Lloyd v. Horn, Inc.
| Decision Date | 29 November 1993 |
| Citation | 166 F.3d 1221 |
| Parties | NOTICE: Although citation of unpublished opinions remains unfavored, unpublished opinions may now be cited if the opinion has persuasive value on a material issue, and a copy is attached to the citing document or, if cited in oral argument, copies are furnished to the Court and all parties. See General Order of |
| Court | U.S. Court of Appeals — Tenth Circuit |
Before ANDERSON and KELLY, Circuit Judges, and BRETT, ** District Judge.
Plaintiff-Appellant, Daren Lloyd ("Lloyd") appeals the Order of the United States District Court for the District of Kansas rescinding the SDI of Fort Scott, L.L.C. Operating Agreement ("Operating Agreement") entered into by Lloyd and Defendants-Appellees, Horn, Inc. and RIMA, Inc. The case below was bifurcated into issues of construction of the Operating Agreement and damages. After a trial to the court on the equitable counterclaims of defendants, the district court rescinded the Operating Agreement based on its findings of defendants' unilateral mistake and Lloyd's constructive fraud. It is this ruling which Lloyd appeals. Based on the parties' stipulation as to damages, the district court entered judgment in favor of Lloyd and against defendants in the amount of $17,354.40, the value of Lloyd's capital account. We exercise jurisdiction under 28 U.S.C. § 1291 and affirm the trial court.
In June 1989 Lloyd was hired as a manager trainee by the owners of an existing Sonic Drive-In in Fort Scott, Kansas--Max Rickerson ("Rickerson") of RIMA, Inc. ("RIMA") 1, Marion Leneev of Leneev, Inc. and John Horn ("Horn"). [Tr. at 68-70, 100-101]. Pursuant to an oral agreement between the owners and Lloyd, Lloyd replaced Horn as manager of the drive-in restaurant on July 1, 1989, receiving $1,200.00 per month in wages and ten percent of the profits. [Tr. at 70-72, 111].
On February 21, 1990, Lloyd entered into a Partnership Agreement with Horn and RIMA 2 whereby Lloyd became Managing Partner and acquired 25% interest in the new partnership, paying $12,500 to Horn and $12,500 to RIMA for his interest. 3 [Tr. at 19, 71; Plt's Ex. 1, Partnership Agreement, Section 2.01]. The partnership was formed for the purpose of owning, operating and continuing to do business as Sonic Drive-In of Fort Scott ("Sonic Drive-In"). [Plt's Ex. 1, Partnership Agreement, Article 1]. As Managing Partner, Lloyd received a salary of $1,200.00 per month and $25.00 per week car allowance, plus 25% of the net profits. [Plt's Ex. 1, Partnership Agreement, Section 5.03 and Article 3].
Pursuant to the Partnership Agreement, the profits from the operation of the Sonic Drive-In were distributed among the partners according to their respective interests: Lloyd with 25%, RIMA with 37 1/2% and Horn with 37 1/2%. [Plt's Ex. 1, Partnership Agreement, Section 5.03 and Article 3]. However, the Partnership Agreement expressly limited the amount Lloyd, as Managing Partner, could realize from his partnership interest should he withdraw or be fired from the partnership. Under the terms of the agreement, if Lloyd withdrew or was fired as Managing Partner, his partnership interest would be valued as the amount of his capital account plus all undistributed earnings through the effective date of withdrawal or termination. [Plt's Ex. 1, Partnership Agreement, Sections 6.01, 7.01, 7.02].
The Partnership Agreement was amended twice, on November 1, 1990 and on February 26, 1992. [Plt's Ex. 2, Amended Partnership Agreement; Plt's Ex. 3, Second Amended Partnership Agreement]. The Amended Partnership Agreement and Second Amended Partnership Agreement did not substantively alter the terms of the Partnership Agreement other than to substitute Horn, Inc. for John Horn as one of the three partners. The partnership continued under the Second Amended Partnership Agreement until the parties entered into the Operating Agreement on June 30, 1995, by which the partnership was converted into a limited liability corporation, SDI of Fort Scott, Kansas, L.L.C ("SDI").
The conversion of the partnership to a limited liability corporation was recommended to Rickerson by Tim Larson ("Larson"). Larson was an attorney for Rickerson and his corporation, RIMA, and also advised Rickerson concerning legal matters pertaining to the Sonic partnership. [Tr. at 26, 55-56]. Rickerson testified that Larson recommended the conversion of the partnership to a limited liability corporation to limit the owners' liabilities. [Tr. at 26]. Rickerson also testified that he directed Larson to prepare the Articles of Organization and Operating Agreement for the formation of SDI and none of the terms was subject to discussion or negotiation with Lloyd. [Tr. at 26-29; Plt's Ex. 4, Articles of Organization; Plt's Ex. 5, Operating Agreement]. After Rickerson, Horn and Lloyd separately reviewed and signed the documents, the Articles of Organization and Operating Agreement were filed with the Secretary of State of Kansas on August 9, 1995. [Tr. at 29, 74-75, 106; Plt's Ex. 4].
Most of the provisions of the Operating Agreement mirrored corresponding provisions of the prior partnership agreements. However, the Operating Agreement reflected the following changes in the form of management of the new limited liability corporation:
5.01 Management of the Company. Management of the Company shall be vested in the Members. The Members of the Company initially shall be to-wit:
Daren T. Lloyd Horn, Inc.
1700 S. National 120 S. National
Ft. Scott, KS 66701 Ft. Scott, KS 66701
RIMA, Inc.
c/o Max K. Rickerson
P.O. Box 431
Chanute, KS 66720
5.04 Designated Managing Member.
(a) There may be a designated Managing Member of the Company who shall have the responsibility to act on behalf of the Company and to carry out the decisions of all the Members by handling the general daily affairs and operations of the Company. The Managing Member shall inform the Members of any problems of unusual nature with the operations that are not resolved in the regular course of business operations, and the Members shall determine by vote of the majority in interest the action to be taken.
5.06 Additional, Removal, and Replacement of Managing Member or Supervising Member. The Managing Member or Supervising Member, as the case may be, may be added, removed, and/or replaced by written agreement signed by the Members upon a vote of the majority in interest.
[Plt's Ex. 5, Operating Agreement, Sections 5.01, 5.04 and 5.06]. Although the "Managing Partner" was now designated as the "Managing Member," the Operating Agreement incorporated the prior partnership agreements' restriction on the value of the Manager's interest in the event he were fired to the amount of his capital account plus his pro rata share of all undistributed earnings up to the effective date of termination. [Plt's Ex. 5, Operating Agreement, Sections 7.01 and 7.02].
On August 16, 1995, Lloyd wrote the following letter to Rickerson and Horn:
Today in the mail, I received copies of Articles of Organization and an Operating Agreement for the above referenced company [SDI].
I want to make clear that I do not desire to be appointed nor will I accept the designation as managing member of SDI of Fort Scott, Kansas, L.L.C. I have no idea to whom you intend to seek or designate as managing member, however, I will be happy to assist in this decision at such time as we may meet for organizational purposes.
I intend to remain as a member of SDI of Fort Scott, Kansas, L.L .C. and continue to receive pro-rata draws. To that end, I will be happy to assist in consultation or supervision as we as members shall decide.
Also, please accept this as my official designation in writing pursuant to paragraph 11.01 that notices and other correspondence should be directed to me at P.O.Box 1027, Fort Scott, Kansas 66701-1027, from and after the date of this letter.
Please contact me at your earliest opportunity so that we may further discuss.
[Plt's Ex. 6]. Following receipt of the letter, Rickerson and Horn met with Lloyd and asked if he planned to continue to manage the Sonic Drive-In. Lloyd answered no, and the meeting ended. [Tr. at 35-36].
By letter dated September 5, 1995, Larson, on behalf of RIMA and Horn, Inc., informed Lloyd that Rickerson and Horn considered Lloyd's August 16, 1995 letter a "withdrawal and resignation" of his position as Managing Member. Alternatively, Larson notified Lloyd that he was expelled as a member of SDI based on his failure to disclose his intent not to manage the Sonic Drive-In once the limited liability corporation was formed. [Plt's Ex. 7].
On December 12, 1995, Lloyd brought suit for breach of the Operating Agreement, seeking the fair market value of his membership interest in SDI and his share of any distributions paid to the members since August 1, 1995, plus punitive damages, costs and attorney fees. Defendants Horn Inc., RIMA and SDI counterclaimed for equitable relief seeking judgment that Lloyd was the Managing Member of SDI under the literal terms of the Operating Agreement, and if not, based on the conduct and understanding of the parties and other equitable principles, the Operating Agreement should be reformed to so designate Lloyd as Managing Member, or be rescinded.
The trial court bifurcated the case and conducted a bench trial on the issue of rescission or reformation on September 17, 1996. At the conclusion of the trial, the court found that rescission of the Operating Agreement was warranted based on (1) defendants' unilateral mistake regarding the effect of the Operating Agreement, if, as Lloyd contended, the effect were to change Lloyd's ownership interest to a full equity interest rather than a limited management interest,...
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