B&S MS Holdings, LLC v. Landrum

• Decision Date: 30 July 2020
• Docket Number: NO. 2018-CA-01734-SCT,2018-CA-01734-SCT
• Citation: 302 So.3d 605
• Court: Mississippi Supreme Court
• Parties: B&S MS HOLDINGS, LLC v. Jill LANDRUM

302 So.3d 605

B&S MS HOLDINGS, LLC

v.Jill LANDRUM

NO. 2018-CA-01734-SCT

Supreme Court of Mississippi.

July 30, 2020

Rehearing Denied October 1, 2020

ATTORNEYS FOR APPELLANT: JOHN G. CORLEW, LYNN CHAIN WALL, Madison

ATTORNEYS FOR APPELLEE: HARRIS H. BARNES, III, JAMES WILLIAMS JANOUSH, Flowood

BEFORE KING, P.J., CHAMBERLIN AND ISHEE, JJ.

KING, PRESIDING JUSTICE, FOR THE COURT:

¶1. In this dispute between members of a limited-liability company, the question before this Court is whether statutory provisions prevent the enforcement of an arbitration provision and waiver contained in the operating agreement of the company. Because the statutory provisions do not control over the terms of the operating agreement, we affirm the trial court's decision to compel arbitration.

FACTS AND PROCEDURAL HISTORY

¶2. David and Jill Landrum began to develop land in Livingston, Madison County, Mississippi, in approximately 2006. David then sought financial assistance from Michael L. Sharpe. Michael invested substantial sums in the business, and his wife, Marna Sharpe, gained a membership interest in the business. On January 27, 2010, Livingston Holdings, LLC (Livingston), a Mississippi limited-liability company, was formed. The original members of the company were Jill, Marna, and Sara E. Williams. Livingston acquired Williams's ownership interests, and Marna later assigned her membership interest to B&S. The development is now known as the Town of Livingston. The current members of Livingston consist of B&S MS Holdings, LLC (B&S), and Jill.

¶3. An operating agreement was executed effective January 1, 2010. It contained an arbitration provision under article XIV that provided,

Except for the injunctive relief provided in Article IX , any dispute, claim, or controversy in connection with or arising under this Operating Agreement, its construction, existence, interpretation, validity, or any breach hereof, which cannot be amicably settled between the parties, shall be finally and exclusively resolved by arbitration under the Rules of Arbitration of the American Arbitration Association then prevailing .... THE PARTIES HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OR CLASS TREATMENT OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE BREACH THEREOF, PROVIDED THAT NOTHING IN THIS AGREEMENT SHALL PRECLUDE A PARTY FROM SEEKING TO COMPEL ARBITRATION IN A STATE OR FEDERAL COURT OF COMPETENT JURISDICTION.

¶4. On July 25, 2014, a Second Amended and Restated Memorandum of Understanding and Amendment to Operating Agreement was executed. The amendment stated that Marna "ha[d] made and continue[d] to make greater contributions to the Company than Landrum." Marna and Jill agreed that Marna's excess contributions would be converted to a loan.¹ Therefore, the amendment provided that, after July 26, 2014, Marna's membership interest in the company would be 51 percent and Jill's would be 49 percent until payment in full of the loan and the return of Marna's capital contributions.

¶5. On February 13, 2018, B&S filed a complaint to dissolve Livingston under Mississippi Code Section 79-29-803. B&S alleged that Livingston had become "involved with a purported business turnaround consultant which, through egregious conflict of interest, self-dealing, and fraud acquired a dominant influence over Livingston." It stated that consultant Mark Calvert and his company Cascade Capital Group, LLC (Cascade), had acquired the principal debt of Livingston entities, a note and deed of trust to BankPlus with a principal balance of $421,957.94. Cascade allegedly modified the BankPlus note and demanded from Livingston $951,147.12 with an interest rate escalated from the 5.5 percent charged by BankPlus to 12 percent.

¶6. Cascade then filed suit in the United States District Court for the Southern District of Mississippi against Livingston; Chestnut Developers, LLC, a Livingston subsidiary; David Landrum; and Michael Sharpe. Livingston answered the allegations of the complaint and filed its own counterclaim, arguing fraud and self-dealing by Calvert and Cascade. But David answered the lawsuit and admitted all of Cascade's allegations. Additionally, B&S alleged that Jill's counsel demanded that Livingston not pay to defend itself against the Cascade lawsuit.

¶7. B&S contended in its complaint to dissolve Livingston that

Nothing could be more graphic than the fact that ‘it is not reasonably practicable to carry on the business in conformity with the ... Operating Agreement’ than this disagreement between the 51% member of Livingston that it should recover damages for fraud and void the fraudulent transactions of Calvert/Cascade and the position of the 49% member that Livingston should not seek damages for the fraud committed against it, nor should it seek to void the alleged transactions which led to claims of over $1,300,000.00 against it. Livingston cannot carry on any business absent a recovery from the fraud committed against it. The members of this limited liability company have irreconcilable differences and the Court should dissolve the limited liability company pursuant to the provisions of Miss. Code § 79-29-803(1).

¶8. In response, Jill filed a motion to dismiss the complaint or, alternatively, to compel arbitration and to stay or dismiss the case.² In her response, Jill argued that the operating agreement provided that, "[i]f a quorum is present, the affirmative Majority Vote of the Members shall be the act of the Members ...." Under article XIII, section 13.1(a), the operating agreement stated that

The Company shall be dissolved upon the occurrence of any of the following:

(1) Upon the date specified in the Certificate of Formation filed in the office of the Secretary of State of Mississippi; or

(2) By the affirmative Majority Vote of the Members.

No meeting or vote had ever been called with respect to the dissolution of the company. Arbitration also had not been commenced. Jill argued that the parties were bound to the operating agreement and had entered into a valid and binding arbitration provision. Because the claims in B&S's complaint arose under the operating agreement, Jill urged the Court, if it did not dismiss the matter under Rule 12(b) of the Mississippi Rules of Civil Procedure, to dismiss the matter and refer it to arbitration.

¶9. B&S contended that Mississippi Code Section 79-29-123(3) foreclosed Jill's argument. Section 79-29-123(3) states,

(3) Except as provided in this subsection (3), the provisions of this chapter that relate to the matters described in paragraphs (a) through (d) of subsection (1) of this section may be waived, restricted, limited, eliminated or varied by the certificate of formation or operating agreement. In addition to the restrictions set forth in subsections (4) and (5) of this section, the certificate of formation or the operating agreement may not:

....

(m) Vary the power of a court to decree dissolution in the circumstances specified in Section 79-29-803(1) ....

Miss. Code. Ann. § 79-29-123(3)(m) (Supp. 2019). Section 79-29-803(1) provides that,

(1) On application by or for a member, the chancery court for the county in which the principal office of the limited liability company is located, or the Chancery Court of the First Judicial District of Hinds County, Mississippi, if the limited liability company does not have a principal office in this state, may decree dissolution of a limited liability company:

(a) Whenever it is not reasonably practicable to carry on the business in conformity with the certificate of formation or the operating agreement ....

Miss. Code. Ann. § 79-29-803(1)(a) (Rev. 2013).

¶10. The Madison County Chancery Court found that under Mississippi Code Section 79-29-1211, members of a limited-liability company have a right to agree to arbitration. Section 79-29-1211 provides, in relevant part, that,

Except by agreeing to arbitrate any arbitrable matter in a specified jurisdiction or in this state, a member who is not a manager may not waive its right to maintain a legal action or proceeding in the courts of this state with respect to matters relating to the organization or internal affairs of a limited liability company.

Miss. Code. Ann. § 79-29-1211 (Rev. 2013) (emphasis added). Because the members of Livingston agreed to arbitration in the operating agreement, the trial court ordered the parties to conduct binding arbitration.

ISSUES

I. Whether the trial court erred by ordering the parties to submit to arbitration in accordance with the terms of the operating agreement.

II. Whether judicial dissolution fell outside of the scope of the operating agreement arbitration clause.

DISCUSSION

¶11. Valid arbitration agreements are favored under Mississippi law. Harrison Cty. Commercial Lot, LLC v. H. Gordon Myrick, Inc. , 107 So. 3d 943, 949 (Miss. 2013) (citing Smith Barney, Inc. v. Henry , 775 So. 2d 722, 724 (Miss. 2001) ). "The grant or denial of a motion to compel arbitration is reviewed de novo ." Rogers-Dabbs Chevrolet-Hummer, Inc. v. Blakeney , 950 So. 2d 170, 173 (Miss. 2007) (internal quotation marks omitted) (quoting E. Ford, Inc. v. Taylor , 826 So. 2d 709, 713 (Miss. 2002) )."We will not disturb a chancellor's factual findings ‘when supported by substantial evidence unless ... the chancellor abused his discretion, was manifestly wrong, clearly erroneous or applied an erroneous legal standard.’ " Venture Sales, LLC v. Perkins , 86 So. 3d 910, 913 (Miss. 2012) (quoting Ladner v. O'Neill (In re Estate of Davis) , 42 So. 3d 520, 524 (Miss. 2010) ).

I. Whether the trial court erred by ordering the parties to submit to arbitration in accordance with the terms of the operating agreement.

A. Reasonable Practicality of Carrying on Business

¶12. B&S argued that Mississippi Code Section 79-29-123(3)(m) prohibited an operating agreement from contracting away the power of a court to decree dissolution. It contended that no clause in an operating agreement can take away a...