Tuesday, January 26, 2016

An Amendment Too Far: Arbitration Provision Added to Amended Operating Agreement Not Be Enforced Against Objecting Members

An Amendment Too Far: Arbitration Provision Added to Amended Operating Agreement Not Be Enforced Against Objecting Members

      One of the great questions with respect to operating agreements that may be amended with less than unanimity is the maximum degree to which either new obligations or waivers of rights may be imposed upon any objecting members. The recent decision out of Ohio held that, even if one of the members had the capacity to amend the operating agreement, they did not have the authority to impose on the other members an obligation to arbitrate disputes. Leight v. Osteosymbionics, L.L.C., No. 102869, 2016 WL 193511 (Ohio Ct. App. Jan. 14, 2016).
      Osteosymbionics, L.L.C. was formed in 2006 by Cynthia Brogan, Troy Leight and John Nail. Brogan was the 55% member of the LLC. The operating agreement contemplated, with the exception of certain matters that could be approved by the board of managers, that the agreement could be amended by a member vote, and it was specifically provided that a majority vote of the members could affect an amendment of the operating agreement. Brogan, acting unilaterally, purported to adopt an amended and restated operating agreement that appointed her the sole manager of the company and requiring that all members arbitrate any disputes. Leight and Nail thereafter filed suit against the LLC and Brogan asserting a variety of claims including breach of fiduciary duty. Brogan would argue that those claims had to go to arbitration.
      Focusing upon the question as to whether the parties had agreed to arbitrate their dispute, and qualifying their analysis to “Under the unique facts of the instant case,”, the court would ultimately answer “no”. Relying on the decision rendered in Maestle v. Best Buy Co., 2005-Ohio-4120, notwithstanding the fact that Brogan might have had the right to unilaterally amend the operating agreement, there was no meeting of the minds as to an agreement to arbitrate. Ultimately:

Interpreting the meaning and scope of § 9.2 of the OA is giving Brogan unfettered authority to amend the a amounts to the assumption the Leight and Nail agreed ahead of time to be bound by any change Brogan chose to make. This is particularly concerning because there is no procedural or notice provision in the OA that the majority Members - in this case, Brogan - must follow before amending the OA. See generally Badie v. Bank of AM., 79 Cal. Rptr. 2d 273, 281 (1998) (California cases “do not support the proposition that a party with the unilateral right to modify a contract has carte blanche to make any kind of change whatsoever as long as the specified procedure is followed.”)
      It is hard to know how much further this case may be extended. Arbitration involves the waiver of the otherwise applicable constitutional right to access the courts, to appeal, etc., and is therefore markedly different from, for example, modifying decision making process or economic terms.

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