Wednesday, December 13, 2017

Indiana Courts Reject Physician’s Efforts to Loot LLC


Indiana Courts Reject Physician’s Efforts to Loot LLC

      In a recent decision from Indiana, the Court of Appeals affirmed certain determinations made at the trial court that a physician’s conduct vis-a-vie the LLC in which he was a one third owner were improper, and that the language he cited to validate his conduct was inapplicable. Joshi v. Apollo Medical Group, LLC, Ct. App. Case No. 82A01-1612-CT-2842, 2017 WL 4414302 (Ind. Ct. App. Oct. 5, 2017).
      Apollo Medical Group, LLC had three members, Drs. Joshi, Elfar and Guiao; each owned a one third interest therein. Under Apollo's amended and restated operating agreement, the company was managed by its members, each required to “exercise business judgment in participating in the management of the business operations and affairs of the Company.” The operating agreement went on to provide that a member “shall incur no liability to the Company or to any of the Members as a result of engaging in any other business or venture, whether or not competitive, disclosed or undisclosed.” A third relevant provision of the Operating Agreement provided: “A Manager shall not be required to have the management of the Company as his or her sole and exclusive function, and may have other business interests and may engage in other activities in addition to those relating to the Company. “In addition to Apollo, there was organized AMG Management Services, LLC. Each of the three owners in Apollo were one-fourth owners therein. In addition, Gary Pilibosian was a member of that company.  It providing management, administrative and other non-physician services to certain of Apollo’s clients. For reasons not discussed in the opinion, Joshi did not want Pilibosian to share in AMG’'s business, but Joshi was unable to convince either Elfar or Guiao to exclude him. As set forth by the Court of Appeals:

In September 2016, Dr. Joshi told Drs. Elfar and Guiao that he intended to divert business away from AMG in an attempt to limit Pilibosian’s financial benefit and that if the other members did not agree with him, he would funnel any new business to a new company and that “Apollo would be dead.” Drs. Elfar and Guiao objected to the plan and told Dr. Joshi that they would not participate in the scheme to cheat Pilibosian.

      Joshi then did exactly what he threatened to do. For example, he contacted two clients of Apollo, misrepresenting to them its current status with the effect that both terminated their agreements with Apollo. When a prospective client sought a proposal from Apollo for services, he diverted it to himself. He as well diverted Apollo’s physical mail and emails to himself, depriving the other owners of the LLC access thereto. When finally challenged in a letter from Apollo’s attorney, his counsel indicated that he had a “unfettered right to engage in activities that are competitive with Apollo.” Ultimately, Apollo would bring a complaint against Dr. Joshi, seeking relief including a temporary restraining order and preliminary injunction. After oral arguments a preliminary injunction was granted, and it was from the granting of that preliminary injunction that this appeal was taken.
      Before the Court of Appeals, with respect to the “likelihood of success on the merits” component, Joshi focused upon the alleged breach of fiduciary duty, arguing that the language above quoted from the operating agreement modified his fiduciary duties to the company. The Court of Appeals rejected that determination. Rather, while an operating agreement may “modify, negate, and/or limit duties, including fiduciary duties,” the court found that this language is not sufficient to do so. Rather, in order to modify or negate fiduciary duties, they being “fundamental and paramount to the smooth operation of companies,” any modification or negation “must be explicit.” The court determined that, in this instance, the language quoted above was not an explicit modification or negation of fiduciary duties.
       Applying a belt and suspenders analysis, the court went on to determine that even if the language quoted above modified Joshi’s fiduciary duties, it did not sanction the conduct in which he engaged in this case. Rather, while he could have other business interest, he could not engage in conduct that actively undermined Apollo. In addition, while the operating agreement may allow members to engage in competitive activities, that did not extend to undermining and sabotaging Apollo's current business relationships. “And it would certainly not include a right to hijack Apollo’s website, email, and mail.”
      The Court of Appeals, as did the trial court, went on to find that the weighting of the harms was in favor of Apollo, as was the question of public interest. With respect to the scope of the preliminary injunction, Joshi argued it went too far in that it did not reset the status quo. The Court of Appeals found to the contrary, the status quo being the circumstances as they existed prior to the time Joshi sought to undermine Apollo. “Therefore, the trial court’s order on these matters merely maintain the status quo as it existed before the current controversy arose.”

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