Retina Associates of Greater Philadelphia, Ltd. v. Retinovitreous Associates, Ltd. , 176 A.3d 263 ( 2017 )

J-A10023-17
2017 PA Super 380RETINA ASSOCIATES OF GREATER IN THE SUPERIOR COURT OF
PHILADELPHIA, LTD., JONATHAN B. PENNSYLVANIA
BELMONT, M.D., ROBERT C.
KLEINER, M.D.
Appellant
v.
RETINOVITREOUS ASSOCIATES,
LTD. D/B/A MID ATLANTIC RETINA,
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., CARL D. REGILLO, M.D.,
ARUNAN SIVALINGAM, M.D., WILLIAM
TASMAN, M.D., JAMES F. VANDER, M.D.,
AND JASON HSU, M.D.
No. 3265 EDA 2016
Appeal from the Order Dated July 2, 2010
In the Court of Common Pleas of Montgomery County
Civil Division at No(s): 09-32182
BEFORE: DUBOW, J., SOLANO, J., and FORD ELLIOTT, P.J.E.
OPINION BY SOLANO, J.: FILED DECEMBER 07, 2017
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.,
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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 Retinoviteous
Associates, Ltd., doing business as Mid Atlantic Retina (“Mid Atlantic”). We
reverse.
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
____________________________________________
1 Paragraph 25 of the amended complaint alleged:
The professional and financial benefits of RDTA membership to
[Appellants] included, but were not limited to:
(Footnote Continued Next Page)
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member owned an equal 5.263% interest in the company. The operating
agreement provided 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
(Footnote Continued) _______________________
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.
2The operating agreement is an exhibit to the amended complaint. Section
5.01(a) of the agreement provided:
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.
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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 contrary, 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
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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
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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 limited 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
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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 [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
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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 Pa.R.A.P. 341 (appeal may be filed after
entry of order disposing of all claims against all parties).
In response to a court order, Appellants filed a Pa.R.A.P. 1925(b)
Statement that listed, among other errors that they planned to appeal —
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.
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Pa.R.A.P. 1925(b) Statement, at 1-2 (emphasis added). The Mid Atlantic
Physicians objected to Appellants’ inclusion in their Rule 1925(b) statement
of questions regarding breach of their fiduciary duties as managers (as
opposed to majority members) of RDTA, arguing that the amended
complaint never stated a claim against any of them based on a status as
RDTA managers. Mid Atlantic Physicians’ Joint Objs. to Retina’s Rule
1925(b) Statement, 11/2/16, at 1-2. They observed that the amended
complaint “literally does not contain the word ‘manager.’” Id. at 2. The trial
court did not rule on the Mid Atlantic Physicians’ objection to Appellants’ Rule
1925(b) Statement.
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 of
Section 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.
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Trial Ct. Op., 12/6/16, at 5-6 (citation and footnotes omitted).3
In their appellate brief, Appellants now raise the following issues:
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
____________________________________________
3 The trial court added: “The amended complaint lacks any allegation of a
relationship between the individual defendants and plaintiff Retina Associates
of Greater Philadelphia Ltd. As such, [Appellants] should not be heard to
argue on appeal that they have stated a claim for breach of fiduciary duty on
behalf of Retina Associates of Greater Philadelphia Ltd.” Tr. Ct. Op. at 5 n.7.
The claims in this appeal have been asserted only on behalf of the Retina
Physicians, and not Retina itself. See Appellants’ Br. at 7 n.1.
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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 demurrer, the court may
consider only such matters as arise out of the complaint itself; it cannot
supply a fact missing in the complaint”). As our Supreme Court has
observed, “[t]he question presented by the demurrer is whether, on the
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facts averred, the law says with certainty that no recovery is possible.”
Price v. Brown, 680 A.2d 1149, 1151 (Pa. 1996) (citation omitted);
Lerner, 954 A.2d at 1234.
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. See 1 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.
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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 (Pa. 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 dissolution and the sale of all of RDTA’s
assets to their own ophthalmology practice, Mid Atlantic, at a price below
market value, thereby depriving the Retina Physicians of important contract
rights and causing them financial harm. Appellants contend that they
alleged “a classic case of oppression by the majority owners of a business
through the freeze out of the minority owners,” Appellants’ Br. at 30, and
that the Mid Atlantic Physicians’ conduct therefore is actionable as a breach
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of their duties to the minority members of RDTA under the Commonwealth’s
laws governing limited liability companies. Appellants acknowledge that no
Pennsylvania appellate decisions have addressed this issue, but they
contend that the result they advocate flows naturally from analogies to other
areas of Pennsylvania corporate and business law. They state:
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, 15 Pa. C.S. §§ 8901-8993 (repealed
2016) (“the 1994 Law”). Last year, the Legislature replaced the 1994 Law
with the Pennsylvania Uniform Limited Liability Company Act of 2016, 15 Pa.
C.S. §§ 8811-8898, but the conduct at issue here occurred prior to
enactment of the 2016 legislation and all parties agree that the 1994 Law
applies to this case. See 15 Pa. C.S. § 8811(b), (c) (rules regarding
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applicability of 2016 statute). Throughout this opinion, we shall cite to the
1994 Law without reference to its repeal.4
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 Committee’s history of the 1994 Law
points out, the statute was derived in substantial part from a Prototype
Limited Liability Company Act (the “Prototype Act”) that had been proposed
by a working group at the American Bar Association in 1992. See Comm.
Cmt. – 1994 to 15 Pa. C.S. § 8901.6
____________________________________________
4 If this case had arisen under the 2016 statute, the questions presented
might be more easily resolved. The 2016 Act provides that a member of a
limited liability company is subject to a contractual duty of good faith and
fair dealing when discharging duties and obligations or exercising rights
under the Act or the company’s operating agreement. 15 Pa. C.S.
§ 8849.1(d), (i). This provision is not made retroactive, however, and thus
is inapplicable to this case. Cf. Hanaway, 168 A.3d at 157-58.
5 The popularity of this business form may be explained by the fact that a
limited liability company is “a conceptual hybrid, sharing some of the
characteristics of partnerships and some of corporations. In particular, an
LLC combines the two most critical features of all of the other business
organizations in a single business organization — a corporate-styled liability
shield and the pass-through tax benefits of a partnership.” In re
Allentown Ambassadors, Inc., 361 B.R. 422, 442 (Bankr. E.D. Pa. 2007)
(citations and internal quotation marks omitted); see Comm. Cmt. – 1994
to 15 Pa. C.S. § 8925.
6 Section 1939 of the Statutory Construction Act provides:
(Footnote Continued Next Page)
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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. 15 Pa. C.S. § 8941. The 1994 Law also provides
that the company’s Operating Agreement may set forth rules for the
company’s organization — including rules specifying requirements for voting
by members on certain types of decisions — that vary from those in the Law,
see id. § 8915, 8916(b), 8942; and, as noted, RDTA’s Operating Agreement
(Footnote Continued) _______________________
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.
1 Pa. C.S. § 1939. The Business Associations Committee drafted comments
to sections of the 1994 Law “to form part of the legislative history of [the
Law] and to be citable as such” under Section 1939. Comm. Cmt. – 1994 to
15 Pa. C.S. § 8901; see generally W.H. Clark, Jr., Forward to Title 15, 15
Pa. Cons. Stat. Ann. xxi, xxiv-xxv (2013). The Committee’s comments
adopt portions of the commentary to the ABA’s Prototype Act, but “are not
intended to supersede the comments to the Prototype Limited Liability
Company Act which contain detailed discussion of the laws of other states
and the federal income tax aspects of organizing limited liability companies
which have been omitted from the Pennsylvania comments.” Comm. Cmt. –
1994 to 15 Pa. C.S. § 8901. In light of these authorities, we rely on some of
this commentary later in our opinion. The ABA’s Prototype Act appears not
to be available online, and we refer to the text of that draft legislation as it
appears in Volume 3, Appendix C to the very helpful treatise by Robert R.
Keatinge and Larry E. Ribstein, Ribstein and Keatinge on Limited Liability
Companies (Thomson Reuters 2017).
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thus contains special requirements for votes by RDTA’s members on the
company’s dissolution and sale of assets.
The duties applicable to a limited liability company’s members and
managers are set forth in Section 8943, which provides:
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.
15 Pa.C.S. § 8943 (emphasis added). The trial court relied on Section
8943(b)(2) in holding that the Mid Atlantic Physicians had no duties to the
Retina Physicians and therefore could not be held liable to them. Trial Ct.
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Op. at 6. Not surprisingly, the Mid Atlantic Physicians echo the trial court’s
reasoning, contending that Section 8943(b)(2) is clear and unambiguous in
foreclosing any basis for actions against them as RDTA members for breach
of any duties to other members. Appellees’ Br. at 17-19.7
In response, the Retina Physicians rely on a Committee Comment to
Section 8943(b)(2), which states:
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 15 Pa.C.S. § 8943. Section 110 of the Associations
Code, which is referenced in the comment, reads:
Unless displaced by the particular provisions of this title, the
principles of law and equity, including, but not limited to, the law
____________________________________________
7 The Mid Atlantic Physicians contend that this interpretation of the statute is
bolstered by Section 8922(a) of the 1994 Law, entitled “Liability of members
and managers,” which provides that members “shall not be liable, solely by
reason of being a member, under an order of a court or in any other manner
for a debt, obligation or liability of the company of any kind or for the acts of
any member, manager, agent or employee of the company.” 15 Pa.C.S. §
8922. Section 8922 deals with members’ liability to third parties, such as
company creditors — not liability to other members. See Comm. Cmt. –
2001 to 15 Pa. C.S. § 8922 (subsection does “not deal with the internal
affairs” of the company and may be varied only by “expand[ing members’]
liability to third parties”). We therefore find the section inapposite.
Similarly, other provisions of the 1994 Law discussing members’ liability to
the company itself (as in a derivative action) deal with duties distinct from
those owed to other members and also are not instructive here.
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relating to principal and agent, estoppel, waiver, fraud,
misrepresentation, duress, coercion, mistake, bankruptcy or
other validating or invalidating cause, shall supplement its
provisions.
15 Pa.C.S. § 110. The 1994 Law specifically provides that Section 110 may
be used as a basis for determining the liability of a limited liability company’s
members. 15 Pa. C.S. § 8904(b).8
In light of the comment to Section 8943(b)(2), the Retina Physicians
contend that the trial court misconstrued Section 8943(b)(2) as setting forth
an absolute rule that no member of a manager-managed limited liability
company ever owes a duty to another member, a result that the comment
makes clear was unintended by the statute’s drafters. See Retina’s Brief at
20. They contend that, properly read, the provision gives courts the
flexibility to analogize to corporate and partnership law to bar a member
from engaging in the oppressive conduct that they allege occurred here.
In resolving this issue, our first task is to determine whether, as the
Mid Atlantic Physicians suggest, the language of Section 8943(b)(2) is so
plain and unambiguous as to foreclose any interpretation that would permit
a recognition of duties owed by RDTA’s members to other members of the
company. The provision states that a member who is not a manager “shall
have no duties . . . to the other members solely by reason of acting in
____________________________________________
8 Section 8904(b) states that the liability of members shall be determined
“solely and exclusively” by the provisions of the 1994 Law “[e]xcept as
otherwise provided in section 110 (relating to supplementary general
principles of law applicable).”
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his capacity as a member.” 15 Pa. C.S. § 8943(b)(2) (emphasis added).
The provision thus suggests that the mere fact that a member acts as a
member of the company is not a sufficient basis upon which to make that
member liable to other members. The word “solely” further suggests,
however, that a member may have duties to other members if the member
is held to account for reasons other than or in addition to his mere status as
a member of the company. The provision does not explain what situations
would give rise to such duties, leaving it to the courts to fill in this gap in the
statute. For this reason, we hold that Section 8943(b)(2) “is not explicit or
is ambiguous.” Taylor, 164 A.3d at 1155; see id. at 1156 (provision is
ambiguous if it does not “contain[] any explicit language addressing the
issue raised”). Therefore, we may look to the comments to Section 8943 as
well as its legislative history to discern the provision’s meaning. 1 Pa. C.S.
§ 1921(c), 1939.
The Committee Comment to Section 8943 states that a member who
appropriates company property for his personal use is not absolved of
liability despite the language of Section 8943(b)(2). See Comm. Cmt. —
2001 to 15 Pa. C.S. § 8943. In providing that example of a case in which
the “no duties” language of Section 8943(b)(2) is inapplicable, the Comment
implies that a member who acts for selfish personal reasons is not acting
“solely . . . in his capacity as a member” and may not claim protection under
Section 8943(b)(2). This view of Section 8943(b)(2) is supported by
comments to Section 402(C) of the Prototype Act, on which Section
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8943(b)(2) is patterned. 9 In language closely resembling that of Section
8943(b)(2), Section 402(C) states:
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., 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, 265 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
____________________________________________
9When enacting the 1994 Law, the Legislature appended to the statute a list
of official Source Notes that identify the source from which each provision
was drafted. The legislation lists Section 402(C) of the Prototype Act as the
source of Section 8943(b)(2). See Act No. 1994-106, P.L. 703, 772 (Dec. 7,
1994) (calling section “402(c)”).
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Atlantic Physicians’ interpretation of Section 8943(b)(2), they do have duties
to the other members in those circumstances.
The Committee Comment to Section 8943 further states that we
should look to corporate and partnership law to ascertain whether and what
duties exist in “situations such as oppression of minority members,” Comm.
Cmt. to 15 Pa. C.S. § 8943, and Sections 110 and 8904(b) explicitly
authorize us to apply “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” in connection with this task. 15 Pa. C.S. § 110.10 Our
review of the authorities reveals that courts in Pennsylvania and other
jurisdictions routinely have provided remedies when a controlling faction of a
corporation, partnership, or other business entity engages in conduct alleged
to oppress a minority.
The issue arises most commonly within corporations, 11 when
controlling shareholders seek to benefit themselves at the minority’s
expense. In Donohue, the Massachusetts decision cited in the comment to
____________________________________________
10 The 1994 Law does not make any explicit reference to oppression by a
majority of the members, but the statute’s provisions on dissolution appear
to recognize that a segment of the company’s members may act wrongfully
in dissolving the company. See 15 Pa. C.S. § 8973(a)(1) (sometimes
limiting those who may wind up the company’s affairs to “the members who
have not wrongfully dissolved the company”).
11 In Missett v. Hub Int’l Pa., LLC, 6 A.3d 530, 537 (Pa. Super. 2010), we
observed that a “‘membership interest’ is an ownership interest in a limited
liability company and is akin to an interest in stock of a corporation.”
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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
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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., 469 A.2d 1046, 1050 (Pa. 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., 412 A.2d 1099, 1103 (Pa.
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, 51 A.2d 811, 811-812 (Pa. 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, 857 A.2d 680 (Pa. 2004), cert. denied, 543 U.S. 1146 (2005). We
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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, 318 A.2d 329,
333 (Pa. 1974) (construing statutory predecessor 59 P.S. § 54); 12 Jarl
Investments, L.P. v. Fleck, 937 A.2d 1113, 1123 (Pa. Super. 2007). We
have held the same with respect to joint venturers. See Clement v.
Clement, 260 A.2d 728, 729 (Pa. 1970). Several cases have rendered
similar holdings in other jurisdictions. See 1 L.E. Ribstein & R.R. Keatinge,
Ribstein and Keatinge on Limited Liability Companies § 9.6, at 590-91 n.7
(2d ed. 2017) (citing cases).
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
____________________________________________
12 See George v. Richards, 64 A.2d 811, 813 n.1 (Pa. 1949) (quoting 59
P.S. § 54 as follows: “Every partner must account to the partnership for any
benefit, and hold as trustee for it any profits derived by him without the
consent of the other partners from any transaction connected with the
formation, conduct, or liquidation of the partnership, or from any use by him
of its property”).
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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 Section 8904 of the
1994 Law, which provides:
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
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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].
15 Pa.C.S. § 8904 (emphasis in subsection (a)(2) added). Section
8904(a)(2)(ii) “deems” members of a manager-managed company to be
limited partners for purposes of applying, among other things, the provisions
of the Pennsylvania Revised Uniform Limited Partnership Act, 13 and we
assume for present purposes that limited partners have no duties to other
____________________________________________
13The 2016 statute that repealed the 1994 Limited Liability Company Law
and replaced it with a new statute also repealed the Uniform Partnership Act
and the Pennsylvania Revised Uniform Limited Partnership Act and replaced
those statutes with new legislation on the same subjects. Those statutory
changes are not relevant to our analysis here.
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partners under that statute. See Hanaway, 168 A.3d at 154-58. 14 But
Section 8904(b) makes clear that Section 8904(a)(2)(ii)’s “deeming” of
members to be limited partners has nothing to do with members’ liability,
which is determined not by applying the provisions of the Pennsylvania
Revised Uniform Limited Partnership Act, but by “solely and exclusively”
applying the provisions of the 1994 Limited Liability Company Law, as
supplemented by Section 110. The Mid Atlantic Physicians’ claim that
Section 8904 requires that they be treated as analogous to limited partners
in determining their duties and liabilities to other RDTA members therefore is
incorrect.
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.
____________________________________________
14 The Mid Atlantic Physicians based their argument that limited partners
have no duties to other partners on Section 8523(a) of the Revised Uniform
Limited Partnership Act, 15 Pa. C.S. § 8523(a), which states that limited
partners are not liable to third-party creditors of the partnership. See
Appellees’ Br. at 19. Section 8523(a) does not discuss limited partners’
duties to other partners, and we deem it inapposite here. The Supreme
Court’s decision in Hanaway, which was issued after the Mid Atlantic
Physicians filed their brief, provides more persuasive support for the Mid
Atlantic Physicians’ argument regarding limited partners’ lack of duties.
Though not applicable here, we note that the Pennsylvania Uniform Limited
Partnership Act of 2016 (the statute that replaced the Pennsylvania Revised
Uniform Limited Partnership Act referenced in Section 8904(a)) provides that
limited partners under the new statute have a duty of good faith and fair
dealing in exercising rights under the partnership. 15 Pa. C.S. § 8635(a).
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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 these decisions, the
majority members were not mere passive bystanders to allegedly wrongful
conduct by RDTA’s management; they were the persons engaging in the
wrongful conduct. With respect to the challenged decisions, the members
exercised powers in place of RDTA’s managers, and it therefore is
appropriate to assess their duties in light of that non-passive role. See
Prototype Act § 402(C), Cmt. (stating members “may have fiduciary duties if
they engage in control transactions”).
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
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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
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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 disapproved. 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 fair dealing,” an apparent hybrid, see id.
at 18. These terms are not synonymous. A fiduciary duty “is the highest
duty implied by law” and exists in legal relationships requiring trust and
confidence, where it often is enforced by tort actions. See Yenchi v.
Ameriprise Fin., Inc., 161 A.3d 811, 819-20 (Pa. 2017). The duty of good
faith and fair dealing is most commonly recognized as a contractual
obligation. See Herzog v. Herzog, 887 A.2d 313, 317 (Pa. Super. 2005).
There are times, however, when the concepts blend. See, e.g., Birth Ctr.
v. St. Paul Cos., 787 A.2d 376 (Pa. 2001). Appellants’ apparent confusion
about the correct terminology applicable to obligations within limited liability
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companies seems to mirror the state of the law in this area in other
jurisdictions. See 1 Ribstein & Keatinge §§ 9.6, 9.7; see generally Comm.
Cmt. – 2016 to 15 Pa. C.S. § 8849.1 (discussing duties applicable under
2016 Limited Liability Company Act).
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.
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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 Pa.R.Civ.P. 1019(a). They continue:
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
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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., 622 A.3d 355, 357
(Pa. Super. 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., 538 A.2d 567, 569 (Pa. Super. 1988). Here, the Operating
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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, 143 A. 10, 18 (Pa. 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 Mid Atlantic Physicians who was not a manager cannot face
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15 The authors of Standard Pennsylvania Practice 2d state that a “court may
link the overruling of a preliminary objection” on the basis of insufficiency
specificity “with the express recognition that further specificity could be
obtained through pretrial discovery, for example, where the parties are
adequately identified, or where the defendant has as much knowledge of the
facts as the plaintiff.” 5 Standard Pa. Prac. 2d § 25.71 (2015) (footnotes
containing citations omitted).
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liability as a manager, and any manager who is not already a defendant
cannot face liability either.
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.
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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
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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
that can be maintained against Physician Defendants,” Appellants’ Reply
Brief at 4, regardless of the defendant’s status as a member or manager, so
long as the recovery is based only on the facts currently alleged in the
amended complaint.
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.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 12/7/2017
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16 We do not disturb any part of the trial court’s order other than that
dismissing the claims under Count I of the amended complaint.
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