The link between capital contributions to an LLC and the LLC’s purpose is usually clear. The contributions from the members support the LLC’s purpose and are in proportion to the members’ interests in the LLC. Similarly, the increase in value of the LLC’s assets is shared among the members in proportion to their interests. But in a recent case before the Oregon Court of Appeals, one member objected when the required capital contributions were used to directly benefit individual members, as well as benefiting the LLC. Awbrey Towers, LLC v. Western Radio Servs., Inc.,278 P.3d 44 (Or. Ct. App. 2012).
Background. Awbrey Towers, LLC was formed in 2000 to purchase a 19-acre antenna site located on Awbrey Butte in Bend, Oregon. The LLC’s operating agreement stated that its purpose was to “[a]cquire, own and operate an antenna site on Awbrey Butte in Bend, Oregon” and to “[e]ngage in such other activities as are related or incidental to the foregoing purpose and such additional purposes as may be determined from time to time by the Members.” Id. at 46 (brackets in original). Each of the seven LLC members owned a communication tower on the site and leased the land for its tower from the LLC. Each apparently held a one-seventh interest in the LLC.
The LLC’s operating agreement allowed the LLC to require additional capital contributions from the members “as may be necessary to service any debt incurred in connection with the acquisition of the Tower Site and such additional capital needs of the Company as determined by a vote of the Members.” Id.
By late 2001 two members were preparing conditional use permit applications for the City of Bend in order to make changes to their towers, and another member, Western Radio Services, Inc., applied for a building permit from the City to build a new tower. It soon became clear to the members that all seven contemplated building new towers or expanding their towers at some point, so five of the members met with the City to discuss its permitting process. The City indicated that it did not want to deal with the conditional use permit applications separately. It informed the members that it would not accept permit applications from any member until a ten-year master plan for development of the entire site was submitted, and it denied Western Radio’s building permit application. Id.
The members concluded that the master plan required by the City would affect all the members’ interests and decided that the LLC should develop and submit the plan. Western Radio objected on the grounds that the master plan was necessary only for the conditional use permits required of the other six members, not for the type of tower that Western Radio desired to build. The other members nonetheless approved the LLC’s development of the master plan and its payment of the necessary legal and engineering expenses.
The LLC made a series of capital calls over the next several years, mainly in connection with the master plan. The members, other than Western Radio, voted in favor of resolutions approving the capital calls. Western Radio paid some of the requested amounts but withheld expenses for the master plan. Id. at 46-47.
Eventually the LLC sued Western Radio for its unpaid capital contributions. Western Radio argued at trial that the capital calls were invalid because they were intended to cover engineering and legal costs incurred by individual members for their own benefit, not for the benefit of the LLC, and therefore constituted illegal distributions in kind for the benefit of individual members.
The trial court found for the LLC and entered judgment in the amount of $51,310 against Western Radio, and also awarded the LLC its attorneys’ fees. Id. at 47.
Court’s Analysis. The heart of Western Radio’s argument was that the majority members improperly benefited themselves by making capital calls for expenditures that benefited those members but did not benefit the LLC or Western Radio. The Court of Appeals, however, pointed to trial testimony showing that expenditures supporting the master plan allowed the members to further develop the property, thereby increasing its value. Because the LLC owned the property, this testimony supported the trial court’s finding that the expenditures benefited the LLC. Id. at 48.
Western Radio argued that the LLC’s expenditures on the plan benefited the other members but not Western Radio and therefore were improper. The court rejected that argument because Western Radio’s President testified at trial that the City would not consider Western Radio’s building permit applications without a master plan for the site, which meant that the LLC’s expenditures on the master plan benefited Western Radio as well as the other members.
The Court of Appeals also affirmed the trial court’s other theory – “that defendant had ratified the expenditures in question by acquiescing in the informal procedures by which the members had reimbursed plaintiff for all sorts of expenses, including those that defendant acknowledged it should pay.” Id. The trial testimony showed that when the LLC’s income was inadequate to pay its bills, the LLC’s manager would often simply ask each member to deposit one-seventh of the amount of the bills into the LLC’s bank account, without a member authorization for a formal capital call.
Attorneys’ Fees. Western Radio objected to the trial court’s award of attorneys’ fees, which was based on the operating agreement and on the relevant Oregon statute. The operating agreement provided:
Attorneys’ Fees. In the event any Member brings an action to enforce any provisions of this Operating Agreement against the Company or any other Member, whether such action is at law, in equity or otherwise, the prevailing party shall be entitled, in addition to any other rights or remedies available to it, to collect from the non-prevailing party or parties the reasonable costs and expenses incurred in the investigation preceding such action and the prosecution of such action, including but not limited to reasonable attorney’s fees and court costs.
Id. at 49. The LLC acknowledged that this paragraph, by its terms, applies only if the lawsuit in question is initiated by a Member. The LLC based its claim, however, on Or. Rev. Stat. § 20.096(1) (2007), which at that time stated:
In any action or suit in which a claim is made based on a contract, where such contract specifically provides that attorney fees and costs incurred to enforce the provisions of the contract shall be awarded to one of the parties, the party that prevails on the claim, whether that party is the party specified in the contract or not, shall be entitled to reasonable attorney fees in addition to costs and disbursements.
Western Radio contended that the issue was not mutuality of remedy and that the statute was not relevant – the paragraph in the operating agreement was mutual and provided for the prevailing party to recover its attorneys’ fees. It argued, rather, that the language “[i]n the event any Member brings an action to enforce [the agreement]…” was a pre-condition to any party having a right to recover fees, and that because the LLC had brought the suit it could not recover attorneys’ fees. 278 P.3d at 49.
Relying on Jewell v. Triple B. Enterprises, Inc., 626 P.2d 1383 (Or. 1981), and subsequent cases, the court held that under the statute, whenever a party to a contract with an attorneys’ fees clause brings the kind of action contemplated by the clause, regardless of who brought the suit, the prevailing party can recover its attorneys’ fees. The court accordingly upheld the award of attorneys’ fees to the LLC. 278 P.3d at 51.
Comment. The court upheld the LLC’s expenditures on the master plan on the grounds that (a) the LLC itself benefited because the master plan made the LLC’s antenna site more valuable, and (b) each of the members enjoyed some benefit. This may be a sort of “rough justice,” but it ignores the potential disparity of benefit from one member to another. The City required the master plan as a precondition to accepting applications for the members’ conditional use permits and for Western Radio’s building permit. Presumably the permits would have different utility to the various members, but the opinion implicitly treats the benefit to each member as equal.
The drafting lesson from the dispute over the attorneys’ fee clause is straightforward. If the attorneys’ fee clause in an LLC agreement is intended to include any potential suit brought by the LLC, it could read, for example: “In the event that any dispute between the Company and any Member or between any Members should result in litigation or arbitration, the prevailing party in such dispute shall be entitled to recover its reasonable fees, costs and expenses, including without limitation its reasonable attorneys’ fees and expenses.”