Drs. Dietze and Graham had an established ophthalmology practice. Graham and Dietze each held a 50-percent interest in the professional practice as well as an equipment and real estate partnership.
On November 17, 2003, Graham received a notice of expulsion, the intent of which was to expel his professional corporation from the ophthalmology practice. Graham did not receive any formal notices for the termination of his 50-percent interests in the practice or the related equipment and real estate company, nor has there been dissolution of either entity. After Graham received the notice of expulsion from the ophthalmology practice, he no longer received financial information for either entity based upon Dietze's instruction to the entities' accountant and bookkeeper. Also at Dietze's direction, savings accounts were opened for the companies in which the entities appeared to retain net profits throughout the year until distribution.
After January 2004, Graham received no income distribution from either entity. Graham performed no surgeries after the early part of January 2004, as he received a letter dated January 19, 2004, stating he would not be allowed to perform surgeries. Graham discontinued payments to Geiger on his purchase of Geiger's interest in D & G in February 2004 as he was not receiving any payments from any of the entities.
The Appellate court found that the trial court had erred in applying equitable principals contrary to the plain language of the articles of organization and operating agreement. The agreement did not provide for expulsion or involuntary termination or transfer of a member’s interest and neither of the parties sought judicial dissolution or expulsion. Also, Graham did not have to perform surgeries in order to share in the distributions, and was not expected to devote his full time and attention to the affairs of the LLC. Because he was prevented from performing surgeries and not given financial information, he was unable to devote any time or attention to the LLC.
Therefore Graham remained a member. Rather than an accounting of Graham’s interest as of the time he was excluded, the court found that he was still entitled to share in the profits, even after excluded, because he still retained an interest.
Attempts to exclude or remove members must be done according to the operating agreement. It’s risky to operate with an operating agreement that does not provide for both involuntary and voluntary expulsion. As in this case, without the expulsion or termination provision the LLC’s only recourse would be to have this settled by the court, which is time consuming and costly.
Graham v. Dietze, 2010 WL 1600562 (Neb. App. April 20, 2010)
- Allison M. Lindner
Associate, Business Law Section of the Dickinson Law Firm