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Huatuco v. Satellite Healthcare

Court of Chancery of Delaware

December 9, 2013

AIBAR HUATUCO, M.D., Plaintiff,
v.
SATELLITE HEALTHCARE and SATELLITE DIALYSIS OF TRACY, LLC, Defendants.

Date Submitted: September 25, 2013

Kenneth Aaron, of Weir & Partners, LLP, Attorney for the Plaintiff.

Kevin R. Shannon, Matthew J. O'Toole, and Matthew D. Stachel, of Potter Anderson & Corroon LLP; Of Counsel: Luke G. Anderson, of K&L Gates LLP, Attorneys for the Defendants.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor

Delaware law with regard to limited liability companies is contractarian; individuals may create an organization that reflects their perception of the appropriate relationships among the parties, most conducive to their interests, as represented by their mutual agreement. Chapter 18 of Title 6 of the Delaware Code provides default provisions applicable to Delaware LLCs where the parties' agreement is silent; where they have provided otherwise, with limited exceptions, [1]such agreements will be honored by a reviewing court.

Here, the parties agreed to reject all default provisions, and expressly limited members' rights to those provided in the LLC Agreement. That Agreement strictly limits member rights of withdrawal, and does not provide for judicial dissolution. Nonetheless, the Plaintiff seeks a judicial dissolution under Section 18-802 of the LLC Act, pointing to a member deadlock in the conduct of the business. The Defendants have moved to dismiss. Because the right to judicial dissolution is a default right which the parties may eschew by contract, [2] and because they have done so here, the Defendants' Motion must be granted.

I. BACKGROUND

The facts that follow are taken from the Verified Complaint, unless otherwise noted. Satellite Dialysis of Tracy, LLC (the "Company") is a Delaware limited liability company that owns and operates dialysis facilities in San Joaquin County, California. The Company consists of two members, Plaintiff Dr. Aibar Huatuco and Defendant Satellite Health Care ("Satellite"). The members entered into the Limited Liability Company Agreement of Satellite Dialysis of Tracy, LLC (the "LLC Agreement") on August 15, 2007. Each member holds a fifty percent interest in the Company, and Satellite manages the Company pursuant to the terms of a Management Services Agreement. The Company and A & I Huatuco, Inc., an entity affiliated with the Plaintiff, entered into a Medical Director Services Agreement ("MDSA") under which the Plaintiff would serve as the Company's Medical Director for a five-year term ending August 15, 2012.[3]

On March 1, 2010, the Company, via Satellite, and Union Bank entered into a business loan agreement, which contained a provision requiring that the Company maintain a certain ratio of EBITDA to debt service. Satellite, as manager, provided the loan documentation to the Plaintiff; however, the documentation did not contain the business loan agreement, and the Plaintiff personally guaranteed the loan, unaware of the debt service ratio provision. Then, in August 2010, the Plaintiff again personally guaranteed a loan to the Company, this time for a $500, 000 line of credit. On May 17, 2011, Satellite amended the initial business loan agreement with the bank to include a "borrowing base covenant" that immediately placed the Company in default of that provision. Finally, on May 26, 2011, Satellite, again without the Plaintiff's knowledge or consent, executed an additional $500, 000 line of credit with Union Bank.

One month before the MDSA was set to expire, in July 2012, Satellite informed the Plaintiff that under new regulations issued by the Centers for Medicare & Medicaid Services, the Plaintiff was no longer eligible to serve as the Company's Medical Director. The Plaintiff suggested that the Company seek a waiver from the Centers for Medicare & Medicaid Services so that the MDSA could be renewed, but Satellite rejected that proposal. Instead, Satellite proposed a recapitalization plan, which "permitted Satellite the right to convert the Company's debts to Satellite for loans into an increase in Satellite's Percentage Interests to make Satellite the majority member . . . ."[4] The proposal also contained a provision increasing the percentage interests of a member who made a disproportionate capital contribution.[5] The Plaintiff understood Satellite's intent was to "force [the Plaintiff] to either 'pour more good money after bad' into the Company controlled by Satellite or force [the Plaintiff] out of the Company."[6]Days before the MDSA was to expire, Satellite proposed an additional amendment to the LLC Agreement, which provided that, as manager, Satellite could enter into a medical director services agreement with a party other than the Plaintiff. The Plaintiff rejected that proposal on August 15, the day the MDSA expired, and Satellite informed the Plaintiff that it intended to sign a new medical director services agreement with another doctor the next morning. In addition, Satellite contended that the expiration of the MDSA constituted a "Transfer Event" under the LLC Agreement, [7] triggering its right to purchase the Plaintiff's interest in the Company.[8]

The Plaintiff responded by asserting that, because Satellite had failed to negotiate with the Plaintiff in good faith as required by the MDSA, the MDSA had not expired, and thus such expiration could not constitute a Transfer Event.[9]Instead, between August and October 2012, the Plaintiff identified the following Transfer Events, which he claimed triggered his right to purchase Satellite's interest in the Company: Satellite concealed information from the Plaintiff regarding loans and unilaterally entered loan agreements without the Plaintiff's consent; Satellite induced the Plaintiff to sign loan guaranties without providing him comprehensive loan documentation; Satellite amended loan agreements without the Plaintiff's consent, and entered an additional line of credit without his knowledge; Satellite improperly paid itself a management fee while the Company was insolvent; Satellite failed to negotiate the MDSA in good faith; and Satellite entered into another medical director services agreement without the Plaintiff's consent.[10] In January 2013, the Plaintiff also asserted that Satellite had entered into an additional note in violation of Section 3.4.1 of the LLC Agreement, triggering yet another Transfer Event.[11]

Surprisingly, in this action, the Plaintiff does not seek a judgment that Satellite's breaches of the LLC Agreement constitute Transfer Events, and that he therefore has a contractual right under the LLC Agreement to purchase Satellite's interest in the Company. Instead, the Plaintiff filed a Complaint with this Court on April 8, 2013 seeking judicial dissolution of the Company under 6 Del. C. § 18-802.[12] Accordingly, the parties agree that this Motion to Dismiss is not reliant on the underlying facts alleged in the Complaint. Rather, the parties submit that whether the Plaintiff is entitled to judicial dissolution is governed by the interplay of 6 Del. C. § 18-802 and certain provisions in the LLC Agreement. First, Section 2.2 of the Agreement states:

The respective rights of each Member to share in the capital and assets of the LLC, either by way of distributions or upon liquidation, will be determined by reference to the Percentage Interest of such Member; and each Member's interest in the profits and losses of the LLC shall be established as provided herein. Except as otherwise required by applicable law, the Members shall only have the power to exercise any and all rights expressly granted to the Members pursuant to the terms of this Agreement. No Member shall have any preemptive right to purchase or subscribe for additional Membership Interests in the LLC by reason of the admission of any new Member or the issuance of any new or additional Membership Interests or other debt or equity interests in the LLC.[13]

The Defendants argue that the second sentence of that paragraph applies generally, and forecloses a right to seek judicial dissolution. Second, Section 8 of the LLC Agreement provides that dissolution ...


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