this court’s conclusion that the individual members of the limited liability company did not owe fiduciary duties to each other. The challenge lacks statutory and decisional support.
...
Pursuant to [the Limited Liability Company Law,]
15 Pa. C.S.A. § 8943(b)(2) , “[a] member [of a limited liability company] who is not a manager shall have no duties to the company or to the other members solely by reason of acting in his capacity as a member.” [Appellants] argued the individual defendants owed a fiduciary duty because they collectively held a majority of the interests in RDTA.... The plain language ofSection 8943 , however, does not provide support for [Appellants’] claim that the individual defendants owed them a fiduciary duty. Thus, this court properly sustained the individual defendants’ preliminary objections to the breach of fiduciary duty claim.
Trial Ct. Op., 12/6/16, at 5-6 (citation and footnotes omitted).3
1. Whether the lower court erred in determining, as a matter of law, that managers of a manager-managed Pennsylvania LLC do not owe a fiduciary duty to the minority members of said LLC and dismissing Count I (Breach of Fiduciary Duty) of the Amended Complaint as to [Mid Atlantic Physicians]?
2. Whether the lower court erred in determining, based on the averments of the Amended Complaint and Exhibits attached thereto, that it is not a breach of fiduciary duty for managers of a manager-managed Pennsylvania LLC to intentionally and willfully adopt a resolution to sell substantially all of the assets and contractual rights of said LLC to a separate entity owned or controlled by the majority members of the LLC that excludes the minority members of the LLC and dismissing Count I (Breach of Fiduciary Duty) of the Amended Complaint as to [Mid Atlantic Physicians] without leave to amend?
3. Whether the lower court erred in determining, as a matter of law, that the majority members of a manager-managed Pennsylvania LLC do not owe a fiduciary duty to the minority members of said LLC and dismissing Count I (Breach of Fiduciary Duty) of the Amended Complaint as to [Mid Atlantic Physicians]?
4. Whether the lower court erred in determining, based on the averments of the Amended Complaint and Exhibits attached thereto, that it is not a breach of fiduciary duty for the majority members of a manager-managed Pennsylvania LLC to intentionally and willfully adopt a resolution to sell substantially all of the assets and contractual rights of said LLC to a separate entity owned or controlled by the majority members of the LLC that excludes the minority members of the LLC and dismissing Count I (Breach of Fiduciary Duty) of the Amended Complaint as to [Mid Atlantic Physicians] without leave to amend?
Appellants’ Brief at 5 (emphases added). Though listed as four issues, the questions presented by Appellants all challenge the trial court’s holding that, as a matter of law, the Mid Atlantic Physicians owed no duty to the Retina Physicians under the Limited Liability Company Law, either as managers of RDTA or as the majority of its members.
We address Appellants’ issues under our standard of review applicable to an order sustaining preliminary objections:
Our standard of review of an order of the trial court overruling or granting preliminary objections is to determine whether the trial court committed an error of law. When considering the appropriateness of a ruling on preliminary objections, the appellate court must apply the same standard as the trial court. Preliminary objections in the nature of a demurrer test the legal sufficiency of the complaint. When considering preliminary objections, all material facts set forth in the challenged pleadings are admitted as true, as well as all inferences reasonably deducible therefrom. Preliminary objections which seek the dismissal of a cause of action should be sustained only in cases in which it is clear and free from doubt that the pleader will be unable to prove facts legally sufficient to establish the right to relief. If any doubt exists as to whether a demurrer should be sustained, it should be resolved in favor of overruling the preliminary objections.
Khawaja, 151 A.3d at 630 (citation omitted); Lerner v. Lerner, 954 A.2d 1229, 1235 (Pa. Super. 2008) (“In ruling on a
The trial court sustained the demurrer because it concluded that the Limited Liability Company Law did not impose any fiduciary or other duties on the Mid Atlantic Physicians with respect to the Retina Physicians. In determining whether the trial court erred as a matter of law in reaching this conclusion, we must engage in an analysis and interpretation of the statute. As the Supreme Court recently summarized:
The Statutory Construction Act,
1 Pa. C.S. §§ 1901-1991 , sets forth principles of statutory construction to guide a court’s efforts with respect to statutory interpretation. In so doing, however, the Act expressly limits the use of its construction principles. The purpose of statutory interpretation is to ascertain the General Assembly’s intent and to give it effect.1 Pa.C.S. § 1921(a) . In discerning that intent, courts first look to the language of the statute itself. If the language of the statute clearly and unambiguously sets forth the legislative intent, it is the duty of the court to apply that intent and not look beyond the statutory language to ascertain its meaning. See1 Pa.C.S. § 1921(b) (“When the words of a statute are clear and free from all ambiguity, the letter of it is not to be disregarded under the pretext of pursuing its spirit.”). Courts may apply the rules of statutory construction only when the statutory language is not explicit or is ambiguous.1 Pa.C.S. § 1921(c) .... We must read all sections of a statute “together and in conjunction with each other,” construing them “with reference to the entire statute.”
1 Pa.C.S. § 1922(2) . When construing one section of a statute, courts must read that section not by itself, but with reference to, and in light of, the other sections. Statutory language must be read in context, “together and in conjunction” with the remaining statutory language.
In re Trust of Taylor, 164 A.3d 1147, 1155 (Pa. 2017) (citations omitted). In addition, as we recently stated in Commonwealth v. Anderson, 169 A.3d 1092 (Pa. Super. 2017) (en banc):
Every statute shall be construed, if possible, to give effect to all its provisions. We presume the legislature did not intend a result that is absurd, impossible, or unreasonable, and that it intends the entire statute to be effective and certain. When evaluating the interplay of several statutory provisions, we recognize that statutes that relate to the same class of persons are in pari materia and should be construed together, if possible, as one statute.
Id. at 1096 (citation omitted). Also, “when interpreting a statute we must listen attentively to what the statute says, but also to what it does not say.” Hanaway v. Parkesburg Grp., LP, 168 A.3d 146, 154 (2017) (quoted citation omitted).
The Mid Atlantic Physicians’ Duties as Members of RDTA
We shall begin by addressing the duties of the Mid Atlantic Physicians as RDTA’s members.
The amended complaint alleged that the Mid Atlantic Physicians signed a resolution providing for RDTA’s dissolu-tion
Here, the majority voted to sell all of the assets of the business to another entity which they controlled, to the exclusion of the two minority members. Had the same thing happened in a closely held corporation, a partnership or a joint venture, there would be no question that the conduct is actionable and unlawful. No different result should obtain merely because the entity in question was a limited liability company....
Id. After careful consideration, we agree.
Because limited liability companies are creatures of statute, their members are subject to only those duties that are authorized by statute. See Hanaway, 168 A.3d at 154-58 (general partner in limited partnership not subject to duty of good faith and fair dealing where limited partnership statute did not provide for such a duty). Here, the applicable statute is the Limited Liability Company Law of 1994,
The 1994 Law was Pennsylvania’s first statute to deal with limited liability companies, a form of business organization that gained popularity in the early 1990s.5 Like other portions of Pennsylvania’s Associations Code (Title 15 of Pennsylvania Consolidated Statutes), it was drafted largely by what is now known as the Business Associations Committee of the Section on Business Law of the Pennsylvania Bar Association (sometimes referred to as the “Title 15 Task Force”). As that Commit-
tee’s
The 1994 Law provides that where, as is the case for RDTA, a limited liability company’s governing documents so provide, the company shall be managed by designated managers; otherwise, the company shall be managed by its members.
The duties applicable to a limited liability company’s members and managers are set forth in
Duties of managers and members
(a) Companies without managers.—If the certificate of organization does not provide that the limited liability company shall be managed by managers, every member must account to the company for any benefit and hold as trustee for it any profits derived by him without the consent of the other members from any transaction connected with the organization, conduct or winding up of the company or any use by him of its property. This subsection may not be varied by any provision of the certificate of organization or operating agreement.
(b) Companies with managers.—If the certificate of organization provides that the company shall be managed by one or more managers:
(1) Sections 1711 (relating to alternative provisions) through 1717 (relating to limitation on standing) shall be applicable to representatives of the company. A written provision of the operating agreement may increase, but not relax, the duties of representatives of the company to its members under those sections. For purposes of applying the provisions of those sections, references to the “articles of
incorporation,” “bylaws,” “directors” and “shareholders” shall mean the certificate of organization, operating agreement, managers and members, respectively. (2) A member who is not a manager shall have no duties to the company or to the other members solely by reason of acting in his capacity as a member.
In response, the Retina Physicians rely on a Committee Comment to
Subsection (b)(2) makes clear that members who do not act as managers, like corporate shareholders and limited partners, do not have the fiduciary duties of managers. Even if a member is not involved in management, however, the member has no right to appropriate for personal use property belonging to the company. It is intended that the courts will fashion rules in appropriate circumstances by analogy to principles of corporate or partnership law to deal with situations such as oppression of minority members, actions taken in bad faith, etc. See
15 Pa.C.S. § 110 .
Comm. Cmt.—2001 to
Unless displaced by the particular provisions of this title, the principles of law and equity, including, but not limited to, the law relating to principal and agent, estoppel, waiver, fraud, misrepresentation, duress, coercion, mistake, bankruptcy or other validating or invalidating cause, shall supplement its provisions.
In light of the comment to
ment
In resolving this issue, our first task is to determine whether, as the Mid Atlantic Physicians suggest, the language of
The Committee Comment to
One who is a member of a limited liability company in which management is vested in managers under § 401 and who is not a manager shall have no duties to the limited liability company or to the other members solely by reason of acting in the capacity of a member.
A comment to Section 402(C) explains:
Subsection (C) makes clear that members who do not act as managers, like corporate shareholders and limited partners, do not have the fiduciary duties of managers described in this Act. However, they may have fiduciary duties if they engage in control transactions or act in some capacity other than merely as a member. See Donahue v. Rodd Electrotype Company of New England, Inc., 367 Mass. 578, 328 N.E.2d 505 (Mass. 1975) (liability of controlling shareholder in close corporation). Moreover, even if a member is not involved in management, the member has no right
to appropriate for personal use property belonging to the LLC. See Tri-Growth Centre City Ltd. v. Silldorf, 216 Cal.App.3d 1139, 266 Cal.Rptr. 330 (Cal. App. 1989). In addition, members, like other contracting parties, must exercise their powers in good faith. For example, it may be bad faith to expel a member solely or primarily in order to appropriate the value of the member’s interest. In general, while the Committee believes that some type of “partner-like” duties should be imposed upon non-managing members, it concluded that the exact nature of those duties and whether they should be applied to all members or only managing members is an area best left to the courts.
Prototype Act § 402(C), Cmt. The comment thus suggests that members acting to oppress other members for their own benefit do so “in some capacity other than merely as a member” and therefore, contrary to the Mid Atlantic Physicians’ interpretation of
The Committee Comment to
The issue arises most commonly within corporations,11 when controlling shareholders seek to benefit themselves at the minority’s expense. In Donahue, the Massachusetts decision cited in the comment to the Prototype Act, a closely-held corporation purchased some of its shares from the controlling shareholders at a favorable price that it then refused to offer to the minority. In recognizing a cause of action in favor of the minority shareholders, the Supreme Judicial Court analogized the closely held corporation to a partnership, in which “the relationship among the stockholders must be one of trust, confidence and absolute loyalty if the enterprise is to succeed.” Donahue, 328 N.E.2d at 512. The court then continued:
Although the corporate form provides ... advantages for the stockholders (limited liability, perpetuity, and so forth), it also supplies an opportunity for the majority stockholders to oppress or disadvantage minority stockholders. The minority is vulnerable to a variety of oppressive devices, termed “freezeouts,” which the majority may employ. An authoritative study of such “freeze-outs” enumerates some of the possibilities:
“The squeezers (those who employ the freeze-out techniques) may refuse to declare dividends; they may drain off the corporation’s earnings in the form of exorbitant salaries and bonuses to the majority shareholder-officers and perhaps to their relatives, or in the form of high rent by the corporation for property leased from majority shareholders ...; they may deprive minority shareholders of corporate offices and of employment by the company; they may cause the corporation to sell its assets at an inadequate price to the majority shareholders ....” In particular, the power of the board of directors, controlled by the majority, to declare or withhold dividends and to deny the minority employment is easily converted to a device to disadvantage minority stockholders.
Id. at 513 (citations omitted). The court explained that, unlike a shareholder in a large, publicly held corporation, the minority shareholder in a closely held corporation “cannot easily reclaim his capital” because there is no market for his shares. Id. at 514. In light of this “inherent danger to minority interests,” the court held that “stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another” and “may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation.” Id. at 514-15 (citations and footnotes omitted).
In Pennsylvania, as in Massachusetts, our courts have agreed that majority shareholders of a corporation owe a fiduciary duty to the minority. See Ferber v. Am. Lamp Corp., 503 Pa. 489, 469 A.2d 1046, 1050 (1983) (“majority stockholders occupy a quasi-fiduciary relation toward the minority which prevents them from using their power in such a way as to exclude the minority”); In re Jones & Laughlin Steel Corp., 488 Pa. 524, 412 A.2d 1099, 1103 (1980) (“Pennsylvania and other jurisdictions have held that ‘a freezing out of minority holders with the purpose of continuing the business for the benefit of the majority holders’ is a violation of the fiduciary duty owed to minority shareholders by the majority shareholders” (footnote and citation omitted)); Weisbecker v. Hosiery Patents, 356 Pa. 244, 51 A.2d 811, 811-812 (1947) (minority shareholder who held 10 out of 30 shares raised claim for breach of fiduciary duty against the two majority shareholders holding 19 and 1 share, respectively); Viener v. Jacobs, 834 A.2d 546, 550-51 (Pa. Super. 2003) (addressing whether two shareholders, each holding 1/3 share of company, oppressed minority shareholder holding 1/3 share), appeal denied, 579 Pa. 704, 857 A.2d 680 (Pa. 2004), cert. denied, 543 U.S. 1146 (2005). We also have recognized that, contingent on the terms of the partnership agreement, general partners in a general or a limited partnership owe a fiduciary duty to the other partners. See Boland v. Daly, 455 Pa. 467, 318 A.2d 329, 333 (1974) (construing statutory predecessor
We therefore agree with the following summary of the duties of members of a manager-managed limited liability company provided by a leading treatise on the subject:
The courts have generally held that if a member is acting solely as such, he or she generally does not have any of the fiduciary duties of managers described in this chapter. Thus, the duties above in this section do not apply to members who do no more than approve the actions of designated managers.
Members acting solely as such may breach [a] general duty of good faith ..., although the courts often characterize the conduct as a breach of fiduciary duty. For example, it may be a breach of duty for the members to squeeze out or expel a member or for controlling members to appropriate benefits from minority members by exercising or selling control....
Non-managing members may have other duties, which may or may not be considered aspects of the good faith duty. Whether or not a member is involved in management, the member has no right to appropriate property belonging to the LLC for personal use. Also, members may have a duty to disclose in transactions with each other, as on sale of an interest in the LLC. Although these theoretical distinctions are largely reflected in the holdings of cases, the language of the opinions does not always clearly distinguish between the duties of members as such and those of managing members. Thus, courts sometimes impose what are labeled as “fiduciary” duties on non-managing members.
1 Ribstein & Keatinge § 9.6, at 588-92 (footnotes omitted).
The Mid Atlantic Physicians take issue with this analysis on several grounds. The most significant is their contention that it is error to look for analogies in the law applicable to corporate shareholders or general partners because members of a manager-managed limited liability company are not comparable to such business participants. Rather, they point out, the 1994 Law says such members are comparable to limited partners, and, the Mid Atlantic Physicians insist, limited partners owe no fiduciary-like duties to the other partners in their partnerships.
The Mid Atlantic Physicians’ argument is based on
Rules for cases not provided for in this chapter
(a) General rule.—Unless otherwise provided in the certificate of organization, in any case not provided for in this chapter:
(1) If the certificate of organization does not contain a statement to the effect that the limited liability company shall be managed by managers, the provisions of Chapters 81 [the Partnership Code,
15 Pa. C.S. §§ 8101-8105 ] and 83 [the Uniform Partnership Act,15 Pa. C.S. §§ 8301-8365 (repealed 2016)] govern, and the members shall be deemed to be general partners for purposes of applying the provisions of those chapters.(2) If the certificate of organization provides that the company shall be managed by managers, the provisions of Chapters 81 [the Partnership Code], 83 [the Uniform Partnership Act] and 85 [the Pennsylvania Revised Uniform Limited Partnership Act,
15 Pa. C.S. §§ 8501-8594 (repealed 2016)] govern, and:
(i) the managers shall have the authority of general partners prescribed in those chapters; and (ii) the members shall be deemed to be limited partners for purposes of applying the provisions of those chapters.
(b) Basis for determining liability of members, etc.—Except as otherwise provided in section 110 (relating to supplementary general principles of law applicable), the liability of members, managers and employees of a company shall at all times be determined solely and exclusively by the provisions of this chapter [the 1994 Law].
More generally, although members of a manager-managed company may be analogous to limited partners in other circumstances, the analogy does not apply to these facts. Where members of a company managed by managers are not involved in operation of the company, it stands to reason that their duties may be limited, as may be the case with limited partners. Here, however, Mid Atlantic Physicians are accused of breaching duties they owed to the Retina Physicians by signing the “Written Consent of the Members Holding a Majority of the Percentage Interests” that authorized the sale of RDTA’s assets to Mid Atlantic and the dissolution of RDTA. They signed that resolution pursuant to Section 6.06 of RDTA’s Operating Agreement, which placed the authority to sell the assets and dissolve the company in the hands of a majority of the members, rather than in the hands of RDTA’s managers. Thus, with respect to
The Mid Atlantic Physicians’ other arguments challenge whether the amended complaint sufficiently alleges a type of majority misconduct that should be actionable by the Retina Physicians. They assert, for example, that “the individual [Mid Atlantic] Physician Defendants are all minority members” of RDTA (apparently because each member’s interest in the company is 5.263%), Appellees’ Br. at 22 (emphasis added), and repeatedly emphasize that they comprise a majority only “in the aggregate,” see id. at 6, 8. They complain further that the sale of RDTA’s assets to Mid Atlantic should not be called “self-dealing” because the amended complaint alleges only that they are “members and/or employees of” Mid Atlantic—not Mid Atlantic’s “owners or controllers.” Id. at 23.
We believe these arguments go to factual issues in the case and do not render Appellants’ allegations legally insufficient. Notably, the Mid Atlantic Physicians cite no case law supporting any argument that these purported pleading deficiencies entitle them to dismissal. The amended complaint alleges that the Mid Atlantic Physicians all are members of Mid Atlantic and that most of them voted together—“in the aggregate”—to transfer RDTA’s assets to Mid Atlantic and thereby to freeze the Retina Physicians out of receiving the benefits of their RDTA membership. Through those aggregate votes, they “controlled the majority interest in RDTA,” and were its “controlling majority members.” Am. Compl. at ¶ 43-44. The pleading also says that by transferring RDTA’s assets to Mid Atlantic, their own company, they acted to make a profit at Appellants’ expense. Id. ¶ 46(b). Whether the evidence would support these allegations and whether the facts that develop will amount to the type of majority oppression that is actionable under the case law is a matter to be determined on a factual record, not on preliminary objections. Rather, at this stage, “all material facts set forth in the challenged pleadings are admitted as true, as well as all inferences reasonably deducible therefrom.” Khawaja, 151 A.3d at 630.
The factual record also will inform a decision about just what types of duties apply to the Mid Atlantic Physicians as RDTA members. The trial court dismissed Appellants’ claims because it held that the Mid Atlantic Physicians owed the Retina Physicians no duties as members of RDTA, a holding that we have disproved. But although we have determined that the allegations are sufficient to allow this case to go forward on the understanding that the Mid Atlantic Physicians may have breached some type of duty to RDTA’s minority members, we have avoided a definitive characterization of the type of duty that is at issue.
Appellants pleaded their claim as one for “breach of fiduciary duty,” Am. Compl. Count I, but their pleading variously alleges that the defendants breached “a fiduciary duty,” “a quasi-fiduciary duty,” or “a duty of utmost good faith and fair dealing.” See id. ¶¶ 44-45, 47-48. Appellants’ brief frames the questions presented in terms of whether a “fiduciary duty” was owed to RDTA’s minority members, Appellants’ Br. at 5, but later references a “fiduciary duty of good faith and
None of the parties have addressed this confusion in their briefs to this Court and it is unnecessary for us to do so to resolve this appeal. Appellants’ varying formulations have adequately pleaded a breach by the Mid Atlantic Physicians of a duty and standard of care owed to them. The precise nature of that duty may be determined as this case progresses on remand. For now, we hold only that, on the facts alleged, the trial court erred in holding that Appellants could not proceed with their claim in Count I of their amended complaint on the ground that the Mid Atlantic Physicians owed no duty to the Retina Physicians as members of RDTA. Further issues that stem from this holding will have to be resolved after the parties have developed a factual record.
The Mid Atlantic Physicians’ Duties as Managers of RDTA
In their Rule 1925(b) Statement, Appellants asserted that the trial court’s no-duty holding was erroneous not only because the Mid Atlantic Physicians owed duties to them as members of RDTA, but also because they owed duties to them as managers. Appellees object to that contention because the amended complaint made no specific allegations regarding any breach of duties as managers.
Preliminarily, we are confounded by the fact that there is no clear indication in the record or the parties’ briefs of the identities of the parties to which this argument pertains. Under RDTA’s Operating Agreement, the company had up to six managers, but no one has told us who they were. Appellants imply that the managers may have included Drs. Brown, Fischer, and Sivalingam because they were the Director and Co-Directors of Wills Eye’s Retina Service, Am. Compl. ¶¶ 14-15, but Appellants do not clearly say that and make no allegation regarding the manager status of anyone else. And although the Mid Atlantic Physicians argue that manager-related claims cannot now be asserted against those of them who were managers, they do not say on whose behalf they make that argument.
In arguing that this case does not present claims against managers, the Mid Atlantic Physicians point out that Pennsylvania is a fact-pleading state and that “[t]he material facts on which a cause of action or defense is based shall be stated in concise and summary form.” Appellees’ Br. at 14, quoting
Nowhere in the Amended Complaint do [Appellants] state concisely or summarize the material facts to support a manager-managed fiduciary duty. The Amended Complaint fails to aver (1) that RDTA was a manager-managed LLC; (2) that any Physician Defendant was, or
acted as, a manager of RDTA; or (3) that such Physician Defendant’s actions as a manager breached a duty to Drs. Belmont and Kleiner.
Id. They allege that these deficiencies failed to “put them on notice of liability as managers.” Id. Appellants respond that the copy of RDTA’s Operating Agreement attached to the amended complaint made clear that the company was run by managers selected from among its members, and that—
While the Amended Complaint references Physician Defendants’ fiduciary duties as majority members of RDTA, liability is not premised exclusively on Physician Defendants’ status as majority members of RDTA. Rather, under the facts averred, Appellants have asserted claims for any breaches of fiduciary duty that can be maintained against Physician Defendants.
Appellants’ Reply Brief at 4.
“It is not necessary that the plaintiff identify the specific legal theory underlying the complaint.” Krajsa v. Keypunch, Inc., 424 Pa. Super. 230, 622 A.2d 355, 357 (1993). Here, the amended complaint clearly states that Appellants seek to hold the Mid Atlantic Physicians liable for breaching duties owed to the Retina Physicians by their actions in selling RDTA’s assets to Mid Atlantic and then dissolving RDTA. Appellants were not required to plead the legal theory on which they contended that the Mid Atlantic Physicians had such duties. The question is whether there is some aspect of a claim based on some of the defendants’ status as managers that required a more specific pleading than Appellants provided.
The Mid Atlantic Physicians say that two additional facts that were missing from the pleading were that RDTA was a manager-managed company and that one or more of them acted as managers. Appellees’ Br. at 14. We disagree. Facts in documents appended to a pleading are to be considered in assessing the pleading’s sufficiency. Pleet v. Valley Greene Assocs., 371 Pa. Super. 530, 538 A.2d 567, 569 (1988). Here, the Operating Agreement made clear that RDTA is a manager-managed limited liability company whose managers are selected from among RDTA’s members. As members of RDTA, the Mid Atlantic Physicians surely already knew that. And while we have been confounded by the failure of the parties to tell us which of them were managers to whom this issue applies, each of the Mid Atlantic Physicians who is a defendant in this action surely knows whether or not he was a manager of the company and whether this issue therefore applies to him; he also knows that he has been made a defendant in this case and that Appellants seek to hold him liable. We therefore do not believe that the amended complaint was legally deficient in failing to name which of the Mid Atlantic Physicians were managers; it named all of them, and the status of each was a fact that would be revealed through discovery or other proceedings as the case progressed. See generally Georges Twp. v. Union Trust Co. of Uniontown, 293 Pa. 364, 143 A. 10, 18 (1928) (“As a general rule, a party will not be required to furnish information which is peculiarly within the knowledge of the party demanding the particulars”).15 Any of
The third fact that the Mid Atlantic Physicians say is missing is “that such Physician Defendant’s actions as a manager breached a duty to [the Retina Physicians].” Appellees’ Br. at 14. On this issue, we agree that Appellants were required to plead the material facts on which they sought to hold liable those of the Mid Atlantic Physicians who served as managers. In this connection, we have explained that—
Material facts are ultimate facts, i.e., those facts essential to support the claim. Evidence from which such facts may be inferred not only need not but should not be alleged.... Allegations will withstand challenge under Rule 1019(a) if (1) they contain averments of all of the facts the plaintiff will eventually have to prove in order to recover, and (2) they are sufficiently specific so as to enable defendant to prepare his defense.
Lerner, 954 A.2d at 1236 (citation and brackets omitted). Here, the material facts on which Appellants base their claims against the Mid Atlantic Physicians are the signing of the resolution authorizing the sale of RDTA’s assets to Mid Atlantic and dissolution of the company. See Am. Compl. ¶¶ 27-52. Appellants make no contention that they seek to hold the Mid Atlantic Physicians liable (as members or otherwise) for any other misconduct, and if Appellants later seek to hold any of the Mid Atlantic Physicians liable for other actions not alleged in the amended complaint, they may not recover for those unpleaded other actions. But Appellants may recover for the misconduct they have pleaded.
Appellees’ position is that because the amended complaint said that each defendant engaged in the misconduct as a member of RDTA, Appellants may not recover for the exact same conduct by the exact same defendant to the extent that the defendant also acted as a manager of RDTA. Appellees cite no authority supporting that contention. Under the Operating Agreement, any defendant who was a manager also was a member. Although manager status sometimes may have given a member greater authority to act, it is not clear that matters here. By signing the resolution that forms the basis for Appellants’ claim, all of the signers acted as members because Section 6.06 of the Operating Agreement vested members, not managers, with the authority to dissolve the company and sell its assets.
In addition, the only duty Appellants allege to have been breached by the Mid Atlantic Physicians is the duty they owed to the Retina Physicians as minority members of RDTA. We have held that all of the Mid Atlantic Physicians were subject to that duty as members. Appellees do not argue that this duty does not also apply to managers. As we have explained, the precise nature of the duty—a duty of good-faith and fair dealing, or a more demanding duty, as a fiduciary—remains to be decided in the case, and it may be that those Mid Atlantic Physicians who were managers may be subject to a higher standard. But the amended complaint already avers that the defendants are liable under each of these standards, see, e.g., Am. Compl. ¶¶ 44-48, so that application of any of the standards will not be without notice. On these facts, we therefore conclude that Appellants were not required to plead manager status in order to recover. Rather, we agree with Appellants that they can recover “for any breaches of fiduciary duty
Because the trial court erred as a matter of law in sustaining Appellees’ preliminary objections in the nature of a demurrer, we reverse the order below and remand for further proceedings.
Order reversed in part.16 Case remanded. Jurisdiction relinquished.
Notes
The professional and financial benefits of RDTA membership to [Appellants] included, but were not limited to:
a. A contract with Wills Eye to be the exclusive provider of retinal care at its facility.
b. An academic supervision and teaching agreement, which provided the members of RDTA with an exclusive contract to provide academic supervision and teaching to both ophthalmology residents and retinal fellows.
c. An exclusive provider agreement with Wills Eye to provide on-call retinal coverage and services to the Wills Eye emergency room.
d. A private patient teaching agreement for teaching residents and fellows treating private patients.
e. A contract between Wills Eye and RDTA, establishing RDTA as the sole provider of retinal photography and retinal angiography at Wills Eye.
f. A contract between RDTA and Wills Eye Ophthalmology Clinic ... for outpatient clinical services.
Exclusive Responsibility. Except as otherwise expressly provided herein, (i) the management of the business and affairs of the Company shall be the sole and complete responsibility of the Managers, (ii) a Member, as such, shall not take part in, or interfere in any manner with, the management, conduct or control of the business and affairs of the Company, and shall not have any right or authority to act for or bind the Company, and (iii) the Company may act only by actions taken by or under the direction of the Managers in accordance with this Agreement. Individual Managers shall have only such authority and perform such duties as the Managers may, from time to time, delegate to such individual Managers.
Third Am. and Restated Limited Liability Co. Operating Ag. of RDTA, 1/1/2006, at 10.
The comments or report of the commission, committee, association or other entity which drafted a statute may be consulted in the construction or application of the original provisions of the statute if such comments or report were published or otherwise generally available prior to the consideration of the statute by the General Assembly, but the text of the statute shall control in the event of conflict between its text and such comments or report.