Prior Montana Case. I recently blogged about Gordon v. Kuzara, a Montana Supreme Court decision that refused to enforce an LLC agreement’s arbitration clause in a dissolution dispute, here. One member sued for judicial dissolution of the LLC, and the other member responded with a motion to compel arbitration based on an arbitration clause in the LLC’s operating agreement. The court in Gordon refused to require arbitration because the arbitration clause required arbitration only for disputes challenging the operating agreement, any activity under the operating agreement, or any interpretation of the operating agreement. The petitioner in Gordon sought dissolution under Montana’s LLC Act – a statutory remedy – which was not covered by the arbitration clause.
Georgia Rejects Arbitration. Now we have an eerily similar case from Georgia, handed down three weeks before Gordon. Simmons Family Props., LLLP v. Shelton, No. A10A1495, 2010 Ga. App. LEXIS 1116 (Ga. Ct. App. Nov. 30, 2010). Two of the LLC’s three members filed a petition for dissolution under Ga. Code § 14-11-603(a), which provides for court-ordered dissolution using the familiar standard, “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or a written operating agreement.”
The other member filed a motion to stay the petition and to compel arbitration, relying on the following language from the LLC’s operating agreement:
“Any dispute, controversy or claim arising out of or in connection with, or relating to this Agreement or any breach or alleged breach hereof shall, upon the request of any party involved, be submitted to, and settled by, arbitration ….”
Simmons Family, 2010 Ga. App. LEXIS 1116, at *4.
The court pointed out that the dissolution remedy requested under Georgia’s LLC Act is an independent legal mechanism and that the LLC’s operating agreement did not govern dissolution procedures under Section 14-11-603. The mode of dissolution involved therefore did not “arise out of, in connection with or relate to the terms of the operating agreement or any alleged breach thereof.” Id. at *5-6. The court therefore rejected the motion to compel arbitration.
As I suggested in my previous blog on Gordon v. Kuzara, the arbitration clause would have covered a petition for a statutory dissolution if it had included a reference to the interpretation or enforcement of rights under the state’s LLC Act.
Prior Attorneys’ Fees Case from Idaho. A similar result obtained in an Idaho case where attorneys’ fees were sought in a dissolution petition. Last year I blogged about Henderson v. Henderson Investment Properties, LLC, in which an attorneys’ fees clause in an LLC operating agreement was not enforced in an Idaho judicial dissolution case, here. The attorneys’ fees clause only applied to actions to enforce the LLC agreement, and the dissolution petition was for a statutory remedy, independent of the LLC’s operating agreement.
Dysfunctional Boilerplate. In all three of these cases it’s a fair assumption that when the members put their operating agreement together, they expected the arbitration clause or the attorneys’ fees to apply to a petition for a court-ordered, statutory dissolution. In each case their expectations were dashed. Why? Because the attorney that drafted their operating agreement almost certainly relied on a form or an agreement from a prior deal.
The arbitration clause or attorneys’ fees clause may have been old and may have been frequently used in the past by the lawyer, or it may have come from a form book. But when put to the test it was inadequate. As Kenneth Adams points out in his blog on contract drafting: “If a particular bit of contract prose has been reused year after year after year, that’s no guarantee of reliability. Instead, it likely means that no one has subjected it to real scrutiny and that you probably could poke holes in it.”
Contract boilerplate is not necessarily “tried and true.” Think about that clause before reusing it.
“Most people can't think, most of the remainder won't think, the small fraction who do think mostly can't do it very well. The extremely tiny fraction who think regularly, accurately, creatively, and without self-delusion – in the long run, these are the only people who count.” Robert A. Heinlein