OPINION
LAMB, Vice Chancellor.
I. INTRODUCTION
This is a post-trial opinion concerning the power of the members of a majority in interest of a Delaware limited liability company to remove the entity's other member and declare his interest forfeited. According to the managing member, on the same day he determined that the entity would not receive much needed financing from a source introduced by the fourth member, that other member disclosed to him an inappropriate compensation arrangement with the potential financier. With the consent of the other two members, the managing member determined to remove the fourth member from the LLC without compensating him for the fair value of his economic interest therein. But the other member refused to sign the removal agreement.
Trial was held on March 15-16, 2000. The post-trial briefing provided limited assistance to the court.
Two fundamental issues are presented. First, did the operating agreement of the LLC or the default provisions of the law give the defendant members the right or power to remove the fourth from the entity and forfeit his membership interest? Second, if not, have they shown that their assent to the terms of that operation agreement was the product of fraud or misrepresentation?
I reach two pertinent conclusions. First, there is no support, in the operating agreement of the LLC or the law governing such entities, for the expropriation of a member's equity interest. Second, there
II. BACKGROUND
A. The Parties
Plaintiff Randolph T. Walker is a cousin of former President Bush. Walker testified to having attended Windham College
Defendant William J. Cox, Jr., before the events described herein, was an intelligence officer in the United States Navy. Defendant William C. Baron met Cox while serving as an intelligence officer for the Department of Defense. Prior to leaving the service, they spent time serving in the former Soviet Republic of Moldova. Both had certain technical expertise that would help them in working in the oil and gas industry, but had no significant business experience. Defendant William C. Liedtke, III, is an oil and gas attorney and is the son of William C. Liedtke, Jr. The elder Liedtke, along with his brother J. Hugh Liedtke, were partners and close associates of former President Bush in various oil and gas related business ventures. Liedtke has considerable legal and business sophistication, especially in the oil and gas industry.
Defendant Resource Development Company, Limited, L.L.C. ("REDECO") is a Delaware limited liability company founded by Cox and Baron.
B. Walker Meets Cox and Baron and Joins REDECO
On December 16, 1994, Bill Cox negotiated and secured a Letter of Intent signed by the Prime Minister of Moldova, pursuant to which REDECO would obtain an oil and gas exploration and production concession from the Moldovan Government. It contemplated that the parties would enter into a formal concession when final documents were negotiated and final approvals obtained. The Letter of Intent provided that REDECO, an entity Cox and Baron established, would have a five-year drilling commitment in Moldova beginning in 1995.
At the end of 1994, Walker was involved in difficult divorce proceedings and was experiencing various personal problems, including a bout of alcohol abuse. In early February 1995, he planned a vacation to Hawaii to "get a break" but a snowstorm in Washington, D.C. delayed his departure. Walker booked a room at the Four Seasons Hotel and visited the bar. Walker overheard Baron telling the bartender about his venture in Moldova. Walker chimed in, noting that he is the first cousin of the former President. Walker stated that he had access to valuable business connections and was known for a strong personal reputation.
At trial, Baron explained his initial contact with Walker:
Baron scheduled a meeting between Walker and Cox. When they met, Cox was equally taken in by Walker's apparent sophistication. Walker commented on the need to improve REDECO's business plan presentation, which he thought was "very unprofessional." Walker also contacted representatives of several potentially interested parties known to him through family connections, although none of these parties expressed immediate interest in REDECO.
Walker next introduced Cox and Baron to Stephen L. Norris, the founder of an investment fund called The Appian Group. Walker told Cox that the Appian Group "was a merchant bank with considerable financial resources, large investors from the Middle East, and just huge amounts of money behind it."
Because they needed money to develop the Moldovan concession, and believing that a partnership with Walker could be useful, Cox and Baron suggested that Walker and REDECO establish a close relationship. On February 6, 1995, REDECO signed an agency agreement with "The Walker Company,"
Except for the survival of the arbitration clause, this agreement provided that it would terminate automatically if Walker failed to close a financing transaction by March 30, 1995. Further, REDECO retained a right to terminate the agreement at any time following the occurrence of, inter alia:
C. Liedtke Joins the Business and Walker Travels With Norris
Walker introduced Cox and Baron to Bill Liedtke, an experienced oil and gas attorney and consultant. Leidtke first met Cox and Baron at the end of February when they presented the Moldovan opportunity to POGO Petroleum, a company with which Liedtke's family is involved. Although POGO declined to invest, from that point on, Liedtke personally spent a good deal of time working with Cox, Baron and Walker.
Before Walker could leave for Hawaii, Norris invited him to Europe and Walker accepted. While travelling in Europe, Walker and Norris shared expenses, but it appears that Norris paid the vast majority of those costs, to the extent that May, Walker owed Norris about $13,000.
During these travels, Walker discussed REDECO with Norris. Walker wanted Norris to finance the concession project, which the parties termed the "upstream" aspect of the business. Norris expressed interest but wanted to structure a companion deal in which AGIP Petroli, Italy's national oil company, would invest money in a series of gas stations inside Moldova, referred to as the "downstream" aspect of the business. In connection with this AGIP deal, Norris sent a brochure to Liedtke, apparently seeking an investment by him or his uncle. Since Liedtke "was a little perplexed" by this unsolicited contact (and troubled by Walker's involvement in it), Liedtke never gave the brochure further consideration.
As of March 30, 1995, Walker had not obtained the promised $5 million for REDECO.
While Walker was with Norris in Europe, the three Bills were busy putting together the business plan and trying to get final documentation for the Moldovan concession. At first, Liedtke worked for REDECO solely as a consultant. According to Liedtke, "I treated it as a consulting arrangement even after being given an interest in the LLC later. It was just a side venture in my office."
Cox distributed an April 4 letter to Walker, Liedtke and Baron, detailing the progress of the venture and explaining the new ownership structure of REDECO. The letter stated that the partnership had grown to four members, with the following proportionate ownership breakdown: 51% for Cox, 21% for Baron, 18% for Walker and 10% for Liedtke. Cox wrote that "[t]he partnership is now closed." An April 24 memorandum from Cox to Liedtke, Baron and Walker explained that there are two categories of partners, full-time and part-time. Cox wrote that "[f]ull time partners ... work only for REDECO. Besides their ownership, they will receive a salary." In contrast, "[p]art time partners may pursue other interests. Besides their ownership, they will receive an annual stipend of $48,000.00, or $4,000.00 per month." Presumably, Baron and Cox were full-time partners while Walker and Liedtke were part-time.
D. Walker is Removed From His Position as Fundraiser
The evidence at trial showed that each of the three Bills duly performed his job responsibilities for REDECO, under the direction of Cox, acting as Managing Member of the LLC. Further, on May 10, 1995, Cox requested a capital contribution by each of the members. Baron paid in his contribution by paying expenses incurred by him on the company's behalf and not seeking reimbursement.
Walker failed to secure any financing. Indeed, aside from those initial telephone calls and his efforts with Norris, there is no evidence that Walker actually sought financing on REDECO's behalf. Rather, he was travelling partly for business but mostly for pleasure, sometimes with Norris and sometimes on his own, keeping in touch with the three Bills primarily to discuss the progress of negotiations with the Appian Group.
In the meanwhile, Cox and Baron were still negotiating the terms of the Moldovan concession. In order to show REDECO's ability to finance the business, Norris sent Cox and Baron a letter dated April 5, 1995, describing the possibility of
Cox contacted Walker, who was in Vienna, and asked him to join them in Moldova. Walker initially agreed to make the trip, but on three separate occasions, failed to travel from Vienna to Moldova where his arrival was eagerly awaited by an "official government motorcade ... [of] senior officials of the Moldovan government."
Walker testified unpersuasively that he refused to go to Moldova because Cox insisted that he enter the country illegally, without a visa, and bring a large amount of cash with him. Cox denies this, and I find Walker's testimony on this point to be incredible. According to Cox, Walker was inebriated when they spoke by telephone
Shortly after this incident, Cox called Norris to inquire into the situation. Cox testified that "[Norris] stated that Mr. Walker would have to be removed as the point of contact with him. He would no longer deal with Mr. Walker."
Apart from Norris' demand that he not deal with Walker, the three Bills had other concerns about Walker, including his evident drinking problem, financial irresponsibility, indebtedness to Norris, and failure to appear in Moldova.
Accordingly, Cox removed Walker from
The letter states that Walker would be removed "from all official duties as a Member of REDECO Ltd." The letter explains that the decision:
Walker contacted REDECO to determine the letter's meaning. In response, Baron sent him a letter dated May 18, 1995, explaining that "Bill Cox, as the Managing Member, still intends to authorize your 18% of the Management Fee, as originally agreed. In this respect, you are still being `included.'" In other words, Walker lost his job, but Cox did not purport to eliminate Walker's ownership interest in REDECO.
E. Norris Insists on Walker's Reinstatement
A few weeks later, Walker contacted Cox and, according to Cox, stated that "he had a problem with alcohol .... He had cleaned up his act. He was on the wagon. And he told me he was back in good graces with Mr. Norris."
With REDECO's need to secure financing becoming ever more urgent and the Appian Group the only live possibility, the three Bills decided to allow Walker back into his job. Through June and July 1995, however, it was Cox — not Walker — who worked with Norris to close the deal.
In order to get the financing needed to begin the upstream project, REDECO was
F. The Concession and Operating Agreement are Signed
On July 6, 1995, REDECO and the Prime Minister of Moldova finally executed the concession. Walker played no role in negotiating this agreement.
Also during June and July, Walker and the three Bills negotiated a form of operating agreement for REDECO. REDECO needed to have in place a formal operating agreement prior to finalizing any investment by Appian. The agreement was also needed because to ensure that the three Bills would be protected from liability from Walker's actions. On July 25, 1995, the three Bills and Walker entered into the REDECO LLC Operating Agreement. Despite their knowledge of Walker's personal problems, fiscal irresponsibility, debts to Norris and likely inability to offer financing opportunities other than Norris, the three Bills agreed to give Walker an 18% stake in the entity.
Liedtke testified at his deposition that, when Walker was first reinstated, he was still "on probation."
Several provisions detail the powers and obligations of Cox as Manager. Article X provides for removal of the Manager by the members "whenever in their judgment the best interest of the Company will be served thereby. Such removal shall be without prejudice to the contract rights, if any, of any person so removed." (Emphasis added.) Thus, removal as a Manager would not impair Cox's ownership rights in REDECO.
Article XII(c), which sets out the same proportionate ownership as was agreed to in April, provides that "(a)ll Company costs and benefits (and the deductions of any tax credits or deductions attributable thereto) shall be allocated to the members in their Sharing Ratios." Article XIX provides that "a member of record has an absolute obligation to perform an enforceable promise to make a contribution, or otherwise pay cash or transfer property owned by the Company."
The honoring of commitments to contribute is enforced solely by Article XX, which provides that "[i]n the event a member fails to make a contribution to the Company required by an enforceable promise, the Company is entitled to reduce the defaulting member's ownership in a proportion that the amount of the default bears to the total contribution of the member." Article XXI provides for a mechanism by which the non-defaulting members can consider and provide written consent to excuse default in making a contribution.
Critically, Article XXII provides for the withdrawal of members. As to involuntary withdrawal, section (b) states that "[a] member of the Company ceases to be a member, and is deemed to have withdrawn from the Company, on the occurrence of any of the following events:
Finally, section (c) provides that upon the voluntary or deemed withdrawal of a member, "the Company shall dissolve except with the written consent to continue of all of the other members of record."
G. The Appian Deal Falls Apart and Cox Removes Walker
1. The Events of August 23-24, 1995
REDECO and the Appian Group were scheduled to meet on August 23, 1995 at Appian's offices.
Walker tried to calm Cox down, but Cox stormed out of the meeting, furious that after months of negotiations, no deal would be struck with the Appian Group. Walker followed him out. Cox stated at trial, "After I left the offices Mr. Walker stopped me and said, `Bill, listen we are going to close this deal. We are going to get the financing. I know we are, because Steve Norris is going to compensate me when we get this deal closed.'"
According to Cox, this was a startling admission that Walker was working for or controlled by Norris, with whom he was supposed to be conducting arm's-length negotiations on REDECO's behalf. Cox asserts that he explained and discussed this admission with Baron and Liedtke. With their assent, he removed Walker.
The removal letter, entitled "Severance Arrangement," "set[] forth the arrangement [the three Bills] reached concerning [Walker's] withdrawal as a member of [REDECO]." The letter does not refer directly to Walker's alleged admission or to his relationship with Norris. Instead, it refers in general terms to Walker's poor performance and misconduct, as follows:
Walker never acknowledged or returned the document to Cox. Instead, his counsel sent Cox a letter dated September 22, 1995, stating that because the Operating Agreement does not provide for involuntary withdrawal of a member, Walker remained an 18% owner of the business. With respect to amounts due, Walker's counsel explained that the Agreement does not require additional capital contributions except pursuant to an "enforceable promise" to pay. This letter requested "documentation of this alleged obligation." Cox made no response.
2. Did Walker Make this Admission?
For his part, Walker denies having any "side deal" with Norris and denies ever saying that he did. Norris's deposition testimony on the matter also does not support Cox's recollection. When asked whether Walker would be entitled to some commission or payment if the REDECO transaction had come to fruition, Norris stated, "I honestly don't have any specific recollection of what kind of arrangement, if any — I emphasize that — that we would have had with Mr. Walker for introducing us to REDECO."
The testimony of Baron and Liedtke also fails to support Cox's version of events. Instead, it shows that the decision to terminate Walker was the result of the failure of the negotiations with Norris and The Appian Group, not some newly revealed impropriety of Walker's financial dealings with Norris.
Baron's first deposition testimony (given before Cox was deposed) shows no recollection of the alleged August 23 admission. When asked what happened between July 25, when the Operating Agreement was signed, and August 24, when Walker was removed, Baron testified that the problem with Walker was "the same as before. Mr. Walker failed to live up to his arrangements with the LLC in providing professional capabilities, and he failed to live up to his responsibilities."
Liedtke's initial deposition testimony, although it reflects a greater concern for Walker's conflict of interest, does not put the spotlight on the alleged August 23 admission. Rather, it reflects his awareness of issues of conflict involving Walker even before July 25. When asked why Walker was removed from REDECO on August 24, Liedtke explained that:
Liedtke discussed Walker's receipt of compensation and/or payment for expenses from Norris, but did not specify whether he focused on what he learned in May or some later date. Although he discussed the conflicts, and indicated that after July 25 "there appeared to be further evidence" that Walker's conduct was not in REDECO's best interests, Liedtke did not mention a conversation between Cox and Walker immediately following Cox's recognition that Norris would not provide financing. Asked to be specific in his explanation of why Walker was removed, Liedtke simply stated that "it was a cumulative process that had I been consulted [in late May], I would not have been in favor of his being re-involved with the membership."
At trial, Baron explained that at the August 23 meeting with Appian, "[t]here was a failure in financing. No financing was coming forward. In other words, Mr. Walker did not deliver."
Liedtke testified at trial (more consistently with his deposition) that he agreed with the decision to remove Walker, specifically because he had "growing concerns about Mr. Walker as time had gone on. He didn't seem to have much of a business perspective and I was concerned as to the way he conducted himself. And it was — this kind of proved the point to me that that was going to be consistently the manner in which he might act and so therefore I agreed."
H. The Escrowed Stock of a Canadian Corporation Represents the Three Bills' REDECO Interest
REDECO eventually obtained financing from Costilla Corp., a company with which Liedtke's brother was affiliated. Although Walker argues that the terms upon which Costilla made its investment in REDECO were worse than those offered by Appian on August 23, he made no further showing that the deal was less than arm's-length, and I see no reason to question the bona fides of that transaction.
A series of financing transactions eventually led to the exchange of the three Bills' REDECO holdings (via interests in other companies) into shares of a Canadian corporation holding a 12.5% interest in any future profits that might be earned by REDECO from the Moldovan concession after various other investors receive their return. Specifically, REDECO Energy, Inc., a publicly traded corporation listed on the Alberta stock exchange, holds the 12.5% future profits interest. The three Bills' only remaining connection with REDECO is through shares in REDECO Energy, which, pursuant to Canadian law, are held in an escrow account and will remain in escrow until the company meets certain performance benchmarks. To date, the company has failed to meet any of those benchmarks.
Liedtke testified that before the three Bills' finally exchanged their memberships
III. THE PARTIES' CONTENTIONS
Walker contends that the three Bills had no right or power to deprive him of his 18% membership interest in REDECO. He also argues that he had no side deal with Norris and never said otherwise to Cox. Thus, he claims, there is no basis on which to argue that the Operating Agreement was the product of fraud or misrepresentation.
Walker's remedy analysis is less complete. Despite a full and fair opportunity to do so, he made no effort at trial to prove the fair value of his 18% interest in REDECO. Thus, there is no basis in the record on which to consider an award of money damages. He also made no effort to challenge the bona fides of any of the transactions that have taken place since 1995 and that have substantially altered REDECO's financial structure and the three Bills' interest in it. This failure of proof was not due to a lack of opportunity to engage in relevant pretrial discovery. Indeed, on at least one occasion, I ordered the defendants to provide additional information and deposition testimony on the subject of those transactions. For this reason, I will neither disregard those transactions nor consider restoring Walker's ownership interest in REDECO itself.
These failures of proof do not leave Walker without a remedy. The trial testimony did prove that the stock interests now held by the three Bills in REDECO Energy represent 100% of the original membership interest in REDECO. Thus, while it is not possible to "unscramble the eggs" due to the multiple intervening transactions with third parties, it is still possible to trace Walker's 18% interest in REDECO to the shares now owned by the three Bills in REDECO Energy. This provides a framework on which to consider an award in equity — such as the imposition of a constructive trust on a portion of those shares.
As for defendants, they claim, first, that immediately upon learning of Walker's compensation arrangements with Norris, they removed him from REDECO for that reason. Their justification for this form of self-help is discussed below. Defendants' second theory is that because of Walker's failure to honor his required capital contributions, they were entitled under the Operating Agreement to reduce his ownership interest to zero. Finally, defendants claim that because of Walker's material omissions, relating to his arrangements with Norris, the Operating Agreement was voidable and the August 24, 1995 removal letter constituted a rescission of that contract.
IV. ANALYSIS
Defendants focus on Walker's alleged admission that he stood to be paid by Norris when the deal with Appian closed. They say that this admission caused them to remove him from the company. I conclude, however, that the failure of negotiations with Norris — not any "admission" by Walker — was the actual cause of Walker's removal. The fact is that the three Bills willingly overlooked a multitude of issues relating to Walker's participation in the deal as long as they thought The Appian Group would provide financing. It is only because that prospect vanished and Walker's relationship to Norris no longer mattered that Cox and the others decided to throw him out.
A. Walker Was Removed Because He Failed to Obtain Financing
Cox and Baron brought Walker into REDECO for the sole purpose of raising money. They learned early on that Walker could provide no benefits to REDECO beyond his name and his very valuable family-related connections. They knew, in considerable detail, of Walker's personal problems and close relationship with Norris long before they signed the July 25, 1995 Operating Agreement.
Defendants make the inexplicable assertion that "at the time they signed the Operating Agreement, the three Bills did not know, and had no reason to know, that Walker was indebted to Norris personally and that Norris had promised Walker a success fee upon closing of any financing deal with REDECO."
So long as a deal with Norris was likely, which Cox believed was the case until August 23, 1995, the three Bills were willing to look beyond Walker's weaknesses and problems. Ironically, the testimony is that they executed the Operating Agreement confirming his membership interest, in part, to ensure that the LLC would be recognized as a legal entity in order to shield them from liability for Walker's conduct. In this way, Walker could provide the benefit of introducing REDECO to a financing source without exposing his "partners" to personal liability for his misconduct.
Cox went to the August 23 meeting thinking he had "a closing that was imminent" with the Appian Group.
B. The August 24, 1995 Removal Letter Did Not Remove Walker From His Membership In REDECO
The three Bills had no authority to unilaterally remove Walker from the LLC on August 24, 1995. Neither the Operating Agreement nor the law provides any mechanism for removal of a member in these circumstances.
1. The Operating Agreement Does Not Provide For Removal
Delaware's Limited Liability Company Act is codified at 6 Del. C. Ch. 18. "The basic approach of the Delaware Act is to provide members with broad discretion in drafting the [Operating] Agreement and to furnish default provisions when the members' agreement is silent."
As Chief Justice Veasey said Elf Atochem, "[T]he following observation relating to limited partnerships applies as well to limited liability companies:
Thus, LLC members' rights begin with and typically end with the Operating Agreement. The Operating Agreement includes no provision that can be read to allow the three Bills to deprive Walker of his ownership interest in the circumstances presented in this case. Article X deals with removal of the Manager but makes clear that "removal shall be without prejudice to the [Manager's] contract rights," implicitly including his ownership rights. Article XXII, does address the voluntary and involuntary withdrawal from membership but identifies no instance even arguably applicable in this case. The absence of such a provision is surprising, considering what the three Bills knew about Walker at the time they entered into this agreement.
Thus, the three Bills could easily have protected themselves in the Operating
2. There is No Basis in the Law for Unilateral Removal of an LLC Member
Defendants make the troubling argument that, although there is no basis for doing so in the Operating Agreement, under applicable law the three Bills had the inherent power to remove Walker from the entity, taking away his ownership interests therein, due to his alleged breach of fiduciary duty. In their post-trial brief, defendants identified virtually no legal support for this proposition. After I noted the lack of legal authority at oral argument, defendants directed my attention to Lloyd v. Horn, Inc., an opinion of the United States Court of Appeals for the Tenth Circuit.
Lloyd is plainly distinguishable from the present case and does not, in any case, support defendants' legal argument. In that case, Lloyd, who had acted as managing partner of the business for several years, announced soon after the partnership converted to a limited liability company that he would terminate his employment with the business (by declining to accept the position of Managing Member) but keep his ownership interest in the new entity. The other members then purported to remove him from the LLC and eliminate his ownership interest.
The prior partnership agreement in that case "expressly limited the amount Lloyd, as Managing Partner, could realize from his partnership interest should he withdraw or be fired from the partnership. Under the terms of the partnership agreement, if Lloyd withdrew or was fired as Managing Partner, his partnership interest would be valued at the amount of his capital account plus all undistributed earnings through the effective date of withdrawal or termination." The LLC operating agreement incorporated virtually the same restriction on the value of the Managing Member's interests, but failed to require that Lloyd take that position. Thus, a conflict arose when Lloyd refused to take the position from the outset and claimed a standard member's ownership interest.
The district court rescinded the LLC agreement, on the basis of unilateral mistake and constructive fraud, and determined that the parties' rights were still controlled by the prior partnership agreement, i.e., Lloyd's interest was based on his capital contributions. The court of appeals affirmed the district court's order for equitable rescission and its decision that the parties' rights rested on the prior partnership agreement. Neither court recognized any inherent right on the part of the other members to "fire" Lloyd from the entity or take away his ownership interest.
Defendants also claim that "both the Delaware statutes and authority from other jurisdictions provide that a Chancery Court should uphold the removal of a member or partner when the equities so dictate."
C. Walker's Interest in REDECO Was Never Diluted to Zero
Defendants also argue that even if Walker's alleged failure to disclose his conflict of interest did not warrant his removal, his failure to make capital contributions did. Defendants point out that under Article XII(c) of the Operating Agreement, each member was required to contribute to the company's costs and expenses. Defendants then assert that under Article XIX, a member has an absolute obligation "to perform an enforceable promise" to make contributions. Under Article XX, failure to honor such an "enforceable promise" entitles to entity "to reduce the defaulting member's ownership in a proportion that the amount of the default bears to the total contribution of the member." Hence, defendants argue that Walker's total capital contribution of $700 was far outweighed by the contributions that he refused to make and the "cost, time and disruption that he caused."
Defendants' problem is two-fold. First, the term "enforceable promise" is undefined. I assume it does not mean that anytime Cox made a call for contributions, all of the members were required to pay immediately. Defendants failed to show that Walker ignored an enforceable promise by not making the capital contributions, principally because they provided little or no evidence of how the three Bills made their own contributions. Baron testified that at least part of his own contribution consisted of expenses for which he sought no reimbursement, and conceded that he did not keep receipts of those expenses. Although Cox (and, perhaps, Liedtke) contributed his own funds to REDECO before August 24, 1995, defendants have not explained when the other members made an "enforceable promise" to contribute a particular amount of money by a particular date.
Defendants' second problem is more important. The August 24, 1995 Removal Letter never mentions Walker's failure to honor any such promise as a basis for his removal. Rather, his alleged "breach of trust" is the basis for the removal. The letter simply adds insult to injury by, after announcing Walker's removal, asserting that his financial obligations remain outstanding and demanding payment of his share of the firm's total debt, or $4,179.43. For these reasons, even if defendants could reduce Walker's interest on account of his owing money to the company, they did not purport to do so and will not now
D. The August 24, 1995 Removal Letter Could Not Act as Rescission of the Operating Agreement
Defendants' final position, contained in their supplemental post-trial brief, is that Walker fraudulently induced the three Bills to enter into the July 25, 1995 Operating Agreement. According to defendants, this fraud either permitted the three Bills to remove Walker and otherwise continue the enterprise or bars any recovery by him.
The elements of a fraud claim are: (1) a false representation, typically of fact; (2) knowledge of the falsity of the statement or reckless indifference thereto; (3) intent to induce the victim to act or refrain from acting; (4) justifiable reliance on the representation; (5) damages.
Defendants' misrepresentation claim rests on an alleged omission. Although parties are generally entitled to maintain silence when negotiating a contract, a failure to voluntarily disclose information in certain instances amounts to misrepresentation.
It is arguable that after they removed him in May, Walker owed no duties whatever to the three Bills or to REDECO. At that juncture, he owned 18% of the company's equity, but had no employment with the entity and had no opportunity to act for it in a representative capacity. Defendants have convinced me, however, that Walker's reinstatement and subsequent involvement in the business of REDECO, albeit quite limited in scope, involved a relationship of trust and confidence. Thus, I agree that Walker's failure to disclose a material fact, such as a material conflict of interest, if relied on by the three Bills, could amount to a misrepresentation of fact.
Nevertheless, the misrepresentation claim fails for several reasons. First, defendants have not met their burden of proof as to Walker's alleged admission about an improper fee arrangement with Norris. Although Cox testified to Walker's alleged admission, there is little contemporaneous evidence to show that it occurred as he now remembers. Neither Baron nor Liedtke remembered much about it. Walker denies both that he said what Cox says he remembers hearing or that there was, in fact, an undisclosed fee arrangement with Norris. Norris denies such an arrangement. Importantly, the August 24 letter Cox prepared giving Walker the reasons for terminating his connection with REDECO does not refer to the alleged admission that defendants now argue was the critical factor supporting their actions.
The second related problem with the misrepresentation claim is the absence of reliance. The three Bills knew, as far back as May, that Walker had a close relationship with Norris, including a substantial
Based on my assessment of the testimony and other evidence of record, I conclude that the only reason that Walker received 18% of the entity was because Norris wanted it that way and the three Bills thought that funding from Appian was a sure thing. They were wrong and did not protect themselves for the possibility of being wrong. Thus, I conclude that their assent to the Operating Agreement was not made in reliance on any understanding that Walker was independent of Norris.
E. Walker's Remedy
Defendants raise in their supplemental post-trial brief, for the first time, the claim that the LLC statute protects the three Bills from personal liability for their effort to appropriate Walker's REDECO interests. In that regard, defendants cite to § 18-1101 of the LLC act, which provides that "[t]o the extent that... a member or manager or other person has duties ... and liabilities relating thereto to a limited liability company or to another member or manager ... [that person] shall not be liable ... [for that person's] good faith reliance on the provisions of the limited liability company agreement."
Even if the three Bills believed that they were entitled to take away Walker's membership interest, they have failed to adduce any proof that they formed such a belief in reasonable reliance on any provision of the Operating Agreement. Indeed, no provision of that agreement could support such a belief.
I also have no doubt that the cited statute is not intended to bar Walker from recovering his property from those who purported to take it from him. First, all I conclude here is that the August 24, 1995 letter did not have the effect of depriving Walker of his interest in REDECO. Thus, when they later dealt with REDECO as if they owned 100% of its membership interest, the three Bills were each dealing with Walker's property in proportion to their relative ownership interests in REDECO. Thus, in concluding (as I do, infra) that they hold a portion of the property they have subsequently received in exchange for 100% of the equity interest in REDECO subject to a constructive trust in favor of Walker, I am not ordering them to relinquish anything that they ever owned.
Further, I must view the cited provision allowing members of an LLC to rely in good faith on the terms of the operating agreement in the context in which it appears in the statute, and with regard to the general tenor of the statute as a whole.
As previously discussed, there is no proof before me of the value of Walker' 18% interest at any time. Thus, there is
Of course, the terms of such a trust must reflect the reality that in the period of time since Walker was purportedly expelled, the three Bills have had to meet substantial capital calls to maintain their (and Walker's) economic position. Had they not done so, Liedtke testified, they would have been "drilled out or squeezed out" of the deal. The evidence shows that the three Bills contributed $139,000 "net of everything" since August 24, 1995. Had Walker been allowed to retain his 18% share in REDECO, he would have had to pay his share of REDECO's accrued debt, both the $4,179.43 he owed prior to August 24, 1995, plus an additional $25,020.00, representing 18% of the $139,000 expended by the three Bills after that date, for a total of $29,199.43 plus interest. If he is to recover his proportionate share of the REDECO Energy stock, he will be required to pay that amount in exchange therefor.
V. CONCLUSION
For the reasons and to the extent set forth herein, I will enter judgment in favor of plaintiff and against the defendants. Counsel are instructed to confer and present an order in accordance with this Opinion within thirty (30) days of this date.
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