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Putting Things Off Until Tomorrow May Preclude Claims Later

Where the operating agreement failed to define what constituted “cause” to enable the involuntary withdrawal of a member, there was no “meeting of the minds” as to that contract term.  Epic Chophouse, LLC v. Morasso, 2020 NCBC 63 (J. Conrad).  As a result, the Business Court held that any effort to involuntarily remove a member “for cause” was a nullity.

In 2009, Plaintiffs Richard Mack (“Mack”) and Larry Sponaugle (“Sponaugle”) formed Epic Chophouse, LLC (“Epic”), along with Defendant James Morasso (“Morasso”).  Epic’s purpose was to open and operate a restaurant by the same name. In preparing Epic’s operating agreement, the three members had numerous discussions about how a member could be forced to withdraw from the LLC.  In the end, the three members included only the following truncated phrase in the operating agreement: “Buy/Sell: Involuntary withdrawal with cause only.” The members did not define what constituted “cause.” By September 2018, Mack and Sponaugle had a falling out with Morasso and voted to remove him as a member of Epic “for cause.”  A few days later, Mack, Sponaugle and Epic filed suit against Morasso and sought, inter alia, a declaration that Morasso was no longer a member of Epic.  Morasso filed a counterclaim seeking, inter alia, a declaration that he was still a member of Epic.  The parties filed cross-motions for partial summary judgment only as to their claims for declaratory relief.

In finding for Morasso, the Business Court recognized that parties must have a “meeting of the minds” on a contract’s term in order for that term to be enforceable. Because the operating agreement contained no explanation of what constituted “cause,” and because no law offers a suitable definition of what constitutes sufficient “cause” to terminate one’s ownership in a company, the Business Court determined the agreement was too indefinite on the issue of involuntary withdrawal to be enforceable.  Pointing to the plaintiffs’ inability to articulate an agreed-upon requirement that would satisfy the “cause” requirement in their depositions, the Business Court determined that the three members had merely “shelved the issue [of what would constitute “cause”],” hoping that they would either reach agreement at a later date or never have to come back to the issue at all.  Yet, they never got around to it, and without a meeting of the minds on this term, the Business Court determined Morasso could not be involuntarily removed from Epic.            

Based upon this decision, members of an LLC should review their operating agreement to ensure various important terms clearly evidence that a meeting of the minds has occurred, less that term be unenforceable at a future date.

Copyright © 2020 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume X, Number 256
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Phil Mohr Bankruptcy and Litigation Attorney Womble Bond Dickinson
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Phil is a trial lawyer. Although he will search for creative legal and business solutions for his clients, his more than two decades of trial experience for both publicly traded and privately held companies in state and federal courts throughout the country have taught him that some cases simply have to be tried to verdict. Representing companies that have both been wronged and accused of wrongdoing, Phil has honed his trial skills in cases involving complex business litigation (including fraudulent transfer and equitable subordination cases in federal bankruptcy court)...

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