In Related Westpac LLC v. JER Snowmass, LLC, 2010 WL 2929708 (De. Ch. July 23, 2010), one member of a land development company sought to force the other member to pay damages and meet future capital calls, arguing that his refusal to give such consents and to meet capital calls was “unreasonable”. The members disagreed over whether to expand the company’s development projects funded with additional capital from the members.
This case was dismissed, because although the operating agreement prohibited the defendant from unreasonably withholding consent to certain decisions, it did not constrain other decisions with the “unreasonably withheld” standard including capital calls. In stating specific events requiring consent, the implication was that non-stated events would then be excluded from those same terms and conditions.
The court also rejected the request for an implied reasonableness condition as part of the operating agreement’s implied covenant of good faith and fair dealing based on the fact that the express bargain covered that and implying such an obligation would override the express agreement. Also, there were no contractual obligations to pay damages as the operating agreement provided that a member who did not fund a capital call would not have personal liability.
The court concluded “when a fiduciary duty claim is plainly inconsistent with the contractual bargain struck by parties to an LLC or other alternative entity agreement, the fiduciary duty claim must fall…” and dismissed the case.
While the court refused to imply provisions or duties into the operating agreement, by doing so a set of implied terms were created. When drafting operating agreements the more explicit your terms are, you may be creating an implicit set of terms by exclusion. It is important to keep this in mind, as it may create unintended consequences.
- Allison M. Linder