Management of LLCs By Non-Members

Posted by William J. Piercy on

In Internal Medicine Alliance, LLC v. Budell, 290 Ga. App. 231 (2008), two physicians, Budell and Verbitsky agreed to create a medical practice together.  They formed a new company, Internal Medicine Alliance, LLC, through which to run the business.  Although IMA’s Articles of Incorporation provided that the company was to be a manager-managed LLC, as opposed to member managed, those articles did not specify who the manager was to be; nor did Budell and Verbitsky enter into an Operating Agreement.  The physicians did agree, however, that each would own 50% of that business and they would share profits equally.

IMA signed a lease and both Budell and Verbitsky personally guaranteed the $70,000 in buildout expenses incurred by the landlord.  Budell made an equity capital contribution to IMA of $70,199.  For her part, Verbitsky contributed $70,000.  Within weeks of getting the practice up and running, Verbitsky’s husband injected himself into the operations of the business and insisted on becoming a member of IMA.  When Budell objected, Verbitsky’s husband threatened him with violence.  Shortly thereafter, Budell left IMA to start his own practice.

In an effort to unwind their business relationship, Budell and Verbitsky agreed that Verbitsky would run IMA until the end of the year, at which point Verbitsky would buy Budell out.  When the end of the year came, however, Budell and Verbitsky could not agree on a price.

Using profits from the operations of IMA, Verbitsky reimbursed herself the $70,000 invested at the outset of the business.  However, she refused to return Budell $70,199 initial capital contruction.  Verbitsky also  refused to make further distributions to Budell, instead merely retaining all of IMA’s revenues for herself.  Finally, Verbitsky made no attempt to collect on the IMA receivables associated with Budell’s patients.

Budell filed suit for breach of contract and breach of fiduciary duty, among other claims.  The Court found that Verbitsky had breached her agreement with Budell by not paying him his share of the value of the business and awarded Budell $141,000, which his expert testified was the value.

As for Budell’s breach of fiduciary duty claim, Verbitsky argued that she owed no duty because it was not Verbitsky, but her husband, who served as IMA’s manager.  The Court rejected this argument on the grounds that an LLC can only be managed by a non-member where more than half of the members have agreed to that manager’s appointment.  Because Budell never agreed to the appointment of Verbitsky’s husband as manager, and because Verbitsky remained as IMA’s sole remaining active member, the Court concluded that Verbitsky was effectively IMA’s manager.  As such, the Court found that Verbitsky owed, and breached, her fiduciary duty to act with the utmost good faith and loyalty toward the best interest of IMA.