BATTLING LLC MEMBERS – Why the Company’s Operating Agreement May Prevent You From Suing Another Member of Your LLC
The Third District Court of Appeal, in the matter Tulga Demir v. Georg Schollmeier, recently reversed a trial court’s final order granting summary judgment in favor of Appellee Georg Schollmeier. The appellate court held that the agreement governing the financial contributions made by the parties’ to their company, Avrupa, LLC, precluded liability against Tulga Demir, individually, because the company’s operating agreement did not authorize a Member to bring a direct action against another Member for a breach of its terms.
Demir formed Avrupa in order to manage and operate a night club on Miami Beach known as “Club Sin.” On January 3, 2007, Schollmeier, Demir’s personal friend, entered into an agreement with Demir and Demir’s brother titled the “Avrupa, LLC Contribution Agreement”, which contemplated that the three would become Members of Avrupa. Pursuant to the agreement, Schollmeier was to contribute $400,000.00 to Avrupa for a 20% interest in the company and Demir and his brother were to contribute $1,000,000 each for 40% interests in the company. The agreement stated that “concurrently with the execution of this Agreement, the Members are making . . . contributions to [Avrupa] which will constitute capital of [Avrupa]” and that “contributions can be made to Avrupa’s LLC’s bank account. The agreement also stated that “Schollmeier may decide to withdraw from ownership of [Avrupa], in which case Schollmeier’s contribution of $400,000.00 US shall be reimbursed. Furthermore, the agreement, which was titled Limited Liability Company Agreement, stated “this Agreement is a limited liability agreement under and as provided in the Act.” The Agreement was signed by Demir, his brother, and Schollmeier as “the Members” of Avrupa.
In January 2007, Schollmeier wired $375,000.00 into Avrupa’s bank account. The nightclub opened in early February 2007, but was closed on March 29, 2007. On May 31, 2007, Schollmeier exercised his election under the agreement to withdraw as a Member from the company and demanded that Demir wire $400,000.00 into Schollmeier’s bank account. When Demir failed to wire Schollmeier the funds, Schollmeier filed a lawsuit against Demir and his brother seeking $400,000.00 in damages from breach of contract, breach of fiduciary duty, breach of statutory duty of loyalty and care, and accounting. Demir denied the allegations against him and asserted affirmative defenses. Subsequently, Schollmeier filed a motion for summary judgment as to his breach of contract claim against Demir. Demir filed a response in opposition to the motion asserting that factual disputes remained as to whether he was personally liable to Schollmeier for his contribution to Avrupa, thereby precluding the granting of Schollmeier’s motion for summary judgment.
The trial court granted Schollmeier’s motion for summary judgment finding that Demir was personally liable to Schollmeier for breaching the agreement. Final Judgment was subsequently entered against Demir personally on January 13, 2016 and an appeal followed.
The Third District Court of Appeal found that the trial court erred in determining that the agreement between Demir, his brother, and Schollmeier was not a limited liability company operating agreement under Florida’s Limited Liability Company Act, but rather, a personal contract solely governing the terms of Schollmeier’s contribution to Avrupa. The record was clear that Demir, his brother, and Schollmeier set out the parameters of their relationship and its accompanying obligations through the creation of a limited liability company with a governing operating agreement. Although the parties’ agreement was not titled an “operating agreement”, nor was it signed at the time Avrupa was established as a limited liability company, the agreement dictated the nature of the parties’ relationship and the obligations they owed to each other. Moreover, the appellate court held that an operating agreement is a contract and governs “the relations among the members, the managers, and the limited liability company itself, as well as the effect of these relations on third parties.” The Agreement at issue lead the appellate court to conclude that when Schollmeier withdrew from ownership in Avrupa, his capital contribution to company was to be reimbursed by Avrupa and not by the individual Members. The appellate court further found that the agreement did not “contain any provision or language indicating that any Member of Avrupa would be personally liable to any other Member for the company’s obligations, including the reimbursement of capital contributions made to the company. If the parties intended such a result, the terms needed to be explicit.”
Therefore, if you are a Member of a limited liability company looking to sue another Member of the LLC in his/her individual capacity, make sure to review the company’s operating agreement to determine what duties and obligations, if any, each Member owes to the others. Otherwise, you may find yourself in a similar situation.