A recent Georgia Appeals case shows the perils of not following the the language contained in an operating agreement. In Colquitt v. Buckhead Surgical Associations, LLC et al., A19A0466 (June 28, 2019), a dispute arose between doctors who had founded two LLCs: a medical practice and related surgery center. The LLCs included three managing members and two non-managing members. After a disagreement, one of the managers was removed for cause, in accordance with the operating agreement, by the two other managing members. The terminated member sued the LLCs and the other members, claiming breach of fiduciary duty, breach of contract, punitive damages, and attorney’s fees.
After several motions, the trial court dismissed all claims filed by the terminated member. The Court of Appeals reviewed the case and approved the trial court’s rulings. The takeaways are:
(1) The fiduciary duties of a managing member of an LLC can be reduced or eliminated by language in the operating agreement. In this case, the operating agreement limited breach of fiduciary duties to conduct that amounted to gross negligence and willful misconduct. The terminated manager’s claims against the other managers fell short of being gross negligence or willful misconduct.
(2) There can be no breach of fiduciary duty when the operating agreement allows the complained of activity. Here, the operating agreement stated that a majority of members could vote to terminate a member. Thus, there was no breach of fiduciary duty for following the terms of the operating agreement.
(3) Only managing members owe fiduciary duties to the LLC or other members. Here two of the members were non-managing members and couldn’t, under any circumstances, be held liable for breach of fiduciary duty.
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