### IN THE COURT OF APP EALS OF TENNESS EE AT NAS HVILLE Ja nua ry 5, 200 5 S es sio n
ARC LIFEME D, INC., ET AL 

### . v. AMC-TE NNESSEE , INC.
Appeal f romthe Chancer y Court for Davidson Cou nty No. 01-3163-II Car ol McCoy, C hancellor

No. M2003- 02640-COA-R 3-CV - F iled Augu st 2, 2005

This is an action for brea ch of contra ct by a limited liabilit y

company ag ainst its manag ing me mber. The other members of

the LL C joined as plaintiffs seeking rec overy for br eac h of fiducia ry duty and neg lige nt misreprese ntation. The mana g ing me mber countercla imed ag ainst the LL C for bre ach of contra ct and, in the a lternative, soug ht rec overy in qu an tum me ru it

for unjust enric hment. The trial court h e ld th e ma n a g in g me mb e r to b e li ab le to a ll p la in ti f f s o n a ll is s u e s a n d d is mi s s e d the counter claim. The a ction of the trial c ourt is reve rsed a s to breac h of fiducia ry duty and neg lige nt mis re pr e se ntatio n. Th e jud g me nt o f the tr ial cou rt is a ff ir me d a s to br e a c h o f c on tr a c t a nd a s to dis mis sa l of the c ou nte rc la im. Th e fi nd ing s of the tr ia l c ou rt a s to da ma g e s pa y able to the LL C is
a ff ir me d a s is the dis tr ibu tio n o f the a sse ts of the LL C. Pr e jud g me nt int e re st is dis a llo we d, a ndc os ts
are assessed to the ma nag ing me mber.
Tenn. R. App . P . 3 Appeal as of Right; Judgme nt of th e Chancer y Court Affi rm ed in p art, Reve rsed in part and Rem anded

W I L L I AM B. C A IN , J ., delivere d the opi nion of the court, in which W I L L I AM C.K O CH , J R ., P.J ., M.S., and F RAN K G. C L EME NT , J R ., J ., joined.

Ba rbar a Hawle y Smit h, Nashville, Tenne ssee, Robert P. Johnson, Pro Ha c Vice , Cincinnati, Ohio, for the a ppellant, AMC-Tenne ssee, I nc. Charles W. Cook, I I I , J ames E. Gay lord, Nashville, Te nnessee , for the a pp e ll e e s , A RC LifeMed, Inc., L if e Tr us t A me ri c a . I nc . a ndL if e Me d, LL C.

OP IN ION

This case involves the su pply of pharmace utical produc ts to persons residing in assisted liv ing fa c ili tie s a ndthe c oll e c tio n of pa y me nts fo r s uc h p ro du c ts. AR C L if e me d, I nc . ( “ AR C” ) i s a lar g e cor poration with many y ear s of experience in the nursing home business. L ifeTr ust America , I nc. is a c orpora tion formed in 1996 dur i n g t h e infa ncy of assisted living f

acilities (“A LF” )
c on str uc te d to ho us e res id ent s wh o a re in n e e d o f a ssi sta nc e bu t are no t ph y sic a lly or me nta lly-2-

dis able d to the po int

that the y re qu ir e nu rs ing ho me c are

. AM C- Te nn e sse e , I nc . ( “ AM C- TN ” ) i s a s i z e ab l e r e t a i l p h ar m a c y.

I . H I STO RY OF L I F EM ED , L

L C.

AR C w a s a

lon g -s ta nd ing le a de r in the c on str uc tio n an d ope ratio n of nur sin g ho me fa c ili tie s, pr inc ipa lly in the e a ste rn a nd so uth e a ste rn Un ite d Sta te s, pr ior to the a dv e nt of AL F in th e mid 1990s. Desiring to enter the ALF field, ARC, in 1997, embar ked upon a plan to develop 40 assisted living fa cilities. By

the fa ll of 1998, ARC had 20 such fa cil i t i es i n o peration. L ifeTr ust, I nc., org anized in 1996, had no prior e x perie nce in the AL F market but , by the end of 1998, was opera ting 30 such fa cilities. L ifeTr

ust beg an exploring w ay s to develop revenue from s ource s other than the typical provision o f ro o m and boar d. I t rec og nized that the pharmac y business might provide additional income. LifeTr ust beg an discussing the forma tion of a joint venture with “T he Pharmac y ,” an instit utional pha rmac y serving skilled nur sing f acilities and a ssisted livi ng fac iliti es primarily in Tennesse e. “T he Pharma cy ,” own ed an d m an aged by Buddy Stephens, had a

g ood
re pu ta tio n a ndha d p ro fi ta bly c on c e ntr a te d it s b us ine ss in the l on g -t e rm c are ma rk e t. Lif e Tr us t lear ned that “T he Pharma cy ” would soon be a cquire d by Americ an Medse rve Corporation. Following this acquisition, “The P h ar m ac y ” wa s named AMC-TN . L ater , Americ an Medse rve would itself be ac quired by Omnicar e, I nc., the lea ding institutional pharmac y in the nation, but A M C

- T N w o u l d r e t a i n i t s s e p ar a t e i d e n t i t y.

Du ri ng ne g oti a tio ns be tw e e n Lif e Tr us t a ndAM C- TN , th e c on c e pt o f “the ph arm a c y wi thi n a pharmacy ” (“ PI P”) wa s discussed under which a joint venture wo u l d o p er at e on AMC-TN’ s p h y s i c a l p r e m i s e s t o s u p p l y p h ar m a c e u t i c a l s e r v i c e a n d p r o d u c t s t o Li f e T ru s ta n d i t s A LF s

. T h e P IP
arr ang ement would allow the joint venture to share the overhe ad of a n established provide r and utiliz e those services without having to overc apitalize the projec t. L ifeTr ust and AMC-TN formalized their joint venture w ith the creation of L ifeMed, L L C in 1997. L ifeTr

ust contributed $200,000 in exchang e for a 40% owner ship in the j oint venture . AMC-TN contr ibuted $300,000 for the r em ai n i n g 6 0 % o wn er s h i p i n t er es t

. A Li m i t ed L i ab i l i t y C o m p an y

Agr ee m en tes t ab l i s h ed a boa rd of ma na g e rs fo r Lif

e Me d, LL C.

I n 1 99 7, AR C le arn e d o f the L if e Me d, LL C jo int

ve ntu re wh ile se arc hin g fo r w a y s to inc re a se its revenue s. Unlike L ifeTr ust, A RC had some prior experience with the pharma cy business, having operated an institutional pharmacy in Richmond, Virginia. A RC learned that t h e L i fe M ed joint venture had been opera ting at a brea keven point f

inancially

. I n 1998, ARC c ontrib u t ed $ 300,000 to the venture with AMC-TN re ceiving a $150,000 distribution of capital from the joint venture at such time. An Amende d and Restated L L C Ag ree ment executed by the three parties a llocated
ow ne rs hip e qu a lly

a mon g the me mbe rs

.
Two a gre ements g overne d the joint venture following the admission of ARC as a joint venture r. Th es e we re the Amended a nd Restated Limited L iabilityCompany Ag ree ment (the Oper ating Ag ree ment) dated Oc t o b er2 9 , 1 9 9 8 , an d t h e M an age m en tAgr ee m en tp re v i o u s l y ex ecute d-3-

on J une 11, 1997,betwe en LifeTr ust, I nc. and AMC-TN under which AMC-TN was to mana g e the joi nt v e ntu re . T his a g re e me nt r e ma ine d e ff e c tiv e a ft e r the Am e nd e d a ndRe state d L L C A g re e me nt. By the Amended and R estated L L C Ag ree ment, a one- third ownership intere st was assig ned to eac h member w ith each me mber a ppoin t i n g t wo repr esenta tives to the Boa rd of Dir ector s of L if e M e d

. T h is A g r e e me n t p r o v id e d th a t n o p o r ti o n o f th e c ap it a l f u n d s o f L if

e M e d c o uld be withdrawn at any time w ithout the approva l of all members and that upon termination, dissoluti on, and liquidation of L ifeMed, e ach me mber’s c apital ac count was to be distrib u t ed

. E ac h member could withdraw from LifeMed at any time and re ceive a re turn of its positive capital ac count balanc e.
Acc ording t o t h e M anag ement Ag ree ment, AMC-TN wa s eng ag ed to manag e LifeMed’ s business. I n return, AMC-TN was entitled to a manag ement fee which it would earn by perf orming
ce rt ai n d u t i es fo r t h e O wn er , L i fe M ed . Among these du t i es , t h e A gre em en tp re s cr i b ed t h e f o l l o wi n g:

1. Ret ention of

Manager. O w n e r

h e r e b y r e ta in s M a n a g e r

to p r o vide manag ement ser vices in conne cti o n with the Pharmac y under the terms and conditions set forth herein. The Operating Ag ree ment describes various a dditional du tie s f or wh ic h Ma na g e r is a lso re sp on sib le inc lud ing , w ith ou t li mit a tio n, B ud g e ts (Ope rating Ag ree ment, Section 4.4) and various re sponsibili ties for books, re cords and accounting matters (Opera ting Agr eeme nt, Article 5). The Owner and Manag er inten d t h at the manag ement fe e desc ribed in this Ag ree ment shall be full and complete c ompensation for t h e Manag er f or the provision of its servic es desc ribed in this Agre ement as w ell as the provision of those additional service s require d of the Ma na g e r p ur su a nt t o th e Op e ratin g Ag re e me nt.

2. Responsib ilities of Manager. During the Term, as define d below, Manag er sha ll provide the following manag ement, consulting a nd advisory service s to O wner in c onnection with the operation of the Pharmac y , and sh al l d ev o t e such time, expertise, and re source s as m ay be appr opriate to prope rly manag e the Pharmac y as provided he rein:

. . .
B. Bank Ac c ount s; P ay m e nt of Bus in ess E xpe nse s. Manag er shall direct the ope ning a nd closing of bank a ccounts in the na me of Ow ner f or the benef it and acc ount of Owne r in a b ank of Ma nag er’ s selection, which sha ll be approve d by

the B oard of

Manag ers, a nd shall direct the deposit therein of a ll money
re c e ive d in the c ou rs e of

the op e ratio n o f the Pha rm a cy

. Man ager sh a ll c a us e a ll expenses incurre d i n t h e o p eration of the Pharmac y , including, but not limited to, pa y me nt o f M a na g e r’ s fe e s a nd e xpe ns e s he re un de r, de bt se rv ic e s, pa yro ll, be ne fi ts and re lated employ ee expenses, to be paid, at the Ow ner’ s expense, by chec k draw n on such ac counts and sig ned by such party

or parties as m aybe desig nated by Ma na g e r a ndapp ro ve d b y the B oa rdof Ma na g e rs

.-4-

. . .
H. Boo kke e ping and Account ing ; T ax e s. Manag er sha ll direct the bookkee ping a nd acc ounting pr ocedur es nec essary for the ope ration of the Pha rm a c y a ndthe pr e pa

ratio n o f p ro pe r f

ina nc ia l st a tem ents a ndre c or ds

. Bookke eping and ac counting proce dures a nd sy stems shall be in acc ordanc e with the op e ratin g c apit a l a ndc a sh pr og ra ms d e ve loped by Ma na g e r, wh ic h p ro g ra ms s ha ll conform to ge nera lly

acc epted a ccounting principles. Mana g ers sha ll maintain the g e ne ra l le dg e r f

or the Pha rm a c y , caus e pa y me nt of the a c c ou nts pa y able pu rs ua nt t o Section 2.B. a nd prepa

re pe riodic financ ial statements as require d by Article V of the Oper at i n g Ag ree ment. Under Manag er’ s direction, Owne r shall maintain the
a c c ou nts re c e iva

ble fo r the Pha

rm a c y , a ndre c eiv e, de po sit a ndre po rt

on c a sh
rec eipts on forms provided by Manag er. Subjec t to the provisions of Section 5.7 of the Oper ating Ag ree ment, Manag er shall prepa re and file all tax returns w ith respec t t o t h e P h ar m a c y.
3. Responsib ilities of Ow ner. Du ring the Term, as define d below, Ow n er ’s re s p o n s i b i l i t i es s h al l i n cl u d e, b u tn o tb e l i m i t ed t o , t h e f o l l o wi n g:

A. O p e r a t i o n a l P o l ic ie s. T h e Board of Ma nag ers of the Owne r sh a ll d e ve lop a ndimp le me nt a ll o pe ratio na l po lic ie s a ndpr oc e du re s n e c e ssa ry to establish and maintain the s tandar d of pharmacy service s appropriate for the nature
o f t h e P h ar m a c y.

B. Cha r ge s. Th e B oa

rdof Ma na g e rs of the Ow ne r s ha ll e sta bli sh the sche du l es o f rec ommended cha rg es for pharma ceutica l products and se rvice s p r o v i d e d b y t h e P h ar m a c y.

. . . 5. M ana ge m e nt F e e s. F or se rv ic e s per fo rm e d he re un de r, Ow ne r s ha ll pa y to M a na g er a manag e me nt f e e e qu a l to Ma na g e r’ s a c tua l c os ts i nc ur re d in p r o v id in g th e s e r v ic e s to b e p e r f o r me d b y M a n a g e r h e r e u n d e r , p lu s te n perc ent (10%) . As such costs of Manag er w ill onlybe dete rmined semi-a nnually (as here in a f te r p r o v id e d ) , u n ti l s u c h c o s ts h a v e b e e n d e te r mi n e d , O w n e r s h a ll pa y Manag er on a n interim basis an inter i m fe e of Four Dollar s ($4.00) for eac h pres cr i ption processe d and filled by Owner . Owner

shall pay

such interim fe es mon thl y , in arr e ars , n o late r tha n th e la st d a y of th e mon th f

oll ow ing the mon th du ri ng wh ic h s uc h ma na g e me nt f e e s we re e arn e d. Ma na g e r sh a ll be e nti tle d to c a us e all such amounts to be disbursed to itself out of the a ccounts provided for in Section 2. B . h ereof . Within fo rt y -f ive (4 5) da y s a ft e r the c omp le tio n o f e a c h s ix-m on th period of J uly 1-De cembe r 31 and J anuary 1-June 30 here under (provided, tha t the first peri o d s h al l be J une 11-D ece mber 31), Ma nag er sha ll deliver to Owne r and-5-

L ifeTr ust an itemiz ed stateme nt of Manag er’ s direc t and indi rec t costs of providing the se rv ic e s to be pe rf

or me d b y Ma na g e r he re un de r. Ma na g e r s ha ll c oo pe rate wi th L ifeTr u s t and Owne r in answe ring any questions and addr essing any objections
re la tiv e to M a na g e r’ s c os ts a s set fo rth on suc h ite mize d sta te me nt, a ndsh a ll p e rm it Owner and LifeTr

ust to audit the books an d rec ords of Mana g er r elating to such costs. Owner and L ifeTr ust here by ag ree not to disclose any information provided by Manag er w hich constitutes c onfidential business information of Mana g er, a nd not to u se su c h in fo rm a tio n othe r tha n f or pu rp os e s o f d e te rm ini ng the fe e s to be pa id t o Manag er he reunde r, in ea ch ca se except as otherwise require d by applicable law or court proc ess. B ased upon Ma nag er’ s actua l costs of providing th e services to be pe rf or me d b y Ma na g e r h e re un de r ( c os t s p l u s 1 0 % ) a g ai n s t th e int e ri m f e e s p re vio us ly paid to Manag er on a n interim basis (initially , $4.00 per pr escription), and Manag er or Ow ne r, a s the c a se ma y be , sha ll pa y a ny ov e rp a y me nt o r d e fi c ie nc y of the int e ri m pay ments as co m pare d to the cost-base d manag ement fe e to be pa id here under, a s applicable . Ba sed upon such itemized costs, Owner and Mana g er ( with the consent of L if e Tr us t, wh ic h sha ll not be un re a so na bly wi thh e ld, de la y e d or c on dit ion e d) sh a ll
es t ab lish a new interim fe e to be pa id here under f or the ne x t semi-annual pe riod, which shall approximate as closely as pra cticable the projec ted costs of Mana g er f or the ne xt s e mi- a nn ua l pe ri od , p lus te n p e rc e nt ( 10 %) . Su c h r e c on c ili a tio n o f c os ts t o interim fee s and re-s et ting of the interim fee s to be paid shall be made afte r ea ch semi-annua l period.

. . .
7. No G uaranty of Profitabili ty. Owner acknow ledg es that Mana g er does not g uara ntee that the Pharmacy will be profitable.

I I . L I FEMED , LL C I N OPERATI ON

P r i o r t o t h e b e g i n n i n g o f t h e L i f e M e d , LL C j o i n t v e n t u r e , B u d d y S t e p h e n s , T h e P h ar m a c y, Am e ri c a n M e dSe rv ic e Cor po ratio n, a ndAM C- TN ha d e xtensi ve e xpe ri e nc e in the nu rs ing ho me pharma cy supply business. ARC ha d some experience having , for some period of time, ow ned an instit utional pharmac y

serving its nursing home f acilities. New ly -for med L ifeTr u s t , I nc. had no
e xpe ri e nc e in s up plying ph arm a c e uti c a ls t o n ur sin g ho me s. As sis te d li vin g fa c ili tie s d id n ot c ome into being until the mid-1990s, and none of the pa rties had a ny experience in supply ing the pharma cy ne e ds of a ssi ste d liv ing fa c ili tie s. Whil e on e mig ht thi nk that the tr a ns iti on fr om nu rs ing ho me supply to a ssisted living fac ility supply would involve a simple conve rsion, the parties learne d that such an a ssumption was far f rom the truth. The ope rations manag er f or AMC -TN, Ms. J ulie Fr azier, explained the differ ence s betwee n the under ly ing pr oblems of serving the phar macy needs of nursing ho me s a s c omp are d to su pp ly ing the sa me ne e ds in a ssi ste d li vin g fa c ili tie s. Q. Could y ou g ive us a littl e more detail and ba ckg round on the mix of the customer ba se of The Pharmac y prior to the formation of the joint venture?-6-

A Sur e. P ri or to the joi nt v e ntu re , o ur c us tom e r b a se wa s p ri mari ly nursing home. I t’s a diffe rent po p u l at i o n than assisted living, in that proba bly 80 perc ent of that business is TennCar e related, another, y ou know 10 t o 15 perc ent of it is Medica

re related, in which either the pay or of the bi ll is TennCar e or Me dicar e. You have about a 5 pe rce nt population that’s private pa y or, private insurance

.

The a ssisted livi ng side is prac tically just the opposite. You don’t have a ny Medica re be cause Medica

re still doesn’t have drug benef it prog ram. You don’t have a lot of TennCar e beca use that population in an ALF typically has a son or daug hte r tha t’ s p a y ing the ta b f or the m. So the majority of that population w as private pay , private insura nce, ha d the abil ity to, y ou kn ow , d o th e thi ng s th a t th e y wa nte d to do a ndwa s a

lit tle bit fr ee r p o p u l at i o n t h an wh at we we re u s ed t o s ee i n g i n a n u rs i n g h o m e s et t i n g. Q. Did the diffe rent mix , the TennCar e and Me dicar e on the nur sing ho me sid e ve rs us mor e of a pr ivate pa y ins ur a nc e mix on the a ssi ste d li vin g fa c ili ty sid e , h a ve a ny

e ff e c t on c oll e c tio ns ?
A Absolutely , for multiple rea sons. On e o f t h em wh ich I ’ve a lrea dy talked about is that if y ou don’t g et the corre ct i n formation on a timely basis, then there are limit s as to when y ou can f ile insurance claims. And the other thing is y ou have a more – – a

population of people tha t have a bill that they ’ve g ot to pay , and lots of times the last pay or (sic) that they think about is t h e pharma cy or a ve ndor. Yo u k no w, the y ’r e g oin g to p a y the ir ro om a ndbo ardfi rs t, a ndfr om tha t po int the y ’l l pay whoeve r’s lef

t over.

Yo u’ ve g ot a

sic ke r pop ulatio n o f p e op le . Y ou wo uld n’ t th ink that, but what happe ns in the nursing home s etting is wher e we have such reg ulations that we ha ve to comply

by , we ha ve a te ndency

to do things a lit tle bit differe nt. We have consultants in their building onc e a month who g o throug h a drug reg imen revie w pr oc e ss w h e r e w e t r y

t o m a k e r e c o m m e n d a t i o n s t o t h e d o c t o r t o r e d u c e t h e ir
me dic a tio ns , w he re a s in an ass is te d li vin g po pu la tio ns , y ou ha ve do n’ t ha ve that. You know, they complain about their foot hurting and they g ive them something for i t , an d t h at ’s t h e e as i es twa y t o k ee p t h em fr o mco m p l ai n i n g.
The a vera g e pre scription rate – – and I know i n our busi ness t hat – – and during the L ifeMed joint venture

– – was rig ht around ten pr escr iptions per
re sid e nt, wh e re a s in ou r nu rs ing ho me se tti ng it’ s mo re lik e se ve n o r e ig ht. So the ir dr ug bil ls w e re hig he r. Th e y ma y ha ve ha d pr ivate ins ur a nc e that so me tim e s w ou ld pay for it, but they

still had co-pay s. And so their drug bills t ypically ran hig her tha n what y ou’d see in a nursing home population.-7-

Q. When the joint venture started i n 1 9 9 7 , o p er at i o n ally what wa s involved in ge tting that set up?

A

. W e h a d t o g o o u t i n t h e h o m e s

– – o r t h e c o m m u n i t i e s , I s h o u l d s a y, and y ou had to g ather

information. You g ather ed information, as much as y ou could, about their drug thera

py , about insuranc e informa tion. You had to s et up responsibilitydocuments, in other w o rd s , who was g oing to be responsible for the bil l.

I nte rn a lly

we ha d to g o th ro ug h th e pr oc e ss o f g e tti ng pr e sc ri pti on s, beca use i t is considere d a retail environment. So we had to contac t the doctors and g et pre scriptions. We had to verify all that insurance and make sure that we wer e a pro vi der f

or that in su ra nc e , a ndif

we we re n’ t, s tart

the pr oc e ss f

or g e tti ng on the ir list of prefe rre d providers. We ha d to set them up i n t h e m ac h i n e. You know, we had a brand- new piece of equipment that we’ d been trained on that we ha dn’t used a lot of.
Q. I s that the Ba x ter mac hine?

A. That’s the B axter machine. It was a le arning curve for a ny body . And
we use d that machine, w e tried it, and it worke d pretty well. B ut as we a dded more busine ss and it started having to produce more, that’s w hen we starre d (sic) se eing
ou r p ro ble ms. At the time the joint venture wa s launche d under the Manag ement Ag ree ment J une 11, 1997, the “pha rmac y -within-a- pharma cy ” conce pt was implemented. Joint venture r and ma nag ing
v e n t u r e r , A M C

- T N , w a s i n f a c t a p h ar m a c y, a n d o n l y a p h ar m a c y ( t h o u g h a v e r y l ar g e p h ar m a c y) and wa s supply ing it s o wn cl i entele se parate and a part fr om the assisted living fa cilities it was
su pp ly ing in i ts c apa c ity

a s ma na g e r o f L

if e Me d, LL C.

L ifeMed, L

L C operate d only

for the limited per iod betwee n the i nception of the Manag ement Contract in J une of 1997 and Aug ust 2000, when the de cision was made to dissolve the joint venture. Fr om the beginning , troubles developed relative to separation of inventories betwe en The Pharmac y and the PI P. Said J ulie Fr azier:

A There wer e two things that we needed computer-sy stem-wise. No. 1
w a s w e n e e d e d t o u p g r a d e o u r h ar d w ar e a n d w e n e e d e d t o u p g r a d e o u r s o f t w ar e

. In
or de r t o u pg ra de ou r s of

tw are , w e ha d to up g ra de o ur har dw are . T he pu rp os e of it was to hopef

ully be a b l e t o s epar ate, without having to do a lot of extra work, the A/R [ Acc ounts Receivable ] and the b i l l ing be tween the L ifeMed joint venture and AMC-Tenne ssee. Q. Was the re a pr ob le m se pa

ratin g the bil lin g of

the tw o e nti tie s?-8-

A Be cause we we re r unning of f of one inventory

and we wer e running
o f f th e s a me c o mp u te r

s y s te m, it w a s a ll b e in g p r o c e s s e d u n d e r o n e c o mp a n y

. We did come up with methodolog y in order to se parate the L i fe M ed A/ R from The Pharmac y ’s A/R, and we put that into place.
Q. Acc ording to y our deposition, y ou t es t i fi ed t h at t h e u p gra d e was never – – that y ou never

g ot the upg rade

.
A. W e did g et t he upgra de but not before the joint venture wa s dissolved. We had to do a wor

k-ar ound, which we wer e able to do.
Q. S o un ti l afte r the JV wa s d iss olv e d, a ll the A/R w a s o n th e sa me c omp ute r s y ste m?

A. Th a t is c or re c t.
Q. And it was not ea silysepar ated?

A. On c e we did the wo rk -a ro un d, the on ly pa

rt of it that we we re n’ t a

ble to resolve – – se parate, I

g uess I should say , easily was the third party

. As far as the private, private insuranc e g uara ntor type A/r, we separ ated that. The third party was a lit tle bit mor e dif fi c ult

. Q. But be fore the joint venture wa s dissolved, it was hard to sepa rate the
acc ounts rece ivable?

A N o , w e s e p ar a te d b e f o r e th e

– – w e s e p ar a te d th e g u ar a n to r or the pr ivate pa y

sid e pr ior

to the joi nt v e ntu re dis so lvi ng . We we re no t abl e to s e pa rate t h e t h i r d p ar t y. Q. W h at ’s t h e b rea kdown betwe en third party and priva te pay

for the joint venture

A. The private insurance side was probably 65, 70 perc ent. B ut y ou’ve
s t i l l g o ta p r i v a t e p a y p o r t i o n t o t h a t

. I m e a n , e v e n i f yo u b i l l t h e i n s u r a n c e c o m p a n y, y ou’ve still got the c o-pay s and stuff that f all into the private pa y

side.
Q. Now, with r espec t to inventory , there wer e problems with the cost of g ood s g ener ator a nd so the inventory was sepa rate d sometime in late 1999; is that
c or re c t?

A. We separated the inventory in ear ly 2000.-9-

Q. An d p hy sic a l in ve nto ri e s w e re do ne e ve ry tw o to thr e e mon ths ?

A. Th a t’ s c or re c t.
Q. Now, ther e wa s borrowing betwee n

– – once y ou separ ated the inv e nto ry – – we ll, c a n y ou e xpla in ho w the inv e nto ry wa s se pa rate d f or the Cou rt ?

A. We phy sically tried to se parate the two pharma cie s fr o m t he downstairs of our

building. We ha d a two-story building. And in the downsta irs of
ou r b uil din g – – we pu t ou r nu rs ing ho me or Th e Pha rm a c y or AM C’ s o pe ratio n in the downstairs. The upstairs, we put the L ifeMed joint ventur e. So we separ ated the ir inv e nto ry

up sta ir s, AM C’ s in ve nto ry do wn sta ir s.

W h i l e o v e r e s t i m a t i o n o f

t h e A LFm ark e ta n d s h o r t c o m i n g s i n p r o j e c t e d p art i ci p a t i o n b y

A LF residents play ed a signific ant role in the failure and demise of L ifeMed, LL C, it was a combination of diffic ulties in inventory control and infla ted value of collectible a ccounts re ceiva ble that broug ht
abo ut this lit ig a tio n a mon g the pa rt ie s. The inventory

problem fr om the beg inning of L ifeMed, L

L C, acc ordi n g to A M C- T N ’ s expert J ohn Gould, emana ted from a combination of the “pharmacy -within-a- pharma cy ” conc ept and the use of a n inacc urate cost g ener ator in the c alculation of inve ntories. Said Mr. Gould:

THE WI TNESS: The cost g ener ator is a ve ry educa ted estimate.

TH E CO UR T: L ike a n a c tua ry , te ll m e wh a t it

is.

T H E W IT N E S S : I’ m s o rr y?

THE COURT: L ike ac tuaries do, tell me, wha t is a cost g ener ator.

THE WI TNESS: A cost ge nerator is another te rm used to identify what y our cost of product sold w as. I n most businesses that move inventory , they are able to identify , as it go es out the door, the c ost of that product to them on an individual basis. You know, a widget company can tell y ou that Widget A cost them $5.

I n the phar macy business, because of the volume of products that we have, w e don’t have the sy stem capa bilityto help us track e very individual product leaving the door. We have in upwa rds of 15,000 diff

ere nt products that could lea ve our doors. So we can’ t, as those drug s are leaving the door, identify at that particular po int in t ime wh a t th a t c os t w a s to us in o ur sy ste ms.-10- So fro m a

fi na nc ia l st a nd po int , v e ry g e ne ra l ba sic a c c ou nti ng is, if y ou ’r e g oin g t o make a

sa le of inv e nto ry , y ou ha ve to h a ve a c os t a sso c ia te d w ith that. And in the phar macy world the way we do that is through this cost g ener ator. An d this g e ne ra

tor is s imp ly a pe rc e nt o f s a le s th a t ha s b e e n d e ve lop e d o ve r t ime throug h experience , throug h rec onciliat i o n s wi th y our phy sical inventories a nd thr ou g h ju st g e ne ra l in du stry kn ow le dg e of

c e rt a in m arg ins on dr

ug s. On a monthly b as i s , that g ener ator or tha t perc ent is applied to net sales to id e n ti f

y w h a t th e e s ti mate d c o s t o f p r o d u c t s o ld w a s a s it r e late s to the product that wa s sold in that particular time period.

BY MR. COOK:
Q: So a t so me po int

y ou do ph y sic a l in ve nto ri e s to so rt of re a dju st y ou r c os t g ener ator?

A: Yes, we do.
Q: An d s o it ’s a

mov ing nu mbe r, in e ff

e c t?

A: I t can f

luctuate. I

mean, f or the most part it’s static unless y ou have a l ot of
c ha ng e s g oin g on in y ou r b us ine ss.

Mr . G ou ld f

urthe r t e sti fi e d th a t a

“ c os t g e ne rator ” wa s a t be st a n e du c a te d g ue ss a ndthat if the cost g ener ator used w as m arke dly inadequa te, i t would result i n g reat discrepa ncy betwee n the on-pape r i nventory used in ac counting and the substantive inventory that was a ctually

on hand. As rela tes to acc ounts rec eivable in pharma cy billing practices, to g et from g ross to net, two qualifiers must be considere d.
As explained by

J ohn Gould:
Q

. And i n te r ms o f

p r e p ar in g th e f

in a n c ia l s tate me n ts , if

I lo o k a t a typical fi na nc ia l st a te me nt, I ’m

g oin g to s e e a c c ou nts re c e iva ble , c or re c t?

A. Ye s. Q. An d I ’m

ta lki ng abo ut a

ba la nc e sh e e t.

A. Rig ht.
Q. An d I ’m

g oin g to s e e – –

un de r tha t I ’m

g oin g to s e e , I

g ue ss, tw o q ua lif

ie rs , one is a ll o w a n c e f

o r b a d d e b t, is th a t c o rr e c t, a n d th e o th e r o n e w o u ldbe
c on tr a c tua l di sa llo wa nc e s?-11-

A. Ye s. Q. And ca n y ou explain what those two terms are ?

A. Sure. Going back to two of our pay or ty pes, which w ere Medica id and thirdparty insurance , we ty

pically bill – – there’s a n allowable a mount that they ’re g oin g to p a y , a ndit’ s p re tty sta nd ard . I

me a n, the st ate has a n a llo wa ble
re i mbursement rate, insuranc e compa nies have allowable r eimbursement rates

. I t i s a pra ctice of

ours, and a ctually

in the industry , to bill m ore tha n what they say they ’re g oing to pa y

for.

And the rea son is, if y ou bill less than what they s ay t hey ’re g o in g to p a y

f o r

. T h e y ’ r e g o in g to p a y

th a t. So in o r d e r

to ma xim iz e

– – to make sure y ou’re maxi miz ing the benef it of what they ’re g oing to pay for, y ou typically bill above what y ou know t hey will pay for. The diff ere nce be tween w hat y ou bil l and wha t they pay is called a contra ctual disallowanc e. And, aga i n, that’s only for Me dicaid and third-party

insurance

. Q. Ok a y . A ndho w a bo ut a llo wa nc e fo r b a d d e bt?

A. Al low a nc e fo r b a d d e bt i s a re se rv e on un c oll e c tib le a c ou nts

. Q. An d is it a

g e ne ra lly a c c e pte d a c c ou nti ng pr inc ipl e to r e se rv e a g ains t a c c ou nts
rec eivable?

A. Ye s.

I n order t o u n d er stand the problem with ac counts rec eivable, w hich was the subject of extensive ex pert testimony , it is necessary to excerpt from th e b al an ce she ets prepa red unde r the manag e me n t c o n tr a c t b y A M C- T N a n d s u b mi tt e d to L if e M e d , LL C. B e g in n in g in Ju ly o f 1999, these ba lance sheets disclose:

Date Acc t Rec. (Tr ade) Contractual Disallowanc e Reserve Do ub tf ul A c c t. Reserve Ne t A c c ou nts

Re c e iva ble
7-31-99 663,121 (116,379) (25,000) 521,742
8-31-99 742,821 (145,072) (26,000) 571,749
9-30-99 794,862 (164,004) (27,000) 603,858
10-31-99 773,225 (169,374) (28,000) 575,851-12-

11-30-99 880,579 (180,849) (29,000) 670,730
12-31-99 671,943 (45,663) (30,000) 596,280
1-31-00 836,213 (68,074) (33,500) 734,639
2-28-00 904,980 (101,471) (37,780) 765,729
3-31-00 965,986 (160,159) (43,012) 762,815
4-30-00 997,201 (165,139) (47,681) 784,381
5-31-00 1,037,491 (172,823) (52,374) 812,294
6-30-00 980,947 (158,201) (55,916) 766,830
7-31-00 1,117,839 (208,133) (62,250) 847,456
8-31-00 1,084,112 (198,081) (67,107) 818,924
9-30-00 1,103,525 (185,175) (70,772) 847,578
10-31-00 887,529 (177,028) (70,772) 639,729
11-30-00 829,936 (169,602) (70,772) 589,562
12-31-00 731,886 (139,730) (70,772) 521,384
1-31-01 682,425 (101,099) (89,964) 491,362

As described by

both experts, the contractual disallowance and doubtful acc ounts are c rucia l qu a lif ie rs of the ne t a c c ou nts re c e iva ble a nd of piv ota l imp orta nc e in the su bs e qu e nt lit ig a tio n. Ms. F ra zie r’ s te sti mon y

sh ow s h ow the ne w A LFmark e t a ff e c te d th e se qu a lif

ie rs

.
I I I . THE L I TI GATI ON

F oll ow ing the de c isi on of Au g us t 15 , 2 00 0, to d iss olv e L if e Me d, LL C, the re la tio ns hip be tw e e n th e me mbe r e nti tie s o f the LL C de te ri or a te d to the po int that on Oct ob er 12 , 2 00 1, AR C L ifeMed, Inc., Lif

eT ru s t America , I nc. and L ifeMed, L

L C broug ht suit aga inst AMC-TN, I nc. alleg ing br eac h of contra ct, bre ach of fiduciary relationship, neg lige nt repre sentation and fr audulent mis re pr e se ntatio n. I t is a lle g e d in the Compla int :
B. M ana ge m e nt

12 . A RC- L if

e Me d a ndL if

eTru st ent ere d in to the L if e Me d v e ntu re wi th AMC-TN bec ause A MC-TN and its pare nt Omnicare claimed to h ave significa nt expertise in the pharma ceutica l busine s s , including pricing , packa g ing, inve ntory-13-

manag ement, budg eting and accounting

. ARC-L ifeMed a nd L ifeTr ust did not have the spec ialized knowledg e re g arding the phar macy business that AMC-TN and Om nic are c la ime d to ha ve , a ndthe y re a so na bly re lie d o n A MC-TN’s advic e a s to the se ma tte rs in c on ne c tio n w ith AM C- TN ’s ro le a s a memb e r of L if e Me d. AM CTN ow e d Lif

e Tr us t, A RC- L if

e Me d a ndL if

eMed a fi du c iary

du ty a s a re su lt o f i ts membership intere st and specia liz ed knowledg e.
13

. Pur su a nt t o th e LL C A g re e me nt, AR C- L if e Me d, L if e Tr us t a ndAM CTN ra tified the existi ng manag ement ag ree ment, dated J u ne 11, 1997 (the “Management Ag ree ment”) be tween LifeMed a nd AMC-TN. Pursuant to the Manag ement Ag ree ment, AMC-TN wa s to man a g e the day -to-day aff airs of LifeMed and prov i d e o t h er service s as re quired ther ein such a s: (a) ma nag ement of ba nk
acc ounts, (b) marke ting e fforts, (c) pr epar ation of budg ets, and (d) bookkeeping and
acc ounting. The Manag ement Ag ree ment states that i t is to be gove rned by and construed in a ccor dance with Tenne ssee law. A copy of the Mana g ement Ag ree ment is attache d as Exhibi t B.

14 . Pu rs ua nt t o th e LL C A g re e me nt, AM C- TN wa s d ir e c tly a ndpr ima

ri ly responsible for

the pre paration of budg ets, maintaini n g books and re cords, a nd pe rf or min g oth e r a c c ou nti ng fu nc tio ns

.

C. AMC -TN’s Mism anagem ent And Its Discover y
15. I n Aug ust 2000, the L ifeMed boa rd voted to ce ase ope rations and dissolve L ifeMed. H oweve r, as of this date, L ifeTr

ust and ARC-L ifeMed have not
rec eived a ny

distribu t i o n s of their c ontributions to t he Capital Ac count or a n ac co u n t i n g.
16. At all times be tween O ctober 29, 1998 to J anuary

30, 2001, AMC-TN
a s s u r e d L if

e T ru s t a n d A RC

- L if

e M e d th a t L if

e T ru s t th a t th e ir I n it ia l Capital Contributions wer e saf

e.
17. On J anuary

30, 2001, the L ifeMed boa rd member s met. At that meeting AMC-TN and/or Omnicar e repr esenta tives prese nted updated financ ials for L ifeMed thr oug h J anuary

2001, and ARC-L ifeMed’ s and L ifeTr ust’s repr esenta tive s questioned whyL ifeMed w as still try ing to wind down the acc ounting f ive months
a ft e r the L if

e Me d b oa rdvo te d to c e a se op e ratio ns

. 18. At the J anuary

30, 2001, Meeting ARC-L ifeMed a nd L ifeTr ust learne d the following information:-14- A. AMC-TN neve r re serv e d a g ain s t a c c o u n ts r e c e iv a

ble balanc es s i n c e i n c e p t i o n o f

t h e b u s i n e s s , w h i l e f

a i l i n g t o t i m e l y, pr op e rl y ma na g e re c e iva

ble s.

B

. AM C- TN ne ve r p ro pe rl y c ha rg e d c ost of

g oo ds so ld t o L ifeMed sinc e its inception. AM C-TN neve r per formed phy sical inventories. I t a ppear s that inventory

was stolen or misused by

the par ent phar macy , not billed for or e x pired or
wa s d iscard ed. AM C- TN ne ve r a le rt e d Lif e Tr us t or AR CL ifeMed until J anuary

30, 2001 that the inventory had bee n overva lued by $ 4 0 0,000. I ncidentally , the manag er of the pare nt pharm a c y

also told L ifeTr

ust and ARC-L ifeMed at that J anuar y 30 meeting that s h e ex perie nced a n inventory shrinkag e of c los e t o $ 5 00,000 separ ate a nd apart from the PI P (pharmac y

in pharmac y ) shrinkag e. Evidently , AMC-TN sta ff e d th e pa

re nt p ha rm a c y a ndthe PI P wi th a

g ro ssl y inadequa te manag er a nd failed to provide proper acc ounting and financ ial controls to the extreme detriment of the PI P and L ifeMed.

C. AM C- TN r e g u l arl y pr od uc e d mi sle a din g fi na nc ia l st a te me nts for L if e T ru s t a n d A RC

- L if

e M e d

. F o r

e xa mp le , o n Ja n u ary 30 , 2 00 1, Om nic are ’s re g ion a l con tr oll e r p ro vid e d to AR C income stateme nts and balance she ets for e ach month of 2000 and for J anuary 2001, which pre sents acc ounts rece ivable and inv e nto ry fi g ur e s u na dju ste d a ndinc or re c t.

19. As a re sult of the above- ref ere nce m i srepr esenta tions and wrong ful
a c ti on s a ndomi ssi on s: ( a ) L if e Tr us t a ndAR C- L if

e Me d r e c e ive d mate ri a lly ina c c ur a te fi na nc ia l st a te me nts fr om A MC- TN ; ( b) L if e Me d wa s un able to p ro pe rl y price the g oods and ser vices provide d, resulting in cumulative los ses; (c) the P I P was pe rm itt e d to own i ts o wn inv e nto ry , w hic h w a s d e tr ime nta l to L if e Tr us t, A RCL ifemed a nd L ifeMed and ul timately hid the poor fina ncial re sults of L ifeMed; a nd (d) LifeTr

ust an d ARC-L ifeMed w ere unable to under stand the cumulative poor fi na nc ia l c on dit ion wh ic h c a us e d A RC- L if e Me d a ndL if

e Tr us t t o contin ue the ir participa tion in the losing business longe r than would otherwise have been the case

.

. . . 23. AMC-TN and L ifeTr ust have a sked for

(a) a dissolution of L ifeMed, (b) a n acc ounting, a nd (c) and a return of their funds held in the Capital Account, but AMC-TN has failed to wind up the af fairs of L ifeMed, pr ovide an a dequate an (sic)
acc urate acc ounting a nd pay the amounts reque sted.-15-

Pla int if fs the n s ou g ht int e r a lia , t h e f o l l o wi n g:
A. Require AMC-TN to provide a thoroug h acc ounting of the assets and liabiliti es of LifeMed, inc luding ( 1) a complete e x planation of the c urre nt assets and liabiliti es of LifeMed, ( 2) a c omplete history of the re ceipt of f

u n d s an d other property and the dispositio n of funds a nd other prope rty , and (3) an explanation as to th e s t a t u s a n d w h e r e ab o u t s o f t h e C ap i t a l A c c o u n t a n d L i f e T ru s t ’ s a nd AR CL if e Me d’ s I nit ia l Ca

pit a l Co ntribu tio ns

. B. O rder

a dissolution, winding up and distributi o n o f t h e as s ets of L ifeMed in a ccor dance with the LL C Ag ree ment and applica ble law;

C. Order

that AMC-TN shall not be allowed to (1) rec eive a ny money from the distribution of the assets of LifeMed until AR C -Lif eM ed and LifeTr

ust are
c omp e ns a te d for the ir c on tr ibu tio ns to L if e Me d, inc lud ing int e re st; or (2 ) o the rw ise
re c e ive a ny

dis tr ibu tio n f

ro m th e a sse ts of

L if e Me d a s th e re su lt o f i ts w ro ng fu l a c ts
a ndomi ssi on s.

D

. T o t h e e xt e n t t h a t L i f e T ru s t a n d A R C

- L i f

e M e d ar e n o t ma de wh ole from the distrib u t i o n from LifeMed, a war d a judg ment in favor of L ifeTr ust and ARC-L ifeMed a g ainst AMC-TN for su ch am o u nts toge ther with intere st to make the m w ho le fr om the ir

inv e stm e nts ;

E. I n a dd iti on , a wa

rdL if e Tr us t, A RC- L if

e Me d a nd /or L if e Me d ju dg me nts ag ainst AMC-TN for

all direc t, conseque ntial and punitive d amage s arising from AMC-TN’s f

r a u d u le n t a n d /o r n e g li g e n t mis r e p r e s e n ta

ti o n s , w r o n g f

u l conduct, bre ach of fiducia ry duty and bre ach of

contra ct, lack of

g ood faith and g ross neg lige nce.

F. Awar d Plaintiffs their attorney s fee s and expenses incurr ed in this action.

G. Gr a nt su ch additio na l r e lie f a s is app ro pr ia te un de r e qu ity or is otherwise a

ppropriate

. AMC-TN answ ere d the Complaint with gene ral de nials and w it ha c o unter c laim for payment by L if e Me d, LL C of

un pa id m a na g e me nt f

e e s a lle g e dly

du e un de r the Ma na g e me nt A g re e me nt.

I t is first necessa

ry to consider the sta nding a nd status of L ifeMed, L L C as a part y to the litigation. I n th e C o mplaint of October 12, 2001, L ifeMed, L

L C is averre d to be a pa

rty plaintiff, and the body

of the Complaint contains the following all ega t i ons with reg ard to the status of the LL C:

3. Plaintiff L ifeMed, L L C (“LifeMed” ) is a limite d l i ab i l i t y corpor ation
or g a nize d u nd e r the la ws of De la wa re . A t a ll t ime s r e le va nt t o th is l a ws uit ,-16-

L ifeMed’ s principal off

ices we re loc ate d

in H e rmi ta g e , D a v id s o n County , Tenne ssee. Upon information and belief, L ifeMed is no longe r t ransa cting business in this s tate, and its certificate of

authority has been revoke d by the Tennessee Sec reta ry of State. As is more fully -set forth below, L ifeMed w as for med to provide pha rmac y service s in a ssi ste d li vin g fa c ili tie s.

. . .
6. ARC-L ifeMed, LifeTr ust and AMC-TN a

re the members of

L ifeMed. ARC-L ifeMed a nd L ifeTr ust have assented to L ifeMed’ s filing the c laims contained he re in i n it s o wn na me . I n the e ve nt tha t L if e Me d ca nn ot br ing thi s ac tio n b e c a us e of some re fusal of A MC-TN to consent or ta ke s o m e other action, L ifeTr ust and ARC-TN assert claims on behalf of L ifeMed be caus e i t is unlikelythat AMC-TN would consent to being sued by L ifeMed. Mor eover , t o t h e extent that L ifeMed’ s corpor ate e x istence ha s cea sed or it is otherwise una ble to bring this action in its own name, LifeTr

ust and ARC-L ifeMed a ssert cla ims which would otherwise be broug ht by L ifeMed ba sed on the ha rm to their member ship interests in L ifeMed.

. . . 26. Ba sed on the for eg oing, A MC-TN has bre ache d its d u t i es u nder the LL C Ag ree ment and/or Manag ement Ag ree ment, including its duty of g ood faith and fa ir de a lin g

. L if

e Me d, AR C- TN , a nd L if

e Tr us t we re ha

rm e d a s the pr oxima te re su lt of such br eac h.

When the defe ndant, AMC-TN, I nc., answ ere d the Complaint, it asserted:

3. AM C -T N d enies that LifeMed is a limit ed liability

“cor poration.” AMC-TN admits the re maining alleg ations of par ag raph 3 of the Complaint ex cept th at t h e T en nessee Secre tary of State has r einstated the c ertificate of authority for L if e Me d, LL C.

As an a ffirma tive defe nse, AMC-TN a sserted:

29 . A MC- TN state s th a t L if e Me d, LL C is no t a

proper pl ain tiff

in this action and tha t Plainti ffs ARC L ifeMed, Inc. a n d L i fe Trust Americ a, I nc. ar e not
a uth or ize d to br ing thi s ac tio n o n b e ha lf of L if e Me d, LL C w ith ou t th e c on se nt o f a ll
me mbe rs a nd

/or a n a ff ir ma tiv e vo te of

a ll B oa rdof Ma na g e rs of

L if e Me d, LL C.

I n its countercla im, AMC-TN, I nc. joins ARC-MedL i fe , I nc., LifeTr ust America , I nc. and L if e Me d, LL C a s c ou nte r d e fe nd a nts . A MC- TN , I nc . th e n a lle g e s:R i gh t t o s ue or def end a f t er t erm i na t i o n peri od – – af t er an LLC ha s been t er mi nat ed, an y of i t s former 1

m anagers, gove rnors, or m em b ers m ay ass ert or d ef end , i n t he nam e o f the L LC a ny c l ai m s b y or agai nst t he LL C

. T enn. Code An n

. § 48- 245- 1201.
-17-

4. Co u n t e r

- D e f

e n d a n tL i f

e M e d , L L C ( “ L i f

e M e d ” ) i s a

l i m i t e d l i ab i l i ty company org anized an d ex isting pursua nt to the laws of the State of Delaw are

. L ifeMed is qua lified to do b usiness in Tennessee and, at a ll tim es material to the
a l l e g a t i o n s i n t h i s C o u n t e r

- C l a i m , m a i n t a i n e d a b u s i n e s s o f f i c e i n D a v i d s o n C o u n t y, Tenne ssee.
The Count er Compl aint then allege s brea ch of contra ct by L ifeMed, L

L C in it s failure to pay
ma na g e me nt f

e e s a lle g e dly

du e a ndow ing to A MC- TN

. B y wa y of re lie f, the c ou nte r p la int if f s e e ks :
A. The awa

rd of judgme nts in favor of Counter-Plaintiff AMC-Te nnessee , I nc. ag ainst Counter-De fenda nts A RC LifeMed, I nc., L ifeTr ust America , I nc. and/or L ifeMed, L

L C, for all dama g es arising fr om L ifeMed ’s b re ac h of contra ct and the Cou nte r- De fe nd a nts ’ u nju st e nr ic hme nt a nd /or qu a ntu m me ru it;

When the counter -def

endants a nswere d the counter claim, they answe red all the par ag raphs in the c omb ine d a ns we r a ndCou nte rc la im o f A MC- TN , I nc . w hic h w e re se t f orth nu me ri c a lly

fi rs t in the answe r and the n in the aff irmative def

enses a nd the Countercla im its elf. P er t i nent to the standing and status problem in the a nswer to the Counter claim, it is asserted:

. . . 3. Counter-de fenda nts Adm i t t he Alleg ations in Parag raph 3 of the Cou nte rc la im.

Al l othe r r e le va nt a lle g a tio ns of the Cou nte r- c omp la int

are me t w ith a

g e ne ra l de nia l.
Taking the pleading s as a whole, it appea rs t hat i n the C omplaint, the pl aintiffs di d not know the s tatus of L ifeMed, L L C and asserted in eff ect a possible termination of the LL C under Te nnessee Code Annotated se ction 48-245-701 a nd alternatively soug ht to pursue the ac tion under Tenne ssee Code Annotated se ction 48-245-1201. 1

When the defe ndants asserted their a nswer to the Complaint, they aff irmatively

asserted that “. . . the Tenne ssee Secre tary of State has r einstated the c ertificate of authority for LifeMed, L

L C.” I n its Coun te r- c omp la int , AMC- TN a ff ir ma tiv e ly a sse rt e d tha t L if e Me d, L L C w a s a lim ite d li abil ity
c omp a ny or g a nize d a nde xistin g un de r the la ws of De la wa re a ndqu a lif

ie d to do bu sin e ss i n th e state of Tenne ssee. I n the answe r of the pla intiffs/counter- defe ndants to the Countercla im, they admitted the alleg ation of the continued exis tence of L ifeMed, LL C. The pleading s themselves esta blish the continued existence of L i fe M ed , L L C, and both the Complaint and the Counter-c omplaint draw iss ue s b e tw e e n Lif

e Me d, LL C a ndAM C- TN . E ve n if a te rm inatio n of L if e Me d, LL C ha d a c tua lly
occur red, both the Complaint and Counter- complaint are proper ly befor e the Court under Te nnessee Code Annotated se ction 48-245-1201.-18-

This is essentially

a bre ach of

contra ct case . L ifeMed, L L C seeks re covery

from AMC-TN for t h e m em b er manag er’ s failure to perform its contractual duties with particular e mphasis on AMC-TN’s f

ailure to provide financ ial reports consistent with ge nera lly accep t ed accounting principles. I n this respec t, the case involved a dual of expert wi t n esses. B oth Bria n Richardson, ch i ef financ ial office r of ARC, and John Gould, chief fina ncial off icer for AMC-TN , wer e “inhouse” e x perts rather than inde pendent a ccounta nts. This dual e nded when the tr ial court a cce pted the te sti mon y

of Mr . Ri c ha

rd so n in pr e fe re nc e to tha t of Mr . G ou ld. I n th is kindof a c re dib ili ty

c a ll, the judg ment of the trial c ourt ca rries w ith it gre at weig ht in the appe llate courts. Mitchell v. Arc hib ald , 971 S.W .2d 25, 29-30 (Tenn.Ct.App.1998). I t is well t o observe that the pos ition of Mr. Go uldwa s se ri ou sly

c omp ro mis e d by the fa c t tha t he did no t ta ke ov e r the fi na nc ia l a ff

a ir s o f A MCTN un de r the Ma na g e me nt C on tr a c t un til the tim e that th e de c isi on wa s ma de in Au g us t of 20 00 to dis so lve L if

e Me d, LL C. M os t of

the ma na g e me nt pr ob le ms ha d alr e a dy oc c ur re d be fo re he wa s in a position of responsibility . J ohn Gould assumed command of this Titanic only

afte r it struck the i ce b er g.
Th re e maj or

are a s a re inv olv e d in the br e a c h o f c on tr a c t: ( 1) the “ c os t g e ne rator ” us e d in measuring inventory

was g rossly

in error ; (2) AMC-TN did not collec t i t s fe e and ex penses contempora neously with e arning such fee s and incurring such expenses as require d b y the
m an age m en tco n t ra ct ; (3 ) A M C -T N gr o s s l y u n d er s t at ed re s er v es fo r b ad ac co u n t s

. T h e t ri al j u d ge acc e p te d M r

. Ri c h a

r dson’s testimony , holding that AMC-TN had bre ache d its Manag ement Contrac t with respec t to defi ci en t co n t rol of inventorie s, failure to timelycollect its fee s and expenses and
ma int a ini ng g ro ssl y

ina de qu a te re se rv e s f

or ba d d e bts , a ndthe e vid e nc e su pp orts the se fi nd ing s.
After rea liz ing the bookkeeping and accounting problems of L ifeMed, G ould commiserated wi th Pa t Ke e fe of Om nic are by me mo of Janu ary 11 , 20 01

. I n c on sid e ri ng thi s mem o, cert ain
o b s e r v a t i o n s ar e n e c e s s ar y.
1. What is refer

red to a s “Stephen’s J.V.” is in fac t LifeMed, LL C. What is refer red to a s “Stephens” is AMC-TN (The Pharmac y ) in its status independent of the LifeMed, L L C venture.

2. The c riticisms byGould, deal pr imarily with matters pre dating his arriva l on the scene

. 3. AMC-TN is, and ha s been since the joint venture be g an, a single entity . I t cannot divide itself into component parts and disa vow the pre -Gould er a.
4. The memo is dated f ive months after

the dec ision to d i s s olve the joint venture, f our months a fter the projec ted date of the dissolution and 19 day s prior to the January 30, 2001, meeting of the joint venture boa

rd.

At the ou tse t, the me mo p ro vid e s: The following repr esents key financ ial acc ounts and b alances as of November

30, 2000:-19-

Cash $553,107 Net A/r 596,864 I nventory 557,149 Net P, p&c 72,080 Net Goodwill 238,492 A/p 1,138,847 Member E quity 897,249

The ba lance s above w ere as of Nove m b er 3 0

. I am cur rently in the proce ss of
rec o n c il in g s e v e r a l a c c o u n ts in c lu d in g c a s h , in v e n to r y , a c c o u n ts p a y ab le and
mem b er ’s equit y . Wit h the exception of inventory , due to the lac k of pape r trail, I
a m ha vin g tr ou bl e reco nc ili ng the se a c c ou nts . T he fo llo wi ng is b e ing take n in to consideration before the final ba lance sheet is ca lculated.

. . .
Ac c ou nts Pa y able
Of the $1,138,000 ba lance , $1,110,000 is owed to Stephens phar macy for service perf ormed and inventory purcha sed. The problem is Stephe ns has a n account
rec eiv able balance for the J.V. of $1,231,904 for a differ ence of $117,788. As
me nti on e d a

bo ve the la c k o f p ape r t ra il f or 19 97 -19 99 is m a kin g it d if fi c ult to
rec oncile this balanc e.
Th us , it app e ars that a s o f N ov e mbe r 3 0, 20 00 , jo int ve ntu re c arrie d $1 ,1 10 ,0 00 in a c c ou nts pay able to AMC-TN, not only for inventory purcha sed but for “service perf ormed.” Nothing in the periodic acc ountings and balanc e sheets supplied to L ifeMed, L L C discloses that AMC-TN had not been c ollecting for its “ser vice pe rfor med” a s it is required to d o u n d er parag raph B of the Ma n a g e me n t A g r e e me n t. I t i s a ls o d if f ic u lt to s e e h o w A M C- T N , in it s c ap a c it y a s ma n a g e r

of L if e Me d, LL C, c a n c arry

a c c ou nts pa y able s to AM C- TN of $1 ,1 10 ,0 00 wh ile si multa ne ou sly
car ry ing on its own books ac counts rec eivable f rom the joint venture of

$1,231,904.

Th e me mo ne xt a dd re sse s inv e nto ry a nd re ve a ls in sta rk fa sh ion the sh ortc omi ng s o f A MCT N ’ s m a n a g e m e n to f

i n v e n t o r y.

I nventory

The J.V. started ca

rry ing inve ntory

eff ective January

1, 2000

. Prior to that, an inv e nto ry a mou nt e qu a l to the c os t ge ne rator pe rc e nt w a s tr a ns fe rr e d f

ro m Ste ph e ns ’ books to the J .V. The J .V. recorde d this as cost of g oods sold. Under this scena rio, wh e ne ve r an inv e nto ry wa s tak e n an y g a in or los s wa s r e c or de d o n St e ph e ns ’ b oo ks

. I n the last 6 months of 1999, Stephens rec orded an inventory loss of $450,000, none of which w as re corde d by the J .V.-20-

Even thoug h inv en t o ry was purc hased se parately by Stephens and the J.V. starting in 2000, all phy sical counts we re c ombined and compared to the combined book total for both c ompanies. The rea son for this was ther e wa s still a sig nificant a mount of inventory that was shar ed by b o t h co m p anies that wa s not properly being trac ked. By combining the two inventories a total g ain or loss could be c alculate d with the differ ence usually

being share d.
On September 15, a phy sical inventory was taken and a c ombined loss of $133,000 was noted. D epending on how the re conciliation of the a ccounts pa y able/ac count
rec eivable ba lance s are resolved ( as noted above) this loss could re ach $260,000. A s it stands on the books for ea ch compa ny , S tephens ha s a g ain of $260,000 (or$133,000 g ain if the re conciliation of a /r is unf avora ble to Stephe ns) on a phy sical count of $784,588 a nd the J .V. had a loss of $393,000 on a count of $226,270.

The kicke r to the September 15 phy sical is that throug hout the month, St ephens
wo uldbo rr ow inv e nto ry

fr om the J.V. Th is i nv e nto ry wa s su pp os e d to be tr a c ke d s o th a t a n e n try c o u ld b e ma d e to r e c o r d th e tr a n s f e r

. T h e la s t tr a n s f

e r r e c o r d e d was May 2000. The amount of the unrec orded transfe r is approximently[si c] $400,000. I f t his transfe r were to be recorde d, Stephens would have a l oss at S eptember 15, of $140,000 (or $267,000 de pending on how t he a/r rec onciliation is resolved) a nd the J .V. would have a g ain of a pprox. $10K.
Another thing to not e, the Nove mber 30 inventory for Stephens yielded a g ain of $260,000. Howeve r, this is before the $400,000 transf er a nd Stephens purcha se of J .V. inventory

(the a mount has y et to be dete rmined). I f t he tra nsfer wer e to be
re c or de d th e $2 60 ,0 00 g a in w ou ld b e c ome a $1 40 ,0 00 los s. I f the tr a ns fe r w e re to be ma de , th e J.V. wo uldha ve a n in ve nto ry ba la nc e of

$2 20 ,0 00 that Ste ph e ns wo uld have to pur chase

. There fore the l oss at 11/30 on Stephens books would be $360,000.

Mr. Gould next addresses a ccounts re ceiva ble and make s his candid appraisal of the situation fac ing the joint venture as of the end of

Dec ember

2000.

An a dd iti on a l $8 0, 00 0 wa s c oll e c te d in De c e mbe r. Th e re fo re the ne t a /r ba la nc e is
app ro xime ntl y

(s ic ) $ 51 7, 00 0. My c on se rv a tiv e e sti ma te is that we wi ll be luc ky to
se e $2 00 ,0 00 mor e in co lle c tio ns

. B e c a us e of ho w the bo ok s we re ke pt e arl y on in the J .V., I am not convince d that there is even $517,000 to collec t. Of the $517,000 left to collec t, $200,000 is unbil led third party insurance

. This is the a mount we ar e tr y ing to c oll e c t.

I n testimonyat trial, B ry an Ri ch ar d s o n discussed the re quirements of g ener ally acc epted
a c c ou nti ng pr inc ipl e s a s to re se rv e s a g a ins t ba d a c c ou nts :-21-

[T]he re ’s tw o tes ts as far as w he n y ou wo uldse t up a re se rv e : Whe n s ome thi ng is probable that it will be a loss conting ency ; and when y ou can e stimate it. And then the re ’s so me sp e c if

ic g uid anc e on a c c ou nts re c e iva ble that ta lks ve ry

sp e c if ic a lly about the fa ct that this is – – y ou’re literally looking a t the rec eivables a s a whole.

I n o the r w or ds , th e fa c t th a t a t a ny po int in t ime y ou c a n’ t sa y , w e ll, I ’m not sure that this persons’ g oing to pay me or this pe rson’s g oing to pa y me but that y ou would look at the whole pool of rec eivables tha t y ou have, y ou would look at t h e hi s t o ri ca l t re n d s i n y o u r bu s i n es s an d t h e fa ct t h at , o n av er age , X p e rc en t age of people don’t pay y ou, that y ou would be nee ding to use that kind of g uidance as fa r a s se tti ng up re se rv e s.

So the fac t at any

point in time y ou may not be able to point specific ally

at which rec eivable are g oing to go ba d, the g uidance is very clea r that that is not a defe nse, that y ou need to look at hi s torical tre nds and look at y our e s t i m a t e s a n d s e tu p r e s e r v e s a c c o r d i n g l y.

As a matter

of fa ct, one of

the things tha t I

– – that’s what I ’ve
me n ti o n e d in my w r it e

- u p a s f ar a s , y o u k n o w , th e n e e d to c o n ti n u a ll y a s s ess that based on the trends. One of the items tha t I rec eived as a r esponse to my report was
s o me in f o r mati o n f

r o m Jo h n G o u lde n ti tl e d Re s p o n s e to B r y a n Ri c h ar dson’s Analy sis of L ifeMe d ’s Ac co unts Receivable and Collection Recor ds. And in that he ’s ta lki ng abo ut i n mo st c a se s a re c e iva ble ba la nc e wi ll n ot b e re se rv e d u nti l it is po sit ive ly de te rm ine d th a t no othe r c ou rs e of a c tio n c a n b e take n o r tha t it is h ig hly probable it will not be collec ted. Ag ain, in our business this could take up to a y ear of more to make that deter mination.

That’s direc tly in c ontradiction to w hat GAAP [Genera lly Acc epted Ac c ou nti ng Pr inc ipl e s] te lls y ou y ou ne e d to do

. GA AP is sa y ing y ou c a n’ t w a it u nti l y ou positivelyknow something is g oing to be not collectible that y ou need to make
a re asonable estimate, and it allows y ou to update that estimate fr om time to ti me as y ou ha ve mor e fa cts an d c ir c ums ta nc e s. B ut the re sp on se that John ma de to m y memorandum is direc tly

in contradic tion to what GAAP tells y ou y ou need to do.

And then it further

g oes on to say

– – and, aga i n , this is J ohn’s response to my

memo. I t say s, “It’s easy to conclude today that two and a ha lf y ear s ag o L ifeMed’ s rese rves we re unde rstated, hindsig ht is 20/20. However, I disag ree that two and a ha lf y ear s ag o this conclusion was t h at ev i dent.” This is, ag ain, admitting that as y ou look back, c erta inly those rese rves we re unde rstated but not, I g uess, re cog nizi ng the re sponsibili ty to ha ve set aside an appropriate rese rve at that time.

Mr. Richardson’ s report provided:-22-

6) The total a mounts recor ded on the L ifeMed f inancial state ments as of 9/30/00
wer e:
Acc ounts Receivable $1,110,777 Allowance for doubtful a ccounts (70,772) Contractual Allowa nces (185,175) Net Ac counts Rece ivable $854,830 7) B ased on the information provided, it a p p ea rs t h at the Allowanc e for Doubtful Acc ounts reser ve bala nce a s of 9/30/00 should have bee n at least $380,000.

Over all Conclusions

I n my opinion, based on the infor mation review ed, th e Allowance f or Doubtful Acc ounts as of 9/30/00, should have bee n at l east $380,000. The signific ant balanc es bey ond terms, lack of

eff ective c ollection activity , bi lling diffic ulties, and other information and tre nds should have indicate d a nee d for a larg er rese rve ba lance than
wa s sh ow n o n th e fi na nc ia l st a te me nts

.
Ba sed on the $380,000, the r eser ve bala nce at 9/30/00 of $7 0 , 7 7 2 wa s understate d by $309,228. Ba sed on my revie w, I believe the rese rve balance as re corde d on the L ifeMed f inancial state ments was materia lly understate d throug hout 1999 a nd 2000.

On e c a nn ot h e lp b ut n ote the pa ra lle l be tw e e n M r. Ric ha rd so n’ s a na ly sis of ac c ou nts
rec eivable r eser ves and the candid obse rvations of John Gould i n h i s m em o of January 11, 2001. Un d e r b o th a n a ly s e s , th e c o ll e c ti b il it y o f th e n e t a c c o u n ts r e c e iv ab le r e f le c te d o n the AMC-TN prepa red ba lance sheets for

the joint venture a

re c lear ly and strictly

limit ed.

The trial c ourt held:

As a re sult of the improper financial stateme nts, the joint venture probably continued longer than i t would have by AMC-Tenne ssee a dvancing monies for e x penses and not properly taking them out of the che cking acc ount set up for the joint venture. The me mber s of the joint venture w ere deprive d of how serious the joint venture wa s running into the red.

I f this proc ess that had been set up in the manag ement ag ree ment had b ee n fo l l o we d ra t h er t h an AM C -T en n es s ee fi n an ci n g s o m e of t h e e x p en s es t h ro u gh their ac counts rathe r than the c hecking acc ounts set up and appr oved by the boar d of manag er s , it w o u ld h a v e b e c o me v e r y e v id e n t e ar li e r o n a s to w h a t p r o b le ms wer e being incurre d in the operation of the joint venture.

I cannot pr ecise ly

poin t t o what financial problems started when, whether the billing of the communities’ residents a nd nonpay ment cause d a lack of-23-

cash f low. I don’t know if the pur chase of pharmace uticals by AMC-Tenne ssee a s the PI P, pharmac y

in a phar macy , operator cause d them to have e x penses that they
car ried whic h wer e not re imbursed, but it is appar ent from all the testimony that the $4 00 ,0 00 write -o ff

oc c ur re d ov e r a pe ri od of tim e that wo uld ha ve be e n e vid e nt if a ll of the bookke eping and acc ounting proce dures that wer e set out in the mana g ement ag ree ment had bee n followed.

I t w as incumbent upon AMC-Tenne ssee, I nc., to kee p the books and to prepa re pr oper f

inancial state ments and re cords. That inc luded pre paring proper fi n a n c ia l s tate me n ts in A u g u s t o f 2 0 0 0 a n d in Ja n u ar y

2 0 0 1

. T h o s e f

in a n cial statements wer e not prope rly prepa re d , an d A M C- T e n n essee , I nc., bre ache d its duti es un de r the mana g e me nt a g re e me nt b oth wi th r e g ard s to the pa y me nt o f e xpe ns e s to be paid a t t h e j o int venture’s e x pense by chec ks drawn on the joint venture’s
acc ounts and by

failing to maintain proper bookke eping and acc ounting pr ocedur es a ndpr op e r p re pa

ratio n o f f

ina nc ia l st a te me nts a ndre c or ds

. The evidence sustains these findings of the t rial court that AMC-TN materially brea ched the Ma na g e me nt Ag re e me nt to the de tr ime nt o f Lif e Me d, L L C. A s a

re su lt o f the ma te ri a lly

ina c c ur a te fi na nc ia l st a te me nts iss ue d b y AM C- TN to Lif

e Me d, LL C, the joi nt ve ntu re a sse rt s tha t it wa s u na ble to properly

price the g oods and ser vices provi d ed , an d t h at this inabilit y resulted in cumulative losses. By

withholding the inventory shortag es and fa iling to disclose that its fee s and expenses we re acc umulating r ather

than being contempora neously paid in the manner

require d by

the Mana g ement Ag ree ment and by

overva luing a ccounts re ceiva ble, AMC-TN pr ovided a f alse pictu re of

the true financ ial condition of the joint venture a nd the deg ree to w hich losses wer e ac cumulating . I t matters not whethe r

th e mo ti v a ti o n s o f

A M C- T N w e r e a lt

ru is ti c o r s e lf

- s e r v in g ly d e c e p ti v e

. I f

th e tr ue fi na nc ia l pi c tur e wo uldha ve c a us e d L if e Me d, LL C to pr ic e its pr od uc ts out of the mark e t, s uc h is not a dec ision to be made by the manag er unde r t h e M an age m en t Ag ree ment. Among the responsibilities of the owner , as provided by the Mana g ement Ag ree ment, are : A. Oper ational Policies. The boar d of mana g ers of the o wn er shall develop a nd imp le me nt a ll o pe ratio na l po lic ie s an d p r o c e d u r e s n e c e s s a

r y t o e sta bli sh a ndma int a in t h e s t a n d ar d o f

p h ar m a c y s e r v i c e s ap p r o p r i a t e f o r t h e n a t u r e o f

T h e P h ar m a c y.
B. Ch ar ges

. The boa

rd of mana g ers of

the owner

shall establish the schedule d or
rec ommended cha

rg es for pharma ceutica l products and se rvices provided by The P h ar m a c y.

I ns te a d o f g ivi ng the bo ardof ma na g e rs of

L if e Me d, L L C th e inf

or ma tio n u po n w hic h it could make de cisions as to the pricing of products, or for that matter, the continued ex istence of the joi nt ve ntu re , the ma na g ing me mbe r w ith he ld s uc h in fo rm a tio n a ndapp ro pr ia te d to its e lf a ri g ht t o make unilat e r a l d e c is io n s f o r th e jo in t v e n tu r e

. T h is w a s c le ar ly in b r e a c h o f

th e M a n a g e me nt Ag re e me nt.-24- I V. FIDUCI ARY DUTY A ND NEG L I GENT MI SREP RESENTATI ON

Both bre ach of

fiduciary duty and neg lige nt misreprese ntation fail as cause s of ac tion under the fa cts of this case for r easons se t forth in Mc Ge e v . B e st , 106 S.W .3d 48 (Tenn.Ct.App.2002).

I n McG ee , a ter minated member of the L L C filed suit ag ainst the L L C and its other members char g ing int e r a lia , brea ch of contra ct, brea ch of fiducia ry duty and misrepr esenta tion. I n aff irming the trial court’s reje ction of the bre ach of fiduciary duty claim, this Court held:
The plaintiff a

rg ues that the trial c ourt err oneously held that th e plaintiff’ s claims based upon a n alleg ed bre ach of fiduciary duty owed to him individuallyby the oth e r m e mbe rs mus t f a il a s a ma tte r o f l a w b e c a us e there i s no fi du c iary du ty b e tw e e n , o r

a mo n g , in d iv id u a l m e mb e r s o f a L im it e d L ia

b il it y Co rp o r a ti o n

. We dis a g re e . T e nn .Co de An n. § 4 8- 24 0- 10 2( a )( 20 02 ) p ro vid e s:

(a) FI DUCI ARY DUTY O F ME M BERS OF MEMB ER M AN AG E D L L C. Ex cept a s provided in the articles or oper ating ag ree ment, every member of a member -mana g ed LL C must account to the LL C fo r a ny be ne fi t, a nd ho ld a s trus te e fo r it a ny pro fi ts derive d by

the member

without the consent of t h e o ther membe rs from any transac tion connecte d with the fo rmation, conduc t, or liq uid a tio n o f the LL C or fr om a ny us e by the me mbe r of its pr op e rt y including, but not limit ed to, conf idential or propr ietary

information of the L L C or other matter s entrusted to the membe r as a result of such per son’s status as a membe r. (b) STAND ARD OFCONDUCT. A m ember of a me mbermanag ed L

L C shall d i s ch arge such member ’s duties as a me mber, including a ll duties as a member of a c ommitt ee: (1) I n g ood faith; (2) With the car e an o rd i n arily prudent pe rson in a like position would ex erc ise under similar c ircumstance s; and (3) I n a manne r the membe r re asonably believes to be in the be st i nte re st o f the LL C.

Id.

The rule of statutory construction to whi ch all others must y ield is that the intention of the leg islature must preva il. Mangrum v. O wens , 917 S.W .2d 244, 246 (T en n

. C t

. Ap p

. 1 9 9 5 )( ci t i n g Plough, In c. v. Premier Pneumatics, I nc. , 660 S.W .2d 49 5, 49 8 ( Te nn .Ct .A pp .1 98 3) ; City of H um bo ldt v . M or ris , 579 S.W .2d 860, 863 (T e nn .Ct .A pp .1 97 8) ). “ [L ]eg isl a tiv e int e nt or pu rp os e is to be a sc e rt a ine d p ri mari ly f r o m th e n a tu r a l a n d o r d in ar y me a n in g o f th e la n g u a g e u s e d , w h e n r e a d in th e c o n te xt-25-

of the e ntire statute, without any forc ed or subtle c onstruction to limit or extend the import of the lang uag e.” Mangrum v. O wens , 9 1 7 S

. W

. 2 d at 2 4 6 ; (q u o t i n g W or ra ll v. Kroger Co. , 545 S.W .2d 736, 738 (Tenn.1977) ). The Court ha s a duty to construe a statute so that no part will be inopera tive, superf luous, void or insignifica nt. The Court must give e ffe ct to every word, phra se, clause, and se ntence of the Ac t in order to achieve the L eg islature’s intent, and it mus t construe a statute so that no section will destroy

another

. Id. (c i t i n g City of C ar y v ill e v . Ca mp be ll Co un ty , 660 S.W .2d 51 0, 51 2 ( Te nn .Ct .A pp .1 98 3) ; Ti d we ll v
. Colli ns , 522 S.W .2d 674, 676 (Tenn.1975) ).
The statute in question defines the fiducia ry duty of member s of a membe rmanag ed L

L C as one owing to the LL C, not to i ndividual members. We ca nnot contra vene the intent of the L eg islature. The ref ore, w e fin d t h at t h e trial c ourt
c o rr e c t l y d i s m i s s e d t h e p l a i n t i f f ’ s c a u s e o f

a c t i o n f o r b r e a c h o f f i d u c i ar y d u t y.

Mc Ge e v . B e st , 106 S.W .3d at 63-64.

I n An de rso n, e t al. v
. W il der , etal. , E2003-00460-COA- R3-CV, 2003 WL 22768666 (Tenn.Ct.App.), this Court distinguished the rule in McG ee a n d , a d ap t i n g p ar t n e r s h i p a n d c l o s e l yh e l d c o rp o r a t i o n p r i n c i p l e s , i m p o s e d a f i d u c i ar y r e l a t i o n s h i p u p o n a

m a j o r i t y s h ar e h o l d e r

o f a n LLC in his rela tionship to a mi nority share holder. McG ee wa s dis tin g uis he d by the Cou rt be c a us e the c a se involved “. . . ‘a

rathe r uncomplica ted dispute contro l l ed by the Employ ment Contract and the Oper ating Ag ree ment . . . . The only issue involved is whether te rmination of the employ ment was for cau s e.’ McG ee , 106 S.W .3d at 67.” Anderson , 2003 WL 22768666 at *6. The c ase at bar likewise involves u n co m p l i ca t ed co n t ra ct u al d u t i es u n d eran o p er at i n g agr ee m en tan d a m an age m ent
a g re e me nt a ndno t a

fact ual situa tio n in vo lvi ng op pr e ssi on by a ma jority sh are ho lde r o f m ino ri ty sh are ho lde rs

. The pa rties do not dispute the exist ence of a fiduciary duty owed by the manag ing me mber of the LL C to the L L C. I n addition, all of the fa ctual alleg ations of the Complaint constitute repeated br e a c he s o f the Ma na g e me nt C on tr a c t be tw e e n th e ma na g ing me mbe r a ndthe L L C r e su lting in damag es to the LL C. Thus, the question whether or not a fiduc iary d u t y i s o wed by the manag ing member to the other members is of l ittle conseque nce under the fac ts of this case . Plaintiffs have
asserted no damag es to themselves pe rs o n al l y , but only such dama g es as ne cessa rily flow fr om br e a c h o f the Ma na g e me nt C on tr a c t w ith L if e Me d, LL C.
As to alleg ed neg lige nt misreprese ntation, it is noted that the only mis r e p r e s e n ta

ti o n s a s s e r te d
are the same misreprese ntations as constit ute the bre ach of contra ct asserted by

L ifeMed, L

L C. No
assertions of individual damag es ac cruing to ARC or L ifeTr ust are made indepe ndent of da mag es rec overa ble by the LL C other than g ener al alleg ations asserting c ompensatory and punitive damag es to the members, whic h are supported by no proof. Onc e ag ain, McG ee is instructive.-26- As the trial court pointed out, “t h e plaintiff a lleg es that ce rtain informa tion was withheld from him-either intentionally or neglig ently – and that this information
was materia l in the manner by which he c onducted the a ffa irs of the L L C. Pl aintiff does not alleg e that he conducte d his ow n persona l a ffa irs in relianc e upon any such materia l informati o n o r t hat he oblig ated himself pe rsonally in relianc e ther eon.” Pla int if f’ s a me nd e d c omp la int

pr ov ide s in pe rt ine nt p art :
9 4

. The Pl a in ti f

f w a s r e lyin g o n s tate me n ts o f e mp lo y e e s o f I EI to conduct the a ffa irs of MB F & I and these material omiss ions
cause d Pl aintiff to ac t in manner that he otherwise w ould if he had kn ow n th e true state of

a ff a ir s th e re by

da ma g ing him

a ndthe LL C.
The plaintiff ha s, in essence , alleg ed a de rivative c lai m , b u t at this point has no standing to bring such a c laim. I n B o u r n e v
. W illiams , 6 33 S.W .2d 469 (Tenn.Ct.App.1981), Judge Tomlin of this C ourt said:

I t h as long be en re cog nized that where a wr ong to the corpor ation was c laimed by a st ockholder , if the boar d of direc tors of the cor poration did not take steps to re ctify the w ro n g , then a stockholder could bring the action in the name of the cor poration, for the bene fit of the cor

poration. This is the g rava men of a “derivative” suit. 13 Fletche r, Cy c. Corp. sec . 5908 (perm. ed.1980). Se e als o Opportunity Christ ian Church v . W ashington W

ater Power Co. , 136 Wash. 116, 238 P. 641 (1925).

Bourne v. W

illiams , 63 3 S.W. 2da t 47 1. Ho we ve r, the pla int if f h a s n ot p ro c e e de d in this manner. F urthermor e, the plaintiff’ s amende d complaint also alleg es a pe rsonal injury as a r esult of ce rtain informa tion being w i t h h eld from him. The pla intiff’s pers on al i nj uryis , i n esse nce, th e pl ain ti ff’s ter mi nat io n from emp lo y men t w it h M BF & I

. H o w e v e r , a s th e tria l c o u r t n o te d , “ th a t c la im ar is e s o u t o f

th e e mp loy ment rela tionship and does not cre ate a cause of ac tion for fra

ud or misrepre sentation.”

Mc Ge e v . B e st , 106 S.W .3d at 65.

Br eac h of fiduciary

duty is an ac tion sounding in tort. Mike v. Po Group, I nc. , 937 S.W .2d 790, 795 (Tenn.1996) . An ac tion for neg lige nt misreprese n t at i o n sounds in tort. Atkins v. Kirkpatrick , 823 S.W .2d 547, 552 (Tenn.Ct.App.1991). In ac t i o n s based on or dinary neg lige nce rathe r than willful conduc t, proof of da mag es is an ele ment of the plaintiff’ s cause of ac tion and, without such proof off

ere d by ARC and L ifeTr

ust, I nc., their c ause of

action fai l s. Skoretz v. Co wde n , 70 7 S.W.2 d 5 29 , 5 32 (T e nn .Ct .A pp .1 98 3) ; Mo rri s v . S tat e , 21 S.W .3d 196, 203 (T e nn .Ct .A pp .1 99 9) ; se e als o 22 Am J ur 2d, “D amag es” § 16.-27-

The finding s of the trial c ourt as to fiducia ry duty and neg lige nt misreprese ntation are
reve rsed.

V. COUNTER COMPL AI NT
By its counte rcla im, AMC-TN seeks r ecove ry of unpaid mana g ement fe es under the Ma na g e me nt C on tr a c t a nd , in the a lte rn a tiv e , rec ov e ry fr om L if e Me d, LL C be c a us e of

un jus t enric hment or for

the value of

service s in qu an tum me ru it

.
I n this contex t, as well, the signific ance of the trial court’s acc eptanc e of the testimonyof Mr. Ric ha rd so n o ver

the te sti mon y

of Mr . G ou ld c a nn ot b e ov e re mph a size d. I n a dd re ssi ng thi s cre dibilit y

call, we must give de fer ence to the settled rule:

One of the most tim e-honor ed princ iples of appe llate rev i ew is that trial courts ar e best si t u at ed to determine the cr edibilityof the witnesse s and to resolve fac tual disputes hinging on cre dibilit y deter m i n at i o ns. Se e Sta te v . P ru e tt , 788 S.W. 2d 559, 56 1 ( Te nn .1 99 0) ; Tenn-Tex Prope rties v. Brownell-Elec tro, Inc. , 778 S.W. 2d 42 3, 42 5- 26 (T e nn .1 98 9)

. Ac c or din g ly , app e lla te c ou rt s ro uti ne ly de c lin e to second- g uess a tria l court’s c redibility deter minations unless there is concr ete, c lear , and convinc ing e vidence to the contra ry

. See B i n g h a m v. Dy ersburg Fabrics Co., Inc. , 5 67 S.W. 2d16 9, 17 0 ( Te nn .1 97 8) ; Thompson v

. Creswell I ndus. Supply, Inc. , 936 S.W .2d 955, 957 (Tenn.Ct.App.1996).

The mo s t o ft en cited rea son for this principle c an be tr ace d to the fac t that trial judg es, unlike appellate j udg es, have an opportunit y to observe the manner and demea nor of the witnesses while they are testify ing. See B owman v. Bowman , 836 S.W .2 d 56 3, 56 6 ( Te nn .Ct .A pp .1 99 1) . T he re are , h ow e ve r, oth e r r e a so ns fo r this principle. As the U nited States Supreme Court has obser ved:

Th e tr ia l ju dg e ’s ma

jor ro le is the de te rm inatio n o f f a c t, a ndwi th experience in fulfilling that role c omes expertise. Duplication of the tr ia l ju dg e ’s e ff

orts i n th e c ou rt

of app e a ls w ou ld v e ry

lik e ly
c on tr ibu te only neg lig ibl y to the a c c ur a c y

of fa c t de te rm inatio n a t a hug e cost in diversion of judicia l reso u rces. I n addition, the parties to a c a se on app e a l ha ve a lr e a dy be e n f or c e d to c on c e ntr a te the ir
ener g ies and re source s on persua ding the trial judge that their ac count of the fa cts is the corr ect one; requiring them to persua de thre e more judge s at the appe llate level is re quiring too much.

An de rso n v. City of B e sse me r Ci ty , 470 U.S. 564, 574-75, 105 S.Ct. 1504, 1512, 84 L .Ed.2d 518 (1985).-28- The a dvisory

committee note to Fe d. R

. C i v.P. 52(a), whic h require s that defe renc e be g iven to the trial judg e’s opportunityto j u d g e the c redibility of witnes ses, lists three important policy conce rns behind the r

ule: (1) upholding the leg itimacy

of the trial c ourts to litig ants; (2) preve nting an avala nche of appe als by discourag ing a

ppellate r etrial of f

actua l issues, and (3) maintaining the allocation of judicial authority . The policy underpinning s of Fe d

. R

. C i v.P. 52(a) a dvance the pu bli c ’s int e re sts in s ta

bil ity a nd judic ia l e c on omy , a ndwe vie w the m a s e qu a lly imp orta nt t o T e nn e sse e ’s c iti zen s a ndc ou rt s.

Mi tc he ll v . A rc hib ald , 971 S.W .2d 25, 29 (Tenn.Ct.App.1998).

The trial c ourt ac cepte d the expert testimony proff ere d by the plaintiffs. T h is testimony established that AMC-TN failed to ma nag e LL C a ccounts acc ording to g ener ally ac ce p ted
a c c ou nti ng pr inc ipl e s. Th is f a ilu re c on sti tut e d a

ma te ri a l br e a c h o f the Manag e me nt A g re e me nt. A party who has mate rially

brea ched a contra ct cannot rec over on the contra ct. Neve rtheless, unde r proper conditions and upon car

ry ing the burden of proof a s to the value of se rvice s rende red unde r the contra ct, he may

rec over in qu an tum me ru it . T he ru le is:
Even thoug h a contr act be entire, the p ar t y wh o brea ches the same may rec over of

the other pa

rty , as on a quantum merit, the value of bene fits confe rre d on such other pa

rty by partial pe rfor mance — the s e b e nefits being acc epted a nd reta ined. An y da ma g e , o f c ou rs e , w hic h th e pa rt y no t in d e fa

ult su ff e re d b y the br e a c h a lso to be ta k en i nto acc ount. The law is fr equently so applied in ca ses which involve building contr act s and contracts for persona l service s. Stum p v. Estill, 7 Tenn. (Peck.) 175; Elliot t v. Wil kinson, 16 Te nn. (8 Ye rg .) 411; Porter v. Woods, 22 Tenn. (3 Humph.) 56, 39 Am.D ec

. 1 53; Ba rker v. Reag an, 51 Te nn. (4 He isk.) 590, 596; Bush v. Jones, 2 Tenn.Ch. 190; J ones v. Jones, 32 Tenn. (2 Swan) 605; Cong reg ation of Children of I srae l v. Peres, 42 Te nn. (2 Cold.) 620; Massey v

. T ay l o r, Wood & Co., 45 Tenn. (5 Cold.) 447, 98 Am.Dec

. 429; Hunter v. Litterer & Cabler, 60 Te nn. (1 B axt.) 168; Bruce v. Ba x ter, 75 Te nn. (7 L ea) 477.

National Life & Acc ident Ins. Co. v. Hamilton , 98 S.W .2d 107, 108 (Tenn.1936)

.
I t is well to obser ve also that the fa ilure of AMC-TN to timelycollect its fee s and expenses
was itself in material bre ach of the Mana g ement Contrac t. AMC-TN pre sents no materia l evidence as to the value of its service s so as t o al l o w fo r a r ecove ry in qu an tum me ru it

or any evidenc e of
un jus t e nr ic hme nt. As the tr ia l c ou rt he ld, the c ou nte r c omp la int is w ith ou t me ri t.

VI . DAMAGES

I f the “ ph arm a c y -w ith in- a -p ha rm a c y ” c on c e pt w a s d if

fi c ult to a dmi nis te r, the se pa

rate
reme dies soug ht in this litigation ar e equa lly challen gi n g and must be sepa rate d in order to be
c omp a tib le . Wh e n b re a c h o f f idu c iary du ty , n e g lig e nt m isr e pr e se ntatio n a ndthe c ou nte rcla im-29-

as s er t i n g qu an tum me ru it

and unjust enrichme nt are remove d from the c ase, w e ar e left with a bre ach of contra ct action by

L ifeMed, L

L C ag ainst AMC-TN and a counter claim for br eac h of contra ct by AMC-TN ag ainst L ifeMed, L L C. This Court, h aving aff irmed both the trial court’s finding that AM C- TN br e a c he d the Ma na g e me nt Con tr a c t and its dis mis sa l of the c ou nte rc la im, no w m us t f ir st addre ss the question of damag es re sulting to L ifeMed, L L C because of the br eac h.
Equitable consider ations cannot interve ne in a pur e bre ach of contra ct ac tion.
“Equity follows the law. Wher e t h er e i s no leg al liability , equity can c reate none.” Hende rso n v. Overton , 1 0 T e nn . 3 94 , 3 97 (1 83 0) ; Be dwe ll v . B e dwe ll , 774 S.W .2d 953, 956 (T e nn .Ct .App .1 98 9) ; Metropolitan Lif e Insuranc e Company v . Owens , 246 S.W .2d 971, 972 (Tenn.1952) . “When in doubt equity follows the law.” Tennessee -Carolina Mills v. Mauk , 14 Tenn.App. 517, 519 ( 1931). What appea rs t o be fair as a matter of equity cannot pr evail in the fa ce of constitutional, statutory or contra ctual provisions g overning the rig hts of the parties. As the Supreme Court of Ne vada obse rved,

Our e quitable power s do not ex tend s o far as to permit us to disreg ard fundame ntal principles of the law of c ontrac ts, or arbitra rily to force u p o n parties contra ctual oblig ations, terms or conditions which they have not v o lu n ta ril y a s s u me d. I n th is re g ard , e qu ity re sp e c ts a ndup ho lds thefu nd a me nta l r ig ht o f the ind ivi du a l to
c omp le te fr e e do m to c on tr a c t or de c lin e to d o s o, a s h e c on c e ive s to be fo r h is b e st int e re sts , s o lo ng a s h is c on tr a c t is no t ille g a l or a g a ins t pu bli c po lic y . I n th is r e sp e c t, and many others, equity

follows the law. Muc h as we woul d like to relieve the
app e lla nt fr om his un fo rtun a te situa tio n, we c a nn ot ri g htf ull y do so , as we m us t maintain the nec essary

certai n t y , stabilityand integ rity of contra ctual rig hts and ob lig a tio ns

.
Mc Cal l v . Ca rls on , e t al

. , 172 P2d 171, 187-88 (Nev.1946)

. Consequently , wher e the reme dies available to a litigant are circ umscribed by the boundar ies draw n at l aw, such as i n a bre ach of contra ct ca se, principles of equity cannot c reate rig hts outside those boundarie s. See ge nerally Swartz v. Atkins , 31 5 S.W. 2d 39 3, 39 5 (T enn.1 95 8) ; Bedwell v. Be dwe ll , 774 S.W .2d, at 956. The Missouri Court of Appeals succ inctly stated the rule to be applied in b re a c h o f c on tr a c t c a se s. “ Th e ri g hts of the pa rt ie s a re to b e de te rm ine d f

ro m th e c on tr a c ts i nto wh ic h the y e nte re d a nd the c on se qu e nc e s of tho se c on tr a c ts a nd no t fr om s ome g e ne ra lize d c on c e pts of equity .” Norcomo Corp. v. Franchi Construction Co., Inc. , 587 S.W .2d 311, 317 (Mo.Ct.App. 1979). This Court has held: “The essential elements of any brea ch of contra ct claim include (1) the exis tence of an e nforc eable contra ct, (2) nonperf ormanc e amounting to a

brea ch of the contra ct, and (3) da mag es caused by

the bre ach of

the contra ct.” Custom Built Homes v

. G.S. Hinsen Co., Inc. , 1 9 9 8 W L 9 6 0 2 8 7 (T en n

. C t

. Ap p

. Fe b

. 2 , 1 9 9 8 ) ( ci t i n g Life Care Ctr s. Of Am ., In c . v . Ch ar le s To wn Assoc’s. Ltd. Partnership, LPIMC, Inc. , 79 F.3d 496, 514 ( 6 Cir.1996)). th-30-

Howeve r, the sec ond re m ed y s o u g ht by the Complaint is for the Court to “. . . order a d i s s o l u t i o n , w i n d i n g u p a n d d i s t r i b u t i o n o f t h e a s s e t s o f

Li f e M e d i n a c c o r d a n c e w i t h t h e LLC Ag ree ment and applica

ble law.” This is the re fo re a procee ding to dissolve an L L C by judicial intervention. I n such a pr ocee ding, the court “ . . . may g rant a ny equitable relief it considers just and
rea sonable in the c ircumstance s . . .” Tenn.Code Ann. § 48-245-901.

Determining dama g es for brea ch of c ontrac t in this case is render ed diffic ult by the fa ct that the manag ing me mber c ontrolled the books and r ecor ds of the LL C, w rote all of the chec ks, rec orded
a ll o f the inc ome , d id a ll o f the bo ok keep ing , a ndpr ov ide d a ll o f the a c c ou nti ng s u nd e r i ts Ma na g e me nt C on tr a c t. N e ve rthe le ss, it m us t a bid e by the Ma na g e me nt C on tr a c t.

I n addre ssing the duties of t he manag ing partner of an LL C, it must be rec og nized that the LL C is st ill in i ts relative infa ncy . This Court has observe d:

The L L C is a

r e lati v e ly

n e w f o r m o f b u s in e s s e n ti ty , a

h y b r idw h ic h “incor porate s certain benef

icial aspe cts of a p ar tnership with certain benef icial aspec ts o f a corpor ation.” Annotation, Construction and Appli cation of Limit ed Lia bil ity Compan

y Ac ts , 79 A.L .R.5th 689. This A.L .R. annotation contains the fo llo wi ng he lpf

ul o bs e rv a tio ns :

I t is imp orta nt t o k e e p th e his tory of LL C de ve lop me nt i n perspe ctive whe n working wi t h L L Cs and court interpr etations of LL C a c t s

. . . . The ty pical L L C act is usua ll y a h y b r id of provisions c ulled from the individual state ’s partne rship statutes and business corpor ation law.

* * *
[W]he n a c ou rt is int e rp re tin g a n LL C a c t or a g re e me nt, the c ou rt

wi ll focus o n t h e particula

r aspe ct of the L

L C that give s rise to the problem , with emphasis on the founda tional business form from which th at c h a r a c teristic orig inated. Usua lly , the particular a spect c an be tr a c e d to e ith e r the c or po rate c omp on e nts or

the pa rt ne rs hip components of the L

L C act or a g ree ment. I n such ca ses wher e the char acte ristic orig inated fr om the partne rship aspec ts of the LL C, the court will use the e stablished princip[le] s and pre cede nt of the partne rs h i p l aw to resolve the issue . . . In such ca ses wher e the char ac t er istic origina ted from the c orpora te aspe cts of the L L C, the court will utiliz e the e stablished princip[ l e] s and pre cede nt of corpor ate law to resolve the issue. 79 A .L .R. 5th at pag e 698.

An de rso n, e t al . v . W

ild e r, e t al

. , 2003 WL

22768666 * 3-4 (Te nn.Ct.App. Nov. 21, 2003).-31-

Bor rowing from partnership l aw and under the terms of the M anag ement Contrac t, L ifeMed, LL C was entitled to a proper acc ounting by its manag ing pa

rtner. Fulcher v . Allen , 2 S.W .3d 207, 218 (Tenn.Ct.App.1999).

As he ld b y

the Sup re me Cou rt

of I lli no is:

As the manag ing pa

rtner w ho was a dmittedlyresponsible for virtually all of the fi na nc ia l a sp e c ts of the pa rt ne rs hip , de fe nd a nt ha d a du ty , a s tr us te e , to ma int a in reg ular a nd acc urate rec ords and to ac count for pa rtnership transac tions. (

Altschuler v. Altschuler (1951), 410 I ll. 169, 177-78, 196-97, 101 N.E.2d 552; see also Ba k ali s v. Bressler

(1953), 1 I ll.2d 72, 78-79, 115 N.E.2d 323. Einsweiler v. Einsweiler (1 94 5) , 3 90 I ll. 28 6, 29 3, 61 N. E. 2d37 7; W y lie v . B us hn e ll (1917), 277 I ll. 484, 491, 115 N.E. 618; I ll.Rev.St at.1981, ch. 1061⁄2, pa rs. 20, 2 1 (1 ), 22.) All doubts and obscuriti es cr eated by

his own neg lige nt failure to ke ep ade quate r ecor ds were proper ly resolved a g ainst him bythe trial court. Altschuler v. Altschuler (1951), 410 I ll. 16 9, 19 6- 97 , 101 N. E. 2d55 2; Crimp v

. First Union Trust & Savings Bank (1933), 35 2 I ll. 93 , 1 02 , 1 85 N.E. 17 9; Cra ne & Br om be rg , P ar tne rsh ip sec. 66, at 384 (1968).

Cou ri v . Co ur i , 4 47 N. E. 2d33 4, 33 7 ( I ll.1983 ); see also Glazer v . Kurman , 120 A.2d 892, 894 (Penn.1956).

Th e br e a c h o f c on tr a c t by AM C- TN ha s b e e n p la inl y e sta bli sh e d a ndthe dif

fi c ult ie s in establishing damag es are cause d by the inacc urate acc ountings made by AMC-TN, the misstatement of L if e Me d, LL C’ s tr

ue fi na nc ia l con di ti on , an d th e fa ilu re to m a na g e the LL C’ s b us ine ss i n a c c or da nc e wi th the re qu ir e me nts of the Ma na g e me nt C on tr a c t.

The c ourts will allow rec overy even if it i s impossibl e to prove the exact amount of dama g es fr om the brea ch of c ontrac t. Otherw ise, in certain instances, the courts would be pow erle ss t o help some wrong ed parties. “Exact justice is not alway s attained, a nd the law doe s not require exactness of computation in suits that in v o lv e q u e s ti o n s o f d a ma g e s g r o w in g o u t o f c o n tr a c t o f

to r t. ” [s ic ] Pr

ov ide nt L ife and Acc ident Ins. Co. v. Globe I ndemnity Co. , 156 Tenn. 571, 576, 3 S .W.2d 1057 (1928). I n Coverdell v. M id-South Farm E q u i

p me nt Assoc., Inc. , 3 35 F .2 d 9 (6 th Cir.1964), the court applied Tenne ssee law to deter mine that an insuranc e compa ny ag ent who wa s informed by trustees of the defe n d ant corporation that he ha d been hired unde r a pe rsonal service contrac t to org anize their group insurance, w orked a n entire w eeke nd on the projec t, and ca ncelled a n appointment in T exas was damag ed when th e tr

u s te e s g a v e th e c o n tr a c t t o a n o th e r a g e n t. U n c e r ta in a n d s p e c u lati ve damag es ar e prohibited only when the exis tence of damag e is unce rtain, not when the
a mou nt i s u nc e rt a in. Whe n the re is sub stanti a l evi de nc e in the re c or d a ndre a so na ble infere nces ma y

be dra wn from that evidence mathematica l certainty is not required. Id. at 14.-32-

Cum mi ns v . B ro die , 667 S.W .2d 759, 765 (Tenn.Ct.App.1983).

Fr om a re view of th e re cord in this case , it would appear that the shortag es in inventory within the “phar macy -within-a- pharma cy ” may not have resulted in substantial losses to L ifeMed, LL C si nc e AM C- TN , ind epen den tl y of the joi nt v e ntu re , a

pp e ars to h a ve c ho se n to abs or b th e se losses. The re al damag es occur fr om the failure of AMC-TN to timely collect its expenses and manag ement fe es in the amount of $538,151, whic h was c lear ly in brea ch of the contra ct. I t further ap p ea rs t h at t h e o v er v al u at i o n o f ac co u n t s re ce i v ab l e wa s ap p ro x i m at el y $ 3 8 0 , 0 0 0

. T h es e d am age amounts appea

r to be re cover able by

L ifeMed, L

L C from AMC-TN.

Since the trial c ourt determined the ca se on the basis of breach of fiduciary duty , neg lige nt misrepre sentation, and bre ach of contra ct, and this Court has sustained the a ction only on brea ch of contra ct in favor

of L ifeMed, L

L C only , revie w of the tria l court’s finding s is somewhat complicate d. The fina l judgment of

the trial court provided:

33. D a ma g e s ar e d if

f ic u lt to c a lc u late in th is c a s e d u e to the state of L if e Me d’ s b oo ks . T he Cou rt is g uid e d th ro ug h th e e ndsta g e s of the lim ite d li abil ity company ’s life somewhat by partne rship principles. See H arwitz v. Padde n , 581 N.W.2d 3 5 9 , 3 6 2 (Minn. Ct. App. 1998). I n particula r, all doubts reg arding the division of t h e fi rm’s re maining a ssets well be re solved ag ainst the member responsible for

haphazar d and mi sleading acc ounting pr actice s. See, e .g., W ilson v. Moline , 38 N.W.2d 201, 207 (Minn. 1949).
34. On this standard, the Court ha s litt le difficulty concluding that L ifeTr ust and ARC-L ifeMed have been damag ed to the ex tent of t heir initial capital contributions of $200,000 and $300,000, respe ctively

. The re cord c ontains abundant
e vid e nc e that th e se me mbe rs wo uldha ve vo te d to dis so lve the li mitedlia bil ity company upon lear ning tha t their equity was in dang er.
35. The re cord r efle cts that L ifeMed pr esently has ava ilable ca sh of $686,439.00 and is subject to a third-pa rty property tax claim of $1,135.00. The tax claim shall be pa id from the available cash. There afte r, the non-ma nag ing me mbers capital c ontributions shall be returne d to them. After r eturn of the non-mana g ing
me mbe rs ’ c a

pit a l c on tr ibu tio ns an d p a y me nt o f the ta xes, the lim ite d li abil ity company is le f

t w ith $ 1 8 5 , 3 0 4

. 0 0

. T h e Co u r t h o ld s th a t A M C- T N is e n ti tl e d to a retu r n o f it s a c tu a l c ap it a l c o n trib u ti o n o f $ 1 5 0 , 0 0 0 f

r o m th is s u m. T h e r e ma in ing $35,304.00 i s to be divided pro rata among the parties acc ording to their initial capital c on tributions. Although the LL C Ag ree ment provides for the parties to divide L ifeMed a ssets equally , AMC-TN it self has proposed a pro ra ta distribution (Ex . 39),
a ndthe Cou rt

c on c lud e s th a t su c h a distri bu tio n is mo re e qu ita ble in l ig ht o f A MCTN’s c onduct. Thus, the parties shall rec eive in addition to their ca pital
c on tr ibu tio ns :-33- L ifeTr ust: $10,862.77 ARC-L ifeMed 16,294.15 AMC-TN 8,147.08

36. I t is a lso r epre sented that there are hard assets consisting pr imarily of
me dic a l c ar t s w h i c h b e l o n g t o t h e j o i n tv e n t u r e

. T h e C o u r th a s h e ar d n o c r e d i ble evidenc e re g arding the value of tho s e ca rt s

. I n view of the fac t that the carts are de prec ia tin g a sse ts, the Cou rt c on c lud e s th a t th e tim e a nde xpe ns e re qu ir e d to de te rm ine the ir

va lue a ndow ne rs hip wo uldno t be wa rr a nte d f ro m a c os t- be ne fi t standpoint. Acc ording ly , the carts shall be aw arde d and re main in the possession of wh ic he ve r p a

rt y c ur re ntl y ha s th e m.
37 . It is a lso re pr e se nte d tha t the re is a (si c ) out sta nd ing a c c ou nt p a y able of appr ox imately

$25,000 owed by

the plaintiff L ifeTr

ust to the defenda nt joint venture L ifeMed. T he only testimonyoffe red on this subject wa s the testimony of Ms. F ra zie r, un su pp orte d b y a ny do c ume ntatio n. A r e pr e se ntativ e of L if e Tr us t dis pu te s th e pa y able . T he Cou rt c on c lud e s th a t th e re is i ns uf fi c ie nt e vid e nc e to support the exis tence of the alleg ed pay able and makes no finding s as to the merit of that c la im.

38

. At the su g g e sti on of the pla int if fs , the un c oll e c te d a c c ou nts re c e iva ble remain ing on L if

e Me d’ s b oo ks , e sti ma te d b y AM C- TN to b e app ro xima te ly $200,000.00 are awa

rded to AMC-TN . The de fenda nt shall benefit fr om any collection ef

forts it car es to make.

As ca n r e a d il y b e s e e n , th e tria l c o u rt h o ld s th a t A M C- T N h a s mate r ia ll y b r e a c h ed the contra ct to the detriment of LifeMed, L L C, but does not make an awa rd of c ompensatory

damag es befor e proc eeding t o a judi cial distribution of net assets in conf ormity with the pray er of

the Compla int

fo r j ud ic ia l di sso lut ion of L if e Me d, LL C.

Th e pr ima

ry re lie f s ou g ht i n th e Compla int wa s “ To the e xten t th a t L if e Tr us t a ndAR CL ifeMed a

re not made whole fr om the distribution from L ifeMed, a war d a judg ment in favor of L ifeTr ust and ARC-L ifeMed a g ainst AMC-TN for suchamo u n ts toge ther with intere st to make them whole fr om their investments.”

Th e ho ldi ng of

the tr ia l cou rt re su lts in fu lf ill me nt of the pr ima ry re lie f s ou g ht b y

L if e Tr us t and ARC-L ifeMed. While the proof as t o t h e fa i lure to collec t timelyfee s and expenses and the
ov e rv a lu a t i o n o f a c c o u n t s r e c e i v ab l e m i g h t , u p o n c l o s e a n a l y s i s , s u s t a i n d a m a g e s m o r e o r l e s s in favor of L ifeMed, L

L C tha n the judgme nt of the trial court ultimately deter mined in the distribution made upon dissolution, we ar e content with the result rea ched by the trial court, which is in eff ect
a jud g me nt f

or L if e Me d, LL C in the a mou nt of $5 38 ,1 51

. Th is is the e xac t a mou nt of the e xpe ns e and manag ement fee s not timely collecte d by AMC-TN in br eac h of the Mana g ement Contrac t and the a mou nt d isa llo we d a s a c la im ag a ins t L if e Me d, LL C in the c ou nte r c omp la int of AM C- TN . T his-34-

re c ov e ry fo r b re a c h o f c on tr a c t w ould lea ve , in the ha nd s o f L if e Me d, LL C, the app ro xima te $675,000 equitably

divided by the court in its ultimate distribution to the three joint ventur ers unde r the De c re e of Di ss ol ut io n fa sh ion e d b y the tr ia l ju dg e . T he e ndre su lt i s th a t L if e Me d, LL C is
abs olv e d in the br e a c h o f c ontr act c la im o f $ 53 8, 15 1 c la ime d b y AM C- TN a s ma na g e me nt f e e s. T h e r e f o r e , i n t h e e q u i t a b l e d i s t r i b u t i o n o n d i s s o l u t i o n o f t h e LLC , e a c h o f

t h e Li f e M e d , LLC members r ece ives its init ial contribution plus a pro rata share of any thing left, which is afte r all the primary relief soug ht in this first place. F or re asons stated, weaff irm the judg ment of the trial c ourt with respec t to all issues invol ving br eac h of contra ct and, on the basis stated he rein, da mag es and dissoluti on distribution.

VI . PRE JUDG ME NT I NT ERE ST
All parties in this action wer e hampe red by t h e p au cit y

of ca se law pr oviding g uidance rela tive to limi ted liabilitycompanies w hich have exis ted for ba rely a dec ade in Tenne ssee. The trial
co u rt h as fo u n d n o i n t en t i o n al wr o n gd o i n g o n t h e pa rt o f AM C -T N, an d we agr ee wi t h t h at fi n d i n g. Whil e thebr e a c h o f c on tr a c t by AM C- TN re su lte d in da ma g e s to Lif e Me d, LL C, the re c or d r e ve a ls
c le arl y that su c h b re a c h of

c on tr a c t w a s n ot the on ly

c a us a tiv e fa c tor

in the fa ilu re of

L if e Me d, LL C. All o f the member s overe stimated the participa tion that they could ac hieve in the a ssisted livi ng f a c i l i t i e s w h i c h d e p e n d e d n o tu p o n t h e s i n g u l ar j u d g m e n to f

t h e p ar t i c u l ar

a s s i s t e d l i v i n g f

a c i l i t y, but rather the voluntary

participa tion of individual residents. AMC-TN has pre vailed on appe al on all issues except the breach of contra ct. Apply ing the principles in Myint v. Allstate Insurance Co. , 970 S.W .2d 920 (Tenn.1998) , we have determined that L ifeMed, L L C is not entit led to prejudg ment int e re st. The judg ment of t he trial court as to brea ch of fiduciary duty and neg lige nt misreprese ntation i s r e v e r s e d

. T h e j u d g m e n to f t h e t r i a l c o u r t a s t o t h e a w ar d o f p r e j u d g m e n ti n t e r e s ti s r e v e r s e d

. In
a ll o the r r e sp e c ts, thejud g me nt o f the tr ial cou rt as modi fi e d h e re in i s a ff ir me d. Th e c a se is
r e m a n d e d t o t h e t r i a l c o u r tf o r s u c h f u r t h e r p r o c e e d i n g s a s m a y b e n e c e s s ar y. Costs of appeal a

re a ssessed ag ainst AMC-TN.

___________________________________ WI LL I AM B. CAIN, J UDGE