Friday, February 15, 2019

Missouri Court Interprets Operating Agreement, But Sets Up a Foot Fault as to a Member’s Disassociation

Missouri Court Interprets Operating Agreement, But Sets Up a Foot Fault as to a Member’s Disassociation

      In this recent decision from the Missouri Court of Appeals, it was called upon to apply an operating agreement and the LLC Act to a dysfunctional two-member company. Nicolazzi v. Bone, No. ED 106292, 2018 WL 6052144, 564 S.W.3d 364 (Mo. Ct. App. Div. 4 Nov. 20, 2018).
      Nicolazzi and Boone were the members in Spirit Adult Day Care, LLC, it formed in 2005. The company had a written operating agreement, it providing that each member would contribute $50,000 to the LLC. The agreement did not, however, set a deadline for making those capital contributions. At trial, the LLC’s CPA testified that Bone contributed in excess of $50,000, while Nicolazzi contributed only $25,700. In 2011 Nicolazzi inquired of a competitor whether they would like to buy his interest in the LLC. It would appear those discussions went nowhere. Over 2011 the relationship between Nicolazzi and Bone “steadily deteriorated,” and Nicolazzi ultimately ceased to participate in the LLC’s activities. The opinion does not specify whether or not the operating agreement detailed the job responsibilities of the members and their commitment to provide services. On June 20 Bone filed articles of incorporation for a new corporation named “Young in Spirit Adult Day Care Center, Inc.,” and the next day advised Nicolazzi that she was dissolving the LLC. The operating agreement, addressing involuntary dissolution, provided “Either Member may initiate a dissolution of the LLC after 30-days’ written notice to the other Member in which case the affairs of the LLC shall be wound up as soon as is reasonably possible and all remaining assets divided as provided for by law.” Shortly after receiving notice of Bone’s plans, Nicolazzi filed suit, requesting:
·         a determination as to whether Bone was a member of the LLC;
·         whether Bone had misappropriated LLC assets or herself and the new corporation;
·         for the recovery of distributions to Bone exceeding her 50% interest in the LLC;
·         for an accounting; and
·         for a constructive trust.
      Bone counter-claimed, asking for a ruling that Nicolazzi  was not a member of the LLC because he:
·         failed to make the required $50,000 capital contribution;
·         failed to participate in the LLC’s management;
·         breached the operating agreement by soliciting the purchase of his interest without Bone’s consent; and
·         fraudulently misrepresented the amount of his capital contribution.
      A bench trial followed, ending on October 9, 2012. Judgment was entered on November 1, 2017. Ultimately, Bone prevailed, it being found that Nicolazzi had breached the LLC’s operating agreement both by failing to make the required capital contribution and soliciting the sale of his interest in the company without Bone’s consent. The trial court deemed those breaches as constituting “events of withdrawal” from the LLC to the effect that Nicolazzi he was no longer a member of the LLC. That left Bone as the sole member of the LLC. It was also found that all payments due to Nicolazzi that were due and owing had been satisfied. This appeal followed.
Nicolazzi was a Member in the LLC

      Based upon the operating agreement’s recitation that Nicolazzi (as well as Bone) were the members of the LLC, and that the operating agreement did not set any additional prerequisites or conditions to being a member, Nicolazzi was a member: “As [Nicolazzi] is named as a member of the LLC in the operating agreement and sign the operating agreement when the LLC was formed, he was a member of the LLC from that point onward.”

Nicolazzi Breached the Capital Contribution Obligation
      While, at trial, Nicolazzi and his expert had testified that he had contributed in excess of $50,000 to the venture, the LLC’s CPA testified that he had not done so. The trial court accepted the testimony of the LLC’s CPA. Addressing that determination, the appellate court wrote that “We defer to the trial court’s findings of fact in a court-tried case.” On that basis, it was determined that Nicolazzi had failed to satisfy his obligation to contribute $50,000 to the LLC. With respect to the absence, in the operating agreement, of a deadline for making the contribution, it was written:
and even though there was no deadline in the operating agreement or Appendix A for when the parties were required to make the initial capital contributions, we need not analyze the meaning of the word “initial” as used in the operating agreement here. At trial, it was established that both parties intended and understood that “initial,” as used in “initial capital contribution,” meant the agreed upon amount of $50,000 would be paid within six months of the execution of the LLC’s operating agreement; as such, we give effect to that intent. …. Further, under any definition of the word “initial,” [Nicolazzi’s] failure to make the required $50,000 capital contribution within a five-year time span, as the trial court found, undoubtedly constitute breach of the operating agreement. 2018 WL 6052144, * 6.

Nicolazzi Did Not Breach the Operating Agreement by Soliciting a Sale of His Interest

      The LLC’s operating agreement provided that a member could not sell his or her interest in the LLC without the consent of the other member. The trial court had found that Nicolazzi, by soliciting a potential sale of his interest, had breached the operating agreement. This determination was set aside on appeal; “We find that this conclusion is an erroneous application of the law.” Id. Rather, the court found that while consent was required to actually consummate a sale or other transfer, those provisions did not prohibit or even address an attempt to sell or discussion of the sale of an interest. Id.
Nicolazzi Did Not Withdraw From the LLC; Bone is Not the Sole Member
      The determination that Nicolazzi had withdrawn from the LLC was set aside on the basis that none of his actions fell within any of the statutory events that constitute a withdrawal from the LLC; the operating agreement itself did not define what would constitute a withdrawal. Specifically, it was found that while he had breached the obligation to make his capital contribution, that breach did not constitute withdrawal.
And Then the Court of Appeal Sets Up the Foot Fault
      Continuing its analysis of whether or not Nicolazzi had withdrawn, the Missouri Court of Appeals unfortunately set up a foot fault as to withdrawal.  As do many LLC Acts, that of Missouri, at § 347.123(4)(c), identifies the events of withdrawal as including:
Unless otherwise provided in the operating agreement whereby specific consent of all members at the time, the member … files a petition or answer seeking for himself any reorganization, arrangement, composition, readjustment, liquidation or similar relief under any statute, law or regulation.
       And here’s where the problem is set up. The Court of Appeals wrote that, notwithstanding the question needs to be resolved by the trial court:
We remand this case with instructions for the trial court to determine whether [Nicolazzi’s] filing of his petition constitutes an “event of withdrawal” pursuant to § 347.123(4)(c).
      First, it is unclear how the relief sought by Nicolazzi would fall within any of the categories referenced in this statute. Second, these provisions apply with respect to a member of the LLC (“for himself”) and not with respect to the LLC itself. At least two courts, namely Darwin Limes, LLC v. Limes, No. WD-06-049, 2007-Ohio-2261, 2007 WL 1378357 (Ohio Ct. App. 6th Dist May 11, 2007) and Sayers v. Artistic Kitchen Design, 633 S.E. 2d 619 (Ga. App. 2006) have already made clear that language of this nature refers to the member itself, and does not extend to actions vis-a-vie the LLC such as moving for its judicial dissolution.

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