A recent decision in the
Wisconsin Court of Appeals focuses primarily upon the assertion by certain
expelled members of an LLC that their expulsion and the redemption of their
interests violated the contractual obligation of good faith and fair
dealing. Summary judgment was granted
the defendants by the trial court, and that summary judgment was affirmed by
the Wisconsin Court of Appeals. Berndt and Gretzinger v. Berndt, Matttison
and Hybrid Fitness, LLC, Appeal No. 2011 AP 2425 (March 21, 2013).
Hybrid Fitness, LLC, organized
in Wisconsin, had four members, namely Robin Berndt, Chris Gretzinger, Ryan
Berndt (the opinion does not detail the relationship between Robin Berndt and
Ryan Berndt), and Sarah Mattison. The
LLC was owned 24% by Robin, 24% by Chris, 25% by Sarah and 27% by Ryan. All were engaged in the operation of the fitness
facility.
For reasons that are not
detailed in the decision, there was a breakdown in the relationship between the
four members. Ryan and Sarah,
constituting 52% of the total ownership of the LLC, terminated Robin and Chris
as employees thereof and sent them notice of numerous breaches of the company’s
operating agreement. That operating
agreement provided that, upon a default thereof, the other members would have
an option to acquire the defaulting member’s ownership interests for the
“Determined Value.” Due to this being an
early-stage business, the Determined Value at the time Robin and Chris were
expelled from the LLC was zero.
Robin and Chris brought an
action challenging their termination and buy-out. With respect to their challenge to the
summary judgment given as to the claimed breach of the obligation good faith and
fair dealing, the Court wrote:
On appeal, Robin and Chris argue
that summary judgment was erroneously granted on the breach of good faith and
fair dealing claim because genuine issues of fact exist as to the motivation
for purchasing their shares. Robin and
Chris concede the operating agreement “did indeed authorize Members to purchase
the ownership units of other Members in the event of ‘any breach of the
agreements or provisions contained in this Agreement.’” Nevertheless, they insist their breaches were
“wholly immaterial and resulted in no actual harm to Hybrid Fitness.” Furthermore, they contend the manner in which
Ryan and Sarah acted on their breaches “raised further suspicions about their
true reasons for first terminating Robin and Chris and then re-purchasing their
ownership shares.”
The Court easily set this
argument aside. While agreeing that
every contract contains an obligation of good faith and fair dealing, it was
undisputed that their removal as members was done in accordance with the operating
agreement, as was the re-purchase of their interests. On that basis, the Court found that there was
no breach of the obligation of good faith and fair dealing. The Court distinguished a number of cases in
which employees or commission independent contractors had been terminated with
the expectation of depriving them of accrued but as of the time of termination
unpaid compensation. Under the law of
Wisconsin, those payments were still due and owing. No such effort to deprive Robin and Chris of
accrued benefits was here at issue.
Rather:
The present case is not one of an
agent suing a principal, or an employee suing an employer for terminating the
relationship to avoid paying benefits or compensation previously earned. It is a case of co-owners of a business suing
other co-owners for expelling them and depriving them not of an accrued
benefit, but of their ownership interests and potential future profits. When the terms of the operating agreement are
complied with and sufficient grounds for termination of the ownership under the
operating agreement existed, as in this case, the defendants’ motives in
exercising their prerogatives under the agreement are not material.
This panel of the Wisconsin
Court of Appeals was not going to allow the parties to an agreement to avoid
its application. Also, this is useful
guidance with respect to the obligation of good faith and fair dealing. As has been reviewed in innumerable decisions,
the implied covenant informs the performance of contractually agreed to terms,
filling as necessary interstices therein.
It will not, however, affect the addition of terms to the agreement or
limited a party’s rights that are provided for therein.
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