Lourdes Medical Pavilion, L.L.C. (“LMP”) recently found legs in its breach of non-competition agreement lawsuit against Catholic Healthcare Partner’s, Inc. (“CHP”), the “parent” company of LMP member. Lourdes Hospital, Inc., when a U.S. District Court in Kentucky denied CHP’s Motion for Summary Judgment which argued that the suit should be dismissed because of the absence of corporate authority for LMP to bring the suit. In Lourdes Medical Pavilion, L.L.C. v. Catholic Healthcare Partners, Inc., 2006 Westlaw 753080 (W.D. Ky.), the Court ruled that a provision in the Kentucky Limited Liability Company Act, (the “Act”) KRS § 275.340 providing that “lack of authority of a member or manager to file suit on behalf of an LLC may not be used as a defense to an action filed by the LLC,” trumped provisions in the LMP Operating Agreement requiring majority approval to commence litigation.
LMP provides diagnostic services, ambulatory surgery services and other healthcare services to patients in and around Paducah, Kentucky. It also operates a medical office building for physicians in Lourdes Hospital medical staff. In December of 1998, LMP and CHP inked a non-competition agreement. CHP agreed that neither it nor its affiliated entities would compete with LMP’s lines of business. The other member of LMP, PAPI is a group of physicians.
In 2002, CHP kicked off plans to construct a $27 Million Dollar Marshall Nemer Pavilion with new medical suits and surgical space. LMP and, in particular, PAPI were annoyed and when Dr. Robert Merriweather of PAPI moved to have LMP commence litigation, the Lourdes Hospital side of LMP refused to approve the suit. Nevertheless LMP, through its PAPI side, filed suit without approval of the deadlocked LMP Board of Directors.
The Court’s analysis of CHP’s motion for summary dismissal of the case for lack of authorization followed an intricate path of interplay between the LMP Operating Agreement and the Act. The Court determined that under the terms of the LMP Operating Agreement, there was no corporate authorization for the suit because the Operating Agreement required board deadlocks be resolved through a dispute resolution mechanism in the agreement. LMP argued that another section of the Operating Agreement, interfacing with similar provisions of the Act, permitted one member to commence suit on behalf of the limited liability company without the consent of the other when the other member had breached the agreement or had an interest in the litigation. The problem was that CHP was not the other member but the controlling parent of the other member.
CHP argued further that KRS § 275.335 specifically provides that in the event of a conflict between the provisions of the Act and an Operating Agreement formed under the Act, the Operating Agreement controls. The Court found, however, that the clear unambiguous bar of the lack of authority defense in the Act, prevails over corporate authorization requirements and presumably, the conflicting “Operating Agreement controls” provisions in the Act itself.
Two messages here: 1) the interplay between State Limited Liability Company acts and operating agreements formulated thereunder are important in the event of a dispute between joint venture partners; and 2) never give away competitive rights you might need some day.
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