Background
Priority Medical Group held a 50% membership interest in two medical-practice LLCs under operating agreements with Drew Durbin and PDMI, LLC. In April 2024, Priority gave notice that it was withdrawing. Durbin and PDMI elected to continue the businesses, and the parties began the agreements’ appraisal process for Priority’s interest.
While that process was underway, Priority learned that Durbin had filed a final tax return for one practice in 2022 and that Durbin and PDMI asserted, without documentation, that its assets had been absorbed by the other practice. Priority asserted potential fraud, conversion, rescission, and federal RICO claims, and sought dispute resolution under the agreements. Durbin and PDMI refused, arguing that Priority had ceased to be a member when it gave its withdrawal notice. The superior court agreed and denied arbitration.
The Court’s Holding
The Arizona Court of Appeals vacated the denial of Priority’s motion and remanded with instructions to compel arbitration. It held that the superior court properly decided, as a threshold contract-formation issue, whether Priority was still bound by the member-only arbitration provision.
But the appellate court concluded that Priority remained a member when it invoked the provision. The agreements made withdrawal a phased process: notice initiated withdrawal and appraisal, while membership ended only when the sale of the withdrawing member’s interest closed. No closing had occurred. Priority’s claims also fell within the agreement’s broad clause requiring arbitration of all claims and controversies arising out of or connected with the agreements.
Key Takeaways
- A court decides whether a valid arbitration agreement binds the parties before sending a dispute to arbitration.
- Under these operating agreements, a withdrawal notice did not immediately end LLC membership or eliminate contractual dispute-resolution rights.
- Broad language covering claims arising out of or connected with an agreement encompassed the asserted fraud, conversion, rescission, and RICO-related claims.
Why It Matters
The decision underscores that withdrawal provisions must be read as a whole. Where an agreement ties payment and transfer of an interest to a future closing, a member may retain contractual rights during the interim withdrawal process.
It also confirms that disputes over whether a party remains covered by an arbitration clause are for the court at the gateway stage, while a party found still covered may enforce a broadly worded arbitration provision.