Chadwick v. Huntoon

Decision Date16 September 2021
Docket NumberNo. SD 36850,SD 36850
Parties Steven CHADWICK, Respondent v. Robert HUNTOON, and George Swearengin, Appellants.
CourtMissouri Court of Appeals

ATTORNEY FOR APPELLANTSThomas W. Millington, Springfield, MO.

ATTORNEY FOR RESPONDENTPatricia S. Williams, St. Louis, MO.

MARY W. SHEFFIELD, P.J.

This case requires us to decide whether a member of a limited liability company ("LLC") expelled without cause is entitled to compensation for his member's interest under the company's operating agreement. Robert Huntoon and George Swearengin ("Appellants") expelled Steven Chadwick ("Respondent") without cause from Liberty Home Solutions, LLC (the "Company"). Following his expulsion from the Company, Respondent filed a petition against the remaining members of the Company alleging he was entitled to be compensated for his member's interest. The trial court entered judgment in Respondent's favor, awarding him actual damages, punitive damages, and attorney's fees. Appellants appeal the trial court judgment, raising eight points challenging: the trial court's interpretation of the operating agreement (points 1, 2, 3, and 5); the trial court's determination of the value of the Company (point 4); the denial of Appellants’ affirmative defense of accord and satisfaction (point 6); and the trial court's award of punitive damages (point 7) and attorney's fees (point 8). Finding no merit in Appellants’ points, we affirm.

Factual and Procedural Background

In March 2007, Respondent and Appellants entered into a contract ("operating agreement") for the operation of the Company, which was in the business of home remodeling and repairs. The operating agreement gave each member a one-third interest in the Company. From 2013 to 2017, the Company's yearly total membership distributions averaged over $170,000 and its total income exceeded $2.5 million.

In May 2018, Appellants expelled Respondent without cause pursuant to section 7.4(A) of the operating agreement, which states, in pertinent part, that Appellants would assume all indebtedness and would indemnify Respondent from liability on the company's debts. "In addition, the remaining Members and the Company shall pay the expelled Member the sum of $1,000 per week for twelve (12) weeks commencing not later than two (2) weeks after the expulsion." Respondent was given a check in the amount of $1,000 and a letter informing him he had been expelled as a member "without cause[.]" The letter stated Respondent would receive 12 payments of $1,000 as required by section 7.4(A) of the operating agreement and that Appellants would assume all indebtedness and would indemnify him from liability on the company's debts.1 Respondent received and cashed 11 more payments of $1,000. Following Respondent's expulsion, Appellants continued operating the business.

Respondent filed a petition against Appellants seeking compensation for his member's interest.2 Appellants filed an answer and asserted the affirmative defense of accord and satisfaction based on Respondent's acceptance of the 12 payments of $1,000.

The case was tried to the trial court, which ruled in Respondent's favor. The trial court determined a Company member had two sets of interests: (1) participation rights and (2) distribution rights. The trial court found the 12 payments of $1,000 following Respondent's expulsion were payments for "participation rights" under section 7.4(A) of the operating agreement and were not intended to compensate the member for his distribution rights. The trial court found Appellants’ testimony about the intent of section 7.4(A) of the operating agreement to be not credible. The trial court also determined the expulsion of Respondent was a "Dissociation Event" described in Article VIII of the operating agreement. Further, since Appellants did not purchase Respondent's member's interest, the trial court found Respondent retained the interest and was entitled to distributions from the Company in the amount of $4,500 per month for 23 months following his expulsion, totaling the sum of $103,500. The trial court further found Respondent's expulsion constituted a dissociation event triggering a "Buy-out Default" under section 8.3(A) of the operating agreement and awarded Respondent damages for breach of contract in the amount of $300,000 (1/3 of $900,000, which the trial court found to be the "value" of the Company). The trial court determined Appellants breached a fiduciary duty owed to Respondent and awarded punitive damages in the amount of $25,000. Respondent was also awarded attorney's fees in the amount of $44,000. This appeal follows.

Points 1, 2, and 5

Because our analysis of points 1, 2, and 5 rely on the same principles of law, we address them together. In point 1, Appellants argue the trial court erred in determining Respondent was entitled to compensation "not specifically provided for within section 7.4(A) because the operating agreement ... did not provide for payments to be made to an expelled member other than the $1,000.00 payments for a period of twelve (12) weeks." Appellants’ point 5 follows the same logic as point 1, arguing the operating agreement did not entitle an expelled member to distributions after the date of his expulsion. In point 2, Appellants argue the trial court erred in determining the operating agreement provided members with two types of property interests, "participation rights" and "distribution rights." Each of these points assume that Section 7.4(A) limits compensation to a member expelled without cause to 12 payments of $1,000 and that a member becomes divested of his member's interest upon expulsion.

Standard of Review

We will affirm the trial court's judgment unless there is no substantial evidence to support it, it is against the weight of the evidence, or it erroneously declares or applies the law. Nicolazzi v. Bone , 564 S.W.3d 364, 370 (Mo. App. E.D. 2018). The interpretation of an LLC's operating agreement is a question of law, which we review de novo. CB3 Enters. LLC v. Damas , 415 S.W.3d 163, 166 (Mo. App. W.D. 2013).

Discussion

Appellants argue that Section 7.4(A) limits compensation to a member expelled without cause to 12 payments of $1,000. The trial court, in rejecting Appellants’ argument, determined that the 12 payments referenced in Section 7.4(A) were intended as compensation for the loss of Respondent's right to participate in the management of the Company but did not extinguish his rights to distributions. Whether this determination was in error turns on the effect expulsion without cause has on a member's rights to distributions under the operating agreement. In answering this question, we look to the Limited Liability Act ("the Act")3 and the operating agreement signed by the parties. See Urban Hotel Dev. Co., Inc. v. President Dev. Grp., L.C. , 535 F.3d 874, 878 (8th Cir. 2008) (interpreting Missouri law).

LLCs are creatures of statute and their "corresponding rights and obligations are derived from statute." Hibbs v. Berger , 430 S.W.3d 296, 313-14 (Mo. App. E.D. 2014) (quoting Pitman Place Dev., LLC v. Howard Inv., LLC , 330 S.W.3d 519, 530 (Mo. App. E.D. 2010)). These rights and obligations are set out in the Act. See id. The Act, however, gives members significant flexibility in overriding statutory provisions which would otherwise prevail if the members fail to incorporate such provisions in their operating agreements.4 See Phillip G. Louis, Jr., 25 Mo. Prac. , Business Organizations § 8.19 (2d ed. 2021). Because the Act supplies default terms which can be overridden in the operating agreement when authorized by the Act, our analysis follows a two-step framework: (1) determine what effect expulsion without cause has on the member's interest under the Act (the "default terms"); and (2) determine whether the operating agreement contains a provision overriding the Act's default terms.

Since the question before us is what effect expulsion without cause has on a member's interest under the operating agreement, we must clarify what we mean by a "member's interest." The Act defines a "member's interest" as a "member's share of the profits and losses of [the LLC] and the right to receive distributions of [the LLC] assets[.]" § 347.015(12). The operating agreement does not define a "member's interest", therefore, the Act's definition applies. The operating agreement does, however, define "profits and losses" as "[t]he Company's income, gains, losses, deductions, and credits ... for each fiscal year of the Company" and those "shall be allocated among the Members (for both book and tax purposes) in proportion to their respective Distribution Percentages." A "Distribution Percentage" for each member under the operating agreement is "thirty-three and one-third percent (33 1/3%)." Accordingly, each member of the Company has a member's interest in one-third of the Company's profits and losses and distribution of assets.

Having determined what a member's interest is, we proceed to the Act to determine what effect expulsion without cause has on that interest. Section 347.121 addresses the consequences of withdrawal of a member. Under section 347.123(3) a member expelled in accordance with the operating agreement is a withdrawn member. Section 347.121(3), states that "[e]xcept as otherwise provided in the operating agreement, upon the withdrawal of a member, the withdrawn member shall have no further right to participate in the management and affairs" of the company and "shall have only the rights of an assignee of the withdrawn member's interest." So, unless an operating agreement provides otherwise, an expelled member cannot participate in the management of the company but retains his rights to his member's interest—the right to share in the profits and losses and distribution of assets—as an assignee.

While section 347.121(1) describes the effect a withdrawal event has on a...

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