Freedom of contract is a basic principle of Mississippi’s LLC Act, but freedom of contract includes the freedom to make a bad contract. Case in point: the Mississippi Court of Appeals recently held that the plain language of a law firm’s LLC operating agreement allowed the members to expel attorney David Martindale and pay him only $1,100 for each of his 18 percentage points of his membership interest. That ruling enforced what was a bad bargain from Martindale’s point of view, because it allowed him no share in the firm’s $7,664,000 fee from a long-running contingent fee case that settled seven months after his expulsion. Martindale v. Hortman Harlow Bassi Robinson & McDaniel PLLC, No. 2010-CA-02077-COA, 2012 WL 4497756 (Miss. Ct. App. Oct. 2, 2012).
Background. Martindale practiced law with Hortman Harlow Bassi Robinson & McDaniel PLLC (the Firm) for 14 years. The Firm is a Mississippi professional limited liability company, or PLLC, which is an LLC formed for providing professional services under Article 9 of the Mississippi LLC Act. In 2006 the Firm took on the representation of an injured oil-field worker in a personal injury, contingent fee lawsuit, and devoted nearly all of its resources to the case. Martindale was not involved in the lawsuit, and questioned and criticized the Firm’s expenditures on the case.
The other members of the Firm, relying on the Firm’s operating agreement, expelled Martindale in February 2009 and tendered him a $19,800 check for his membership interest. The operating agreement allowed the members to expel a member by unanimous vote, in which case the Firm was required either to dissolve or to pay the former member $1,100 for each percentage point of his membership interest. The members opted to pay Martindale rather than dissolve.
Martindale refused the Firm’s check, and in May 2009 the Firm filed a lawsuit for declaratory relief, asking for a declaration that it had fulfilled its contractual obligations to Martindale. Four months later the contingent fee case was resolved, and the Firm received its fee of $7,655,000.
The Firm moved for summary judgment, contending that the operating agreement provided Martindale’s exclusive remedy for payment after his expulsion. The trial court found the language of the agreement to be clear and unambiguous, and granted summary judgment to the Firm.
Court of Appeals. The Court of Appeals began by reviewing the relevant provisions of the Firm’s operating agreement.
Section 9.5 of Hortman Harlow’s operating agreement states: “Upon the termination of a Member’s Membership Interest under Section 9.1(b) . . . , the other Members may elect either (1) to pay an amount equal to the terminated Members [sic] points as calculated pursuant to Section 9.2(a) less any debt to the company; or (2) to dissolve the Company . . . .” Section 9.2(a) provides the payment formula for a terminated member’s interest in the law firm: “The terminating Member shall receive an amount equal to One Thousand One Hundred and No/100 Dollars ($1,100.00), multiplied by each percentage point of Membership Interest owned by the terminating Member as set forth on Schedule “B” in lieu of his positive capital account balance . . . .”
Martindale, 2012 WL 4497756, at *2. After briefly paraphrasing the statutory language, the court found that “the only reasonable interpretation of sections 9.2(a) and 9.5 is that the parties intended for these sections to provide a member’s exclusive right to compensation upon his or her expulsion.” Id. at *3. The court therefore found the contract to be unambiguous.
Martindale argued that Section 13.10 of the operating agreement preserved his right to equitable relief, by stating that “rights and remedies [under this agreement] are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise,” and that he had several grounds for equitable relief. Id. at *4.
Equity. Martindale pointed to Section 79-29-306(3)(a) of the prior LLC Act (which applied at the time of his termination): “A court of equity may enforce a limited liability company agreement by injunction or by such other relief that the court in its discretion determines to be fair and appropriate in the circumstances.” He contended that that section and two prior Mississippi cases entitled him to a more favorable equitable remedy. The court dismissed that argument, pointing out that § 79-29-306(3)(a) and the prior cases only apply if there is a breach of the operating agreement. Id.
Intrinsic Fairness. Martindale also claimed that under the Mississippi doctrine of “intrinsic fairness,” the Firm should have treated him in an “intrinsically fair” manner. This rule requires that actions of a majority stockholder toward a minority shareholder in a closely held corporation must be “intrinsically fair” when the majority stockholder stands to benefit, and the rule applies to LLCs. Id. at *5. The court, however, found “no indication they breached this duty in administering his proper payout under the contract.” Id. Martindale got the benefit of his bargain: “While Martindale’s payout is meager in light of the large settlement after his expulsion, we find Martindale received what he initially bargained for under the firm’s operating agreement.” Id.
Implied Duty of Good Faith and Fair Dealing. The court likewise dispatched Martindale’s argument that the Firm’s failure to pay him the fair value of his interest breached the Firm’s implied duty of good faith and fair dealing under the operating agreement. The court found that a party does not breach the implied covenant of good faith and fair dealing when it takes only those actions authorized by the contract. “Because Hortman Harlow could not have acted in bad faith by exercising a contractual right, we find the firm did not breach its implied duty of good faith and fair dealing under the operating agreement.” Id. at *6.
Having rejected all of Martindale’s arguments for equitable, fair, or good-faith treatment, the court affirmed the trial court’s ruling, enforcing what the Court of Appeals found to be the plain and unambiguous language of the operating agreement.
The Dissent. Three of the nine judges of the Court of Appeals dissented from the majority’s opinion. A dissenting opinion in a court of last resort, as U.S. Supreme Court Chief Justice Charles Evans Hughes wrote, “appeal[s] to the brooding spirit of the law, to the intelligence of a future day, when a later decision may possibly correct the error into which the dissenting judge believes the court to have been betrayed.” Alex Kozinski & James Burnham, I Say Dissental, You Say Concurral, 121 Yale L.J.Online 601, 602 (2012). In the Martindale case, the Court of Appeals is not a court of last resort. If David Martindale appeals to the Mississippi Supreme Court, the dissenting opinion should, like a searchlight, illuminate a more complete view of the Firm’s operating agreement than is apparent from the majority’s opinion.
The dissenting opinion includes a more extensive quotation of the relevant provisions from the Firm’s operating agreement, which is helpful. The analysis of the dissent begins with this: When a member is expelled by a unanimous vote of the other members and the members elect to pay the expelled member for his interest rather than dissolve the LLC, then under Section 9.5 they must pay the expelled member “an amount equal to the terminated Member[’]s points as calculated pursuant to Section 9.2(a) less any debt to [the] Company.” Id. at *8 (emphasis added).
An examination of Section 9.2(a) shows that it does more than provide a means to calculate how much must be paid to the departing member; it also characterizes the payment as being “in lieu of his positive capital account balance.” It is this phrase that the majority relied on. But Section 9.2(a) is part of a paragraph dealing with payments on the death or retirement of a member:
Section 9.2 Payments to Terminated Members. Upon termination of a Member’s interest because of death or retirement, the Member shall be entitled to receive from the Company the amounts set forth below:
(a) The terminating Member shall receive an amount equal to One Thousand One Hundred and No/100 Dollars ($1,100.00) multiplied by each percentage point of Membership Interest owned by the terminating Member as set forth on Schedule “B” in lieu of his positive capital account balance.
Id. at *7. Section 9.5 only refers to the calculation method of Section 9.2(a), and if the words “in lieu of his positive capital account balance” were deleted, the calculation would be the same.
The dissent also makes the point that under Section 9.4 of the operating agreement, a disabled member’s interest is terminated “and such Member shall be entitled to receive the payments as provided under Section 9.2 of this Agreement.” Id. at *9. The dissent points out that the difference between “as calculated pursuant to Section 9.2(a)” and “as provided under Section 9.2” is meaningful and at the least creates an ambiguity.
The dissent appears to have the better view of the operating agreement’s payment provisions for an expelled member.