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Bushi v. Sage Health Care, PLLC

Idaho Supreme Court
146 Idaho 764, 203 P.3d 694 (2009)
ELI5:

Rule of Law:

Members of a limited liability company (LLC) owe each other fiduciary duties, and they can breach these duties by expelling another member for personal financial gain, even if their actions technically comply with the provisions of the company's operating agreement.


Facts:

  • In 1994, Dr. Stephen Bushi co-founded Sage Health Care, PLLC (Sage), a limited liability company, with three other psychiatrists, each holding a 25% interest.
  • The LLC's operating agreement allowed amendment by a vote of all but one member and specified grounds for member dissociation, which did not include expulsion by a simple majority vote.
  • Beginning around 2002, Bushi entered a romantic relationship with a nurse practitioner employed by Sage.
  • In October 2005, the other members of Sage (Respondents) discovered Bushi had, without their consent or knowledge, borrowed nearly $45,000 for personal use on the company's line of credit.
  • At an October 2005 meeting, Respondents informed Bushi they wanted him out of Sage, and in December 2005, they voted to deny him future profit sharing after he joined a competing psychiatry group.
  • On January 30, 2006, Respondents held a members' meeting where they first voted to amend the operating agreement to permit the mandatory dissociation of a member by an affirmative vote of all but one of the members.
  • Immediately following the amendment, Respondents voted 3-1 to dissociate Bushi from Sage, effective immediately.

Procedural Posture:

  • Stephen Bushi sued Sage Health Care, PLLC and its other members (Respondents) in the Fourth Judicial District Court of Idaho, which is a trial court.
  • Bushi asserted claims for, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty.
  • Respondents filed a counterclaim seeking a declaratory judgment that their actions in amending the operating agreement and terminating Bushi's membership were valid.
  • Respondents filed a motion for summary judgment on all of Bushi's claims.
  • The district court granted summary judgment in favor of Respondents on all claims, finding their actions were proper under the contract, and awarded them attorney fees.
  • Bushi (as appellant) appealed the district court's grant of summary judgment to the Supreme Court of Idaho.

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Issue:

Does a member of a limited liability company (LLC) breach their fiduciary duty to another member by voting to amend the operating agreement and subsequently expel that member, even if their actions technically comply with the agreement's terms, when the expulsion is allegedly motivated by personal financial gain?


Opinions:

Majority - Horton, Justice

Yes, members of an LLC can breach their fiduciary duty to another member, even when acting in technical compliance with the operating agreement, if their actions are motivated by bad faith, such as seeking personal financial gain at the expense of the expelled member. First, the court holds that even under Idaho's original LLC act, members owe one another fiduciary duties of loyalty and care. A fiduciary duty exists concurrently with the obligations in an operating agreement and is not waived by them. While Respondents' actions—amending the agreement and then dissociating Bushi—were procedurally compliant with the contract's terms, compliance alone does not preclude a breach of fiduciary duty. Citing precedent like Schafer v. RMS Realty, the court reasons that actions taken in accordance with an agreement can still constitute a breach if members improperly use their position for financial gain. Here, a genuine issue of material fact exists regarding Respondents' motivation. Bushi alleged their motive was financial gain, pointing to the large disparity between the buyout value calculated under the agreement ($11,245) and a prior valuation where members valued their interest at $250,000. Because a reasonable person could infer that Respondents acted in bad faith to enrich themselves, summary judgment was inappropriate on this claim.


Concurring - J. Jones, J.

The author concurs with the majority's legal conclusion but expresses that Bushi's claim for breach of fiduciary duty only 'barely' survives summary judgment. The author notes that Bushi's own misconduct, particularly his improper use of the company's line of credit for personal benefit, is a significant factor. However, because Sage did not heavily rely on this fact as a primary reason for dissociation until well after the event, and there is just enough evidence to suggest a motive of improper financial gain, the issue should be decided by a trier of fact rather than being dismissed on summary judgment.



Analysis:

This decision is significant for establishing that fiduciary duties exist between LLC members in Idaho, even under a statute that did not explicitly name them, by incorporating common law principles. It reinforces the legal doctrine that contractual rights cannot be exercised in bad faith to oppress a minority member. The case serves as a crucial check on the power of majority members in an LLC, confirming that courts will scrutinize the motives behind facially valid actions, such as amending an operating agreement to expel a partner. This precedent protects minority owners from 'squeeze-out' maneuvers and ensures that the duty of loyalty tempers the exercise of raw contractual power.

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