AGENCY, PARTNERSHIP, AND THE LLC: THE LAW OF UNINCORPORATED BUSINESS ENTERPRISES LexisNexis Law School Publishing Advisory Board Paul Caron Charles Hartsock Professor of Law University of Cincinnati College of Law Olympia Duhart Professor of Law and Director of Lawyering Skills & Values Program Nova Southeastern University, Shepard Broad Law School Samuel Estreicher Dwight D. Opperman Professor of Law Director, Center for Labor and Employment Law NYU School of Law Steven I. Friedland Professor of Law and Senior Scholar Elon University School of Law Joan Heminway College of Law Distinguished Professor of Law University of Tennessee College of Law Edward Imwinkelried Edward L. Barrett, Jr. Professor of Law UC Davis School of Law Paul Marcus Haynes Professor of Law William and Mary Law School John Sprankling Distinguished Professor of Law McGeorge School of Law Melissa Weresh Director of Legal Writing and Professor of Law Drake University Law School AGENCY, PARTNERSHIP, AND THE LLC: THE LAW OF UNINCORPORATED BUSINESS ENTERPRISES CASES, MATERIALS, PROBLEMS EIGHTH EDITION (Unabridged and Abridged Editions) 2013 SUPPLEMENT J. DENNIS HYNES Nicholas A. Rosenbaum Professor of Law University of Colorado MARK J. LOEWENSTEIN Monfort Professor of Law University of Colorado This publication is designed to provide authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. 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Editorial Offices 121 Chanlon Rd., New Providence, NJ 07974 (908) 464-6800 201 Mission St., San Francisco, CA 94105-1831 (415) 908-3200 www.lexisnexis.com (Pub. 3003) Unabridged: p. 18 insert before section A: Abridged: No change DEMMING v. UNDERWOOD Court of Appeals of Indiana 943 N.E.2d 878 (2011) MATHIAS, Judge. Sheree Demming (“Demming”) appeals from the Monroe Circuit Court's entry of summary judgment in favor of Cheryl Underwood (“Underwood”) and Kenneth Kinney (“Kinney”) (collectively, “the Defendants”) on Demming's claims for breach of fiduciary duty and constructive fraud, as well as Demming's request for the imposition of a constructive trust. We reverse and remand for proceedings consistent with this opinion. Facts and Procedural History The facts most favorable to the non-moving party establish that Demming is a real estate investor in the business of acquiring properties in the Bloomington, Indiana area for remodeling, renovation, leasing, and sale. Demming, who has never held a realtor's license, engaged Underwood's professional services as a realtor to buy and sell properties on multiple occasions between July 2002 and April 2007. During this time, Demming routinely discussed her real estate investment strategy with Underwood, including her plans to acquire multiple properties within a “target zone” near the Indiana University campus. In 2002, Demming became particularly interested in purchasing two properties located within her target zone at 424 and 426 East Sixth Street (“the Properties”). The Properties were owned by Marion and Frances Morris (“the Morrises”), who lived out of state. Realtor Julie Costley (“Costley”) managed the Properties, which were not listed for sale. After discussing Demming's interest in acquiring the Properties, Demming and Underwood agreed that the best strategy would be for Underwood to approach Costley with an offer on behalf of Demming, because as a realtor, Costley would be obligated to relay an offer presented by another realtor to the Morrises. Underwood first presented an offer to Costley on Demming's behalf in the fall of 2002. After the offer was declined, Demming and Underwood “strategized” together on how Demming could acquire the Properties, and Underwood offered to contact Costley every few months to inquire about the Properties' availability. Over the next few years, up until early 2007, Underwood contacted Costley on Demming's behalf regarding the Properties “every four of five months.” Id. Additionally, in May, August, and October 2006, Underwood contacted Costley to inquire into the availability of the Properties after Demming specifically instructed her to do so. While Underwood was not compensated for these services, “it was discussed and understood that ... Underwood would be paid a real estate commission, at closing, in the customary amount of seven percent (7%) of the sales price.” However, unbeknownst to Demming, Underwood became interested in purchasing the Properties for herself after she acquired a neighboring property in May 2006. In February 2007, Demming again instructed Underwood to call Costley and inquire into the availability of the Properties for purchase. Underwood responded, “Sheree, she's just not going to sell.” Demming nevertheless insisted that Underwood contact Costley, and said that if Underwood refused, she would contact Costley herself. Underwood then agreed to call Costley, and when she did so, she asked Costley to contact Mrs. Morris, whose husband had recently passed away, to find out if she would be interested in selling. Costley responded that she would contact Mrs. Morris, but she expressed doubt as to whether Mrs. Morris would be willing to sell. The next day, Underwood told Demming that the Properties were not for sale. Demming instructed Underwood to “stay on it” because she believed that Mrs. Morris would be willing to sell in the near future. A few days later, Costley contacted Mrs. Morris, who instructed her to request that anyone interested in purchasing the Properties tender a written offer. When Costley informed Underwood that Mrs. Morris was willing to entertain an offer, Underwood did not relay this information to Demming. Instead, on March 9, 2007, Underwood and Kinney, acting as partners, tendered their own written offer to purchase the Properties. A counteroffer was tendered and accepted, pursuant to which Underwood and Kinney agreed to purchase the Properties for $650,000. Underwood and Kinney closed on the transaction on March 30, 2007. On April 14, 2007, Demming contacted Underwood after noticing one of Underwood's “For Rent” signs in front of the Properties. Underwood and Demming met the next day, and Underwood informed Demming that she and Kinney had purchased the Properties. On April 19, 2007, Demming filed suit against Underwood asserting claims for breach of fiduciary duty and constructive fraud....[T]he trial court issued its order granting summary judgment in favor of Underwood and Kinney on all claims. In so doing, the trial court entered 4 specific findings and conclusions, in which it concluded that there were no genuine issues of material fact and that no agency relationship existed between Demming and Underwood as a matter of law. This appeal ensued. Additional facts will be provided as necessary. Common Law Agency Demming first argues that the trial court erred in granting summary judgment in favor of the Defendants on her breach of fiduciary duty claim because a genuine issue of material fact exists as to whether Underwood owed Demming a fiduciary duty under the common law of agency. “‘Agency is a relationship resulting from the manifestation of consent by one party to another that the latter will act as an agent for the former.’ ” To establish an actual agency relationship, three elements must be shown: (1) manifestation of consent by the principal, (2) acceptance of authority by the agent, and (3) control exerted by the principal over the agent. These elements may be proven by circumstantial evidence, and there is no requirement that the agent's authority to act be in writing. Whether an agency relationship exists is generally a question of fact, but if the evidence is undisputed, summary judgment may be appropriate. Here, the trial court concluded that no common law agency relationship existed between Demming and Underwood as a matter of law, in part because Underwood never agreed to act as Demming's agent.1 Similarly, the Defendants claim that no agency relationship was established because Underwood simply “made a few telephone inquiries” regarding the Properties “as an act of customer service and not as an acceptance of any agency.” 2 Demming, however, argues that the evidence establishing that Underwood made multiple inquiries into the availability of the Properties on her behalf over a period of more than four years supports an inference that Underwood agreed to act as her agent and creates a genuine issue of material fact precluding entry of summary judgment. We agree. After first becoming interested in purchasing the Properties in 2002, Demming asked Underwood to approach Costley with an offer to purchase, and Underwood complied. After that offer was rejected, Demming and Underwood devised a plan for Demming to acquire the Properties. In accordance with this plan, Underwood approached Costley every few months to 1 The trial court made no findings regarding whether Demming manifested her consent for Underwood to act as her agent, and neither party addresses this issue on appeal. We therefore limit our analysis to the second and third elements necessary to establish an actual agency relationship. 2 The trial court made no findings regarding whether Demming manifested her consent for Underwood to act as her agent, and neither party addresses this issue on appeal. We therefore limit our analysis to the second and third elements necessary to establish an actual agency relationship. 5 inquire into the Properties' availability for purchase. In May, August, and October 2006, and again in February 2007, Underwood contacted Costley to inquire into the availability of the Properties after Demming specifically instructed her to do so. This evidence, when taken together, supports an inference that Underwood agreed to act as Demming's agent for the purpose of acquiring the Properties. The trial court also concluded that no agency relationship was established between Demming and Underwood because Demming did not exert sufficient control over Underwood regarding “the method or terms on which inquiries were made regarding [the Properties].” The trial court found that [n]o discussion, authority, or direction was had or given between Demming and Underwood regarding purchasing authority, purchase price or other terms, or authority to negotiate, regarding the [Properties]. The Defendants agree, relying on a case from the Indiana Tax Court for the proposition that “[t]he principal's control cannot simply consist of the right to dictate the accomplishment of a desired result.” Thus, according to the Defendants, no agency relationship could have been established because Demming did not specify the precise manner in which Underwood was to make inquiries regarding the Properties. To satisfy the control element, “[i]t is necessary that the agent be subject to the control of the principal with respect to the details of the work.” However, the principal need not exercise complete control over every aspect of the agent's activities within the scope of the agency. Thus, in this case, we do not believe it was necessary for Demming to specify the precise method by which Underwood was to contact Costley; rather, it was enough that Demming instructed Underwood to make contact with Costley. But in any event, contrary to the Defendants' assertions, the evidence most favorable to the non-moving party establishes that Demming specified that Underwood should contact Costley by phone, and Underwood complied. Moreover, Demming did more than just dictate the desired result of the agency, i.e. Demming's purchase of the Properties. She also dictated the strategy by which Underwood was to accomplish this result, namely, by continually contacting Costley, who would in turn contact the owners. While it is true that Demming did not give Underwood the authority to negotiate the purchase of the Properties without further consultation, this fact does not establish a lack of 6 control on Demming's part. Indeed, when this evidence is properly construed in favor of Demming in accordance with our standard of review, it gives rise to the inverse inference that Demming had the right to exercise extensive control over the details of Underwood's performance, including when and how to make an offer to purchase. We therefore conclude that the designated evidentiary materials create a genuine issue of material fact regarding whether Demming exercised sufficient control over Underwood's activities to support the existence of an agency relationship. …. For all of these reasons, the trial court erred when it entered summary judgment in favor of the Defendants. We therefore reverse and remand for proceedings consistent with this opinion. FRIEDLANDER, J., and MAY, J., concur. Unabridged: p. 98 number the existing note as note 1 and insert the following as note 2: Abridged: p. 45 insert before Sec. B 2. Contract law recognizes that the implied covenant of good faith and fair dealing is a part of every contract. This fundamental principle of contract law plays an important role in shaping the contractual relationship of agents and principals; partners; and members and managers of limited liability companies. It allows a court to imply a term that, presumably, the parties would have agreed to had the matter been brought to their attention. It serves to preserve the expectations of the parties and is based on the express provisions to which the parties consented. Thus, if the parties addressed a concern, there is no room for a court to imply a term. Not surprisingly, parties disappointed with the behavior of their counter-parties frequently argue that such behavior violates the implied covenant. In Nemec v. Shrader, 991 A.2d 1120 (Del. 2010), for instance, retired corporate officers complained when their former employer redeemed their corporate stock prior to a corporate reorganization with the effect that they received far less than they would have had the redemption taken place after the reorganization. The court refused to find a violation of the implied covenant: The implied covenant of good faith and fair dealing involves a “cautious enterprise,” inferring contractual terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated. “[O]ne generally cannot base a claim for breach of the implied covenant on conduct authorized by the agreement.” We will only imply contract terms when the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected. When conducting this analysis, we must assess the 7 parties' reasonable expectations at the time of contracting and not rewrite the contract to appease a party who later wishes to rewrite a contract he now believes to have been a bad deal. Parties have a right to enter into good and bad contracts, the law enforces both. The plaintiffs lacked “a reasonable expectation of participating in the benefits” of the [reorganization]…. The implied covenant only applies to developments that could not be anticipated, not developments that the parties simply failed to consider-particularly where the contract authorizes the Company to act exactly as it did here. The Chancellor found no cognizable claim for a breach of the implied covenant because the Stock Plan explicitly authorized the redemption's price and timing, and [the parties] received exactly what they bargained for under the Stock Plan. The Chancellor wrote “[c]ontractually negotiated put and call rights are intended by both parties to be exercised at the time that is most advantageous to the party invoking the option.” … The Company's redemption of the retired stockholders' shares now produces the retirees' accusation that the Company breached the covenant of fair dealing and good faith implied in the stock plan. The directors did nothing unfair and breached no fiduciary duty by causing the Company to exercise its absolute contractual right to redeem the retired stockholders' shares at a time that was most advantageous to the Company's working stockholders. … Delaware's implied duty of good faith and fair dealing is not an equitable remedy for rebalancing economic interests after events that could have been anticipated, but were not, that later adversely affected one party to a contract. Rather the covenant is a limited and extraordinary legal remedy. As the Chancellor noted in his opinion, the doctrine “‘requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain.’ ” These plaintiff-appellants got the benefit of their actual bargain, and now urge us to expand the doctrine of the implied duty of good faith and fair dealing. A party does not act in bad faith by relying on contract provisions for which that party bargained where doing so simply limits advantages to another party. We cannot reform a contract because enforcement of the contract as written would raise “moral questions.” The policy underpinning the implied duty of good faith and fair dealing does not extend to post contractual rebalancing of the economic benefits flowing to the contracting parties. Accordingly, we affirm the Chancellor's dismissal of Count I. 8 Unabridged: p. 107 insert before Olsen v. Vail Associates Abridged: No change ESTATE OF ELLER v. BARTRON Delaware Supreme Court 31 A.3d 895 (Del. 2011) Before STEELE, Chief Justice, BERGER and RIDGELY, Justices. STEELE, Chief Justice: A real estate agent served as the seller's agent for two sales of the same house. The initial purchaser submitted a bid for the house and, the same day, hired the initial seller's agent to serve as seller's agent for the second sale. A few days later, the agent convinced the initial seller to accept the initial purchaser's bid without disclosing his conflict of interest or the purchaser's interest in flipping the house. After one day of trial concerning the initial seller's complaint against the agent alleging, inter alia, a breach of fiduciary duties, the trial judge granted the defendant's motion for a directed verdict. Because the plaintiff raised issues of material fact concerning whether the defendant breached his fiduciary duties to the seller, we remand the case for a new trial. FACTUAL AND PROCEDURAL BACKGROUND Loretta Eller decided to sell her mother's house after her mother entered a nursing home. Acting on her mother's behalf, Eller entered into a listing agreement with Wayne Bartron, a real estate agent, on July 22, 1998. The contract awarded Bartron the exclusive right to list the house for one year, specified a sale price of $152,000, and set the commission at seven percent. The contract also included a waiver of Eller's right to object to dual agency, meaning that Eller relinquished her common law right to object to Bartron representing both her and a buyer in the sale of the house. As a result, Bartron could earn the full seven percent, rather than splitting it with a buyer's agent, if he solely found a buyer. Several months passed uneventfully, then a flurry of activity occurred during January, 1999. On January 20, 1999, Bartron showed the house to Brian Pierce, a person Bartron knew to be a real estate investor. Pierce was part owner of Pierce/O'Neill Ltd., a firm that purchases real estate at distressed prices in the hope of quickly reselling it for a profit. Two days later, Pierce/O'Neill made a $96,000 offer, in writing. Bartron read his notes from that day into evidence: 9 O'Neill/Pierce made an offer with stipulation they can access prior to settlement for repairs and showings. Loretta agreed with the condition that she/I be there for all entry.... O'Neill/Pierce signed contract with a promise to list with me for a reduced commission to solve problems with entry prior to. After a brief delay, Eller signed the contract on January 28. She testified that she only decided to accept the offer after a conversation Bartron initiated, at her house, after work hours. As Bartron's notes indicate, the same day Pierce/O'Neill made an offer to Eller, Pierce/O'Neill engaged Bartron to serve as Pierce/O'Neill's agent for reselling the property. Bartron arranged for Wayne Knierim, a potential buyer who knew Pierce socially, to tour the property. Knierim entered into a contract on January 27 to purchase the house from Pierce/O'Neill, for $130,000. Section 11 of that contract stated that Pierce/O'Neill sold the property “as is.” But Knierim testified that he entered into a handshake agreement with Pierce, obligating Pierce/O'Neill to both foot the bill for some repairs to the house and also provide raw materials for Knierim to use to accomplish other improvements. Knierim testified that he would not have paid the $130,000 if Pierce/O'Neill had not agreed to this other help. On March 30, 1999, the settlements for both sales occurred in the same law firm. The first sale consummated that day transferred the house from Eller's mother to Pierce/O'Neill; the next sale transferred it from Pierce/O'Neill to Wayne Knierim. Months later, a realtor who happened to notice that Eller's mother's house was sold twice on the same day mentioned that oddity to Eller. After learning of the second sale, Eller filed a suit against Bartron that alleged a number of claims, including a breach of fiduciary duty. At trial, Eller testified that Bartron never told her that he had agreed to sell the house on behalf of Pierce/O'Neill. Nor, she testified, did Bartron inform her about the second sale. Eller testified that she only learned the house was sold a second time on the same day because a realtor thought it was odd, and so mentioned the second sale to Eller when the two happened to speak some months later. Other factual disputes arose at trial. First, Eller contended that Bartron knew about the January 27 contract on January 28, when he convinced Eller to sign the offer. Eller could offer no specific evidence supporting this contention, instead she relied on the nature of the relationship between Bartron and Pierce/O'Neill to support a finding that Bartron knew of the contract. Despite the circumstances underlying the Bartron and Pierce/O'Neill relationship, the trial judge found that Eller put forward no particular evidence sufficient to create a dispute about a genuine issue of material fact in the face of Bartron's direct testimony that he did not know about the January 27 contract on January 28. 10 Second, Eller contended that the two transactions cheated her out of the difference between the two sales prices. Bartron introduced evidence suggesting, to the contrary, that the price difference reflected Pierce/O'Neill's willingness to finance some renovations to the house. After a one day trial, the trial judge issued an oral order granting the defendant's motion for a directed verdict. Although Eller's complaint asserted that Bartron breached his fiduciary duty, the trial judge's oral order included no specific findings about that claim. The trial judge concluded that the existence of Bartron's notes “does necessarily indicate that he told her that he was working with [Pierce/O'Neill].” STANDARD OF REVIEW We review a trial judge's decision on a motion for a directed verdict to determine “whether the evidence and all reasonable inferences that can be drawn therefrom, taken in a light most favorable to the nonmoving party, raise an issue of material fact for consideration by the jury.” DISCUSSION To establish liability for the breach of a fiduciary duty, a plaintiff must demonstrate that the defendant owed her a fiduciary duty and that the defendant breached it. Because Bartron acted as Eller's agent, and therefore owed her traditional fiduciary duties, the trial judge should have permitted the jury to determine whether Bartron breached his fiduciary duties, and if so, what damages proximately resulted from the breach. … Delaware courts consider real estate agents to be agents as recognized at common law. The existence of an agency relationship empowers an agent to act on behalf of his principal. When accompanied by trust that the agent will use the principal's confidential information to pursue the principal's ends, that relationship also imposes fiduciary duties on the principal [sicagent?]. To protect the social gains resulting from fiduciary relationships, the courts, in appropriate circumstances, afford a remedy to those parties whose trust has been unlawfully abused, often referred to as the “exclusive benefit” rule, which unless modified by contract “flatly forbid[s]” fiduciaries from gaining personally from the agency relationship. Agents owe their principals a duty to disclose certain information, and a duty to avoid gaining an interest adverse to their principal. It is true, of course, that under elemental principles of agency law, an agent owes his principal a duty of good faith, loyalty and fair dealing. Encompassed within such general duties of an agent 11 is a duty to disclose information that is relevant to the affairs of the agency entrusted to him. There is also a corollary duty of an agent not to put himself in a position antagonistic to his principal concerning the subject matter of his agency. An agent who acquires a position adverse to the principal, but fails to disclose it, simultaneously breaches the duties of loyalty and care. The evidence developed after one day at trial created genuine, disputed issues of material fact about whether Bartron breached his fiduciary duties. First, the evidence at trial created an issue about whether Bartron informed Eller that Pierce/O'Neill's bid for her property was accompanied with a promise that Pierce/O'Neill would use Bartron as its listing agent to sell the property. An agent cannot accept another agency that creates tension with an earlier agency unless he first informs the principal and receives the principal's consent. If an agent “acts for more than one principal in a transaction,” he must “disclose to each principal ... all other facts that the agent knows, has reason to know, or should know would reasonably affect the principal's judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them.” This requirement ensures that the principal will have “a focused opportunity to assess risks” once the agent identifies potentially problematic circumstances. Bartron's failure to explain his dual agency role to Eller prevented her from having an opportunity to assess her risks. Bartron's agreement to act as the seller for Pierce/O'Neill's second transaction affected the weight Eller should assign to his views, so Bartron had a duty to refuse to act for Pierce/O'Neill until he informed Eller of his opportunity to benefit and secured Eller's consent. When Eller consented to dual agency, she consented only to Bartron representing her and the buyer in a single transaction. She would have reasonably expected Bartron to sell the house at a price approximating fair market value. She reasonably could have objected to Bartron, as her agent, representing the buyer's resale so quickly as detrimental to her receiving the highest available price in the initial sale. The agent's loyalty to both parties, coupled with the fact that the second sale enhances the returns from the agent's commissions, suggests that Eller would be worried about her price reflecting real market value. But if the real estate agent agrees to sell that same property a second time on behalf of the prospective buyer, the agent faces a set of incentives that can destroy the agent's incentives to get the best deal for the initial seller. An agent who stands to earn a second commission on the same property, immediately, has reason to make sure that the prospective buyer secures the property. The commission that he would stand to earn from a second sale could typically more than compensate him for a lower commission in the first transaction. Eller should have had a focused opportunity to assess whether she would permit an agent with those arguably competing interests to act on her behalf. 12 Eller's contractual consent to Bartron representing her and a buyer's interest in a single sale does not remove Bartron's duty to fully disclose his January 22 agreement to serve as Pierce/O'Neill's agent to resell the house. A real estate agent who accepts a dual agency represents both the seller and the agent in a single transaction. On January 28, when Bartron convinced Eller to accept Pierce/O'Neill's offer even though it was significantly beneath the price she expected, Eller did not know she was dealing with a conflicted advisor. Eller thought Bartron expected to receive a commission as the seller's agent and one as the buyer's agent. She did not know he also expected to receive another commission—as the seller's agent for an immediate resale of the same property. Therefore, Eller did not consent to a situation where she might reasonably expect Bartron to recommend she sell the property for less than his estimate of its market value. Second, Bartron should have told Eller that Pierce/O'Neill planned to immediately resell the house. The seller of a house, a person interested in receiving the best possible price for the property, would want to know if the purchaser planned to flip the house. That information would at least suggest that the house could be sold for a higher price. Eller testified that Bartron did not tell her that Pierce/O'Neill planned to attempt to resell Eller's mother's house before her sale to Pierce/O'Neill even closed. Bartron's notebook offers evidence that he told Eller about this plan. But the conflict between Bartron's notebook and Eller's testimony creates a genuinely disputed issue about a material fact. The jury should have resolved the issue of whether Bartron told Eller Pierce/O'Neill planned to flip the property. Factual arguments advanced by Bartron's counsel misconceive the problem with Bartron's behavior. For instance, it does not matter that Eller put forward no particular facts suggesting that Bartron knew O'Neill/Pierce had signed a contract with Knierim when it happened. Had facts suggested that Bartron knew of the January 27 contract while he was persuading Eller to sign the offer on January 28, his violation of the duty of loyalty would have been patently obvious. But even assuming that Bartron did not know of the contract between Knierim and Pierce/O'Neill, Bartron still should have told Eller of his conflict of interest and of Pierce/O'Neill's intent to resell the house. Similarly, the argument that the higher price in the second sale was justified because a handshake deal between Pierce/O'Neill and Knierim explained the price increase misses the point. Financial support given from Pierce/O'Neill to Knierim only demonstrates that Pierce/O'Neill's profits from the two sales might be less than is suggested by the difference between the first and second sale prices. That Pierce/O'Neill might have made a smaller profit than the facts at first suggest does not affect whether Bartron should have told Eller about those two points. In any event, a jury need not credit Knierim's testimony that a handshake deal existed. Since Pierce/O'Neill, an experienced real estate investment firm, bargained for the contractual right to receive payment without improving the property in any way, a reasonable jury could very well consider the 13 contractual language to be a better guide to the content of the deal than the contradictory testimony…. CONCLUSION We reverse the judgment of the Superior Court and remand for a new trial. Unabridged: p. 110 add as second paragraph to the existing Note: Abridged: No change. In Moye White LLP v. Beren, __ P.3d___ (Colo.Ct.App. 2013) a client of a law firm, counterclaiming to the firm’s suit for an unpaid legal fee, asserted that the firm breached its fiduciary duty for failing to disclose that an attorney it had assigned to the client’s case had a history of disciplinary proceedings, mental illness, alcoholism, and related arrests. (The attorney’s disciplinary record was public, although the firm did not call this to the attention of the client.) There was no evidence that these circumstances affected the attorney’s performance in the client’s case. The appellate court, affirming the trial court, concluded that the firm’s failure to disclose this information was not material, “because the evidence presented at trial demonstrated that [the attorney’s] medical and arrest history did not adversely affect the quality of [the firm’s] representation….Even a reasonably prudent person, concerned about the quality of his or her legal representation, would not find such a speculative risk significant in his or her decision to retain a particular law firm.” Is the fact that the attorney’s performance was unaffected relevant? Should it be? Unabridged: p. 129 insert before the problems: Abridged: p. 62 insert before problems: iii. Dealing at arm’s length Restatment (Third) sec. 8.06 allows a principal to waive a fiduciary obligation of its agent, subject to certain conditions. It provides, in relevant part: Conduct by an agent that would otherwise constitute a breach of duty...does not constitute a breach of duty if the principal consents to the conduct, provided that (a) in obtaining the principal's consent, the agent 14 (i) acts in good faith, (ii) discloses all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal's judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them, and (iii) otherwise deals fairly with the principal; and (b) the principal's consent concerns either a specific act or transaction, or acts or transactions of a specified type that could reasonably be expected to occur in the ordinary course of the agency relationship. In the following case, the New York Court of Appeals treated a member of a limited liability company, who was buying out his co-members, as an agent and the sellers as his principal. Assuming that to be the case, would the sellers’ waiver of the buyer’s fiduciary duties pass muster under Sec. 8.06? PAPPAS v. TZOLIS Court of Appeals of New York 982 N.E.2d 576 (2012) PIGOTT, J. Plaintiffs Steve Pappas and Constantine Ifantopoulos along with defendant Steve Tzolis formed and managed a limited liability company (LLC), for the purpose of entering into a long-term lease on a building in Lower Manhattan. Pappas and Tzolis each contributed $50,000 and Ifantopoulos $25,000, in exchange for proportionate shares in the company. Pursuant to a January 2006 Operating Agreement, Tzolis agreed to post and maintain in effect a security deposit of $1,192,500, and was permitted to sublet the property. The Agreement further provided that any of the three members of the LLC could “engage in business ventures and investments of any nature whatsoever, whether or not in competition with the LLC, without obligation of any kind to the LLC or to the other Members.” Numerous business disputes among the parties ensued. In June 2006, Tzolis took sole possession of the property, which was subleased by the LLC to a company he owned, for approximately $20,000 per month in addition to rent payable by the LLC under the lease. According to plaintiffs, they “reluctantly agreed to do this, because they were looking to lease the building and Tzolis was obstructing this from happening.” Pappas, who wanted to sublease the building to 15 others, alleges that Tzolis “not only blocked [his] efforts, he also did not cooperate in listing the Property for sale or lease with any New York real estate brokers.” Moreover, Pappas claims that Tzolis “had not made, and was not diligently preparing to make, the improvements . . . required to be made under the Lease. Tzolis was also refusing to cooperate in [Pappas's] efforts to develop the Property.” Further, Tzolis's company did not pay the rent due. On January 18, 2007, Tzolis bought plaintiffs' membership interests in the LLC for $1,000,000 and $500,000, respectively. At closing, in addition to an Agreement of Assignment and Assumption, the parties executed a Certificate in which plaintiffs represented that, as sellers, they had “performed their own due diligence in connection with [the] assignments . . . engaged [their] own legal counsel, and [were] not relying on any representation by Steve Tzolis [,] or any of his agents or representatives, except as set forth in the assignments & other documents delivered to the undersigned Sellers today,” and that “Steve Tzolis has no fiduciary duty to the undersigned Sellers in connection with [the] assignments.” Tzolis made reciprocal representations as the buyer. In August 2007, the LLC, now owned entirely by Tzolis, assigned the lease to a subsidiary of Extell Development Company for $17,500,000. In 2009, plaintiffs came to believe that Tzolis had surreptitiously negotiated the sale with the development company before he bought their interests in the LLC. Plaintiffs commenced this action against Tzolis in April 2009, claiming that, by failing to disclose the negotiations with Extell, Tzolis breached his fiduciary duty to them. They alleged, in all, 11 causes of action. Tzolis moved to dismiss plaintiffs' complaint. Supreme Court dismissed the complaint in its entirety, citing the Operating Agreement and Certificate. A divided Appellate Division modified Supreme Court's order, allowing four of plaintiffs' claims to proceed—breach of fiduciary duty, conversion, unjust enrichment, and fraud and misrepresentation—while upholding the dismissal of the rest of the complaint (87 AD3d 889 [1st Dept 2011]). The dissenting Justices would have dismissed all the causes of action, relying on our recent decision in Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V. (17 NY3d 269 [2011]). The Appellate Division granted Tzolis leave to appeal, certifying the question whether its order was properly made (2012 NY Slip Op 61541[U] [2012]). We now answer the certified question in the negative, and reverse. In their first cause of action, plaintiffs claim that Tzolis was a fiduciary with respect to them and breached his duty of disclosure. Tzolis counters that plaintiffs' claim fails to state a cause of 16 action because, by executing the Certificate, they expressly released him from all claims based on fiduciary duty. In Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., we held that “[a] sophisticated principal is able to release its fiduciary from claims—at least where . . . the fiduciary relationship is no longer one of unquestioning trust—so long as the principal understands that the fiduciary is acting in its own interest and the release is knowingly entered into” (Centro Empresarial Cempresa S.A., 17 NY3d at 278). Where a principal and fiduciary are sophisticated entities and their relationship is not one of trust, the principal cannot reasonably rely on the fiduciary without making additional inquiry. For instance, in Centro Empresarial Cempresa S.A., plaintiffs—seasoned and counseled parties negotiating the termination of their relationship—knew that defendants had not supplied them with the financial information to which they were entitled, triggering “a heightened degree of diligence” (id. at 279). In this context, “the principal cannot blindly trust the fiduciary's assertions” (id.). The test, in essence, is whether, given the nature of the parties' relationship at the time of the release, the principal is aware of information about the fiduciary that would make reliance on the fiduciary unreasonable. Here, plaintiffs were sophisticated businessmen represented by counsel. Moreover, plaintiffs' own allegations make it clear that at the time of the buyout, the relationship between the parties was not one of trust, and reliance on Tzolis's representations as a fiduciary would not have been reasonable. According to plaintiffs, there had been numerous business disputes, between Tzolis and them, concerning the sublease. Both the complaint and Pappas's affidavit opposing the motion to dismiss portray Tzolis as uncooperative and intransigent in the face of plaintiffs' preferences concerning the sublease. The relationship between plaintiffs and Tzolis had become antagonistic, to the extent that plaintiffs could no longer reasonably regard Tzolis as trustworthy. Therefore, crediting plaintiffs' allegations, the release contained in the Certificate is valid, and plaintiffs cannot prevail on their cause of action alleging breach of fiduciary duty. Practically speaking, it is clear that plaintiffs were in a position to make a reasoned judgment about whether to agree to the sale of their interests to Tzolis. The need to use care to reach an independent assessment of the value of the lease should have been obvious to plaintiffs, given that Tzolis offered to buy their interests for 20 times what they had paid for them just a year earlier. …. Accordingly, the order of the Appellate Division, insofar as appealed from, should be reversed, with costs, plaintiffs' complaint dismissed in its entirety, and the certified question answered in the negative. 17 Chief Judge Lippman and Judges Ciparick, Graffeo, Read and Smith concur. NOTE The duties of members of a limited liability company to the LLC (in which the members are responsible for managing the company, as was the case in Pappas) and the duties of partners to their partnership are based on principal-agent law. As will be discussed more fully below, each partner is an agent of the partnership and each member of a member-managed LLC is an agent of the LLC. The fiduciary duties that partners and LLC members owe include the duties of loyalty and care, although the duty of care is somewhat relaxed. In any case, whether the relationship is that of partners, LLC members or a garden variety principal-agent relationship, there may come a time in which the fiduciary seeks to deal at arm’s length with its principal. The law has struggled with this situation, and the Restatement (Third) sought to clarify the relevant doctrine, at least in the principal-agent relationship. Pappas suggests that in an LLC context, the rigid requirements of the Restatement are not applicable. Unabridged: p. 270 insert before Smith v. Hansen: Abridged: No change TAYLOR v. RAMSAY–GERDING CONSTRUCTION COMPANY Supreme Court of Oregon 196 P.3d 532 (2007) BALMER, J. This breach of warranty action requires us to determine when an agent has apparent authority to bind a principal under Oregon law. Apparent authority arises when actions of a principal cause a third party reasonably to believe that an agent has authority to act for the principal on some particular matter. While constructing a hotel, plaintiffs became concerned about the possibility that their new stucco system might rust, and their contractor organized a meeting with the stucco installer and an agent of the stucco manufacturer, among others. At that meeting, the agent made a number of representations to plaintiffs, including that they had a five-year warranty, which he later confirmed in writing. A jury found that the agent had apparent authority to provide the warranty and that the principal had breached that warranty, and the trial court entered judgment 18 for plaintiffs. The Court of Appeals reversed, holding that the agent did not have apparent authority to bind the principal. For the reasons set out below, we reverse and remand to the Court of Appeals. We state the facts in the light most favorable to plaintiffs, because they prevailed before the jury. In 1998, plaintiffs, H.H. (Todd) Taylor and his wife, C.A. Taylor, began construction of a hotel in Lincoln City. They hired Ramsay–Gerding Construction Company as their general contractor. In turn, Ramsay–Gerding hired a subcontractor to install stucco plaster exterior siding and accompanying accessories. Pursuant to the stucco installer's recommendation, Ramsay– Gerding proposed using a stucco system called “SonoWall,” manufactured by ChemRex, Inc., and plaintiffs approved that proposal. During construction, plaintiff Todd Taylor grew concerned about possible rusting of the galvanized fittings that were included in the stucco system. In September 1998, Ramsay–Gerding halted construction until the problem could be solved and organized a meeting to discuss the situation. Among those present at the meeting were Taylor, a representative of Ramsay–Gerding, and a representative of the stucco installer. Additionally, Ramsay–Gerding's representative, pursuant to communications with the stucco installer, brought Mike McDonald, ChemRex's territory manager for Oregon, to the meeting as a ChemRex “representative.” In response to Taylor's concerns, McDonald asserted that the SonoWall system was “bullet-proof” against rust but noted that a corrosion inhibitor would provide further protection. When Taylor was still unconvinced, McDonald stated, “Mr. Taylor, did you know you're getting a five-year warranty?” By the end of that meeting, Taylor agreed to go forward, with the addition of the corrosion inhibitor. In July 1999, after construction had been completed, but before all construction funds had been disbursed, McDonald sent a letter to the stucco installer on ChemRex letterhead. The letter stated, in part, “This letter is to confirm that [ChemRex] will warrantee the Sonowall stucco system for five years covering the material and labor on this project starting in March of 1999,” and was signed “Mike McDonald, Territory Manager OR.” The stucco installer eventually sent that letter to Ramsay–Gerding, who sent it to plaintiffs, and McDonald stated at trial that he had intended the warranty to extend to plaintiffs. At some point in late 1999, an employee of plaintiffs' company noticed discoloration on the exterior walls of the hotel. By the spring of 2000, the employee had realized that the discoloration was rust and contacted Taylor. In the summer of 2000, Taylor informed Ramsay– 19 Gerding of the problem, and representatives from ChemRex and the stucco installer came to the hotel to examine the stucco system. However, no one ever fixed the problem. In 2001, plaintiffs initiated this action against Ramsay–Gerding for breach of the construction contract. In April 2002, Ramsay–Gerding filed a third-party complaint against ChemRex, alleging, among other things, that ChemRex had breached its warranty of the stucco system. Ramsay–Gerding also sought indemnity and contribution from ChemRex for any damages that plaintiffs might recover from them. In August 2003, plaintiffs amended their complaint to add a claim against ChemRex for breach of express warranty. In 2004, plaintiffs and Ramsay–Gerding moved to bifurcate their breach of express warranty claims against ChemRex from the other claims and defenses in the case. The trial court granted that motion, and, in July 2004, the express warranty claims were tried to a jury. At the close of the evidence, ChemRex moved for a directed verdict, arguing that there was insufficient evidence for the jury to find that McDonald had authority to act for ChemRex in giving the warranty. The trial court determined that the evidence did not support a finding of actual authority but allowed the jury to determine whether McDonald had apparent authority. The jury found for plaintiffs on the breach of warranty claim, which necessarily included a determination that McDonald had apparent authority to provide the warranty. … ChemRex…appealed, arguing, inter alia, that the trial court had erred in denying its motion for a directed verdict on the issue of apparent authority. The Court of Appeals agreed with ChemRex that its motion for a directed verdict should have been granted and remanded for entry of judgment in favor of ChemRex….As to the apparent authority issue, the Court of Appeals applied this court's decision in Badger v. Paulson Investment Co., Inc., 803 P.2d 1178 (1991), reasoning that McDonald's role as selling agent and his title of territory manager were insufficient to establish apparent authority to provide a warranty on ChemRex's behalf. … We begin with a review of some basic principles of agency law. Generally speaking, an agent can bind a principal only when that agent acts with actual or apparent authority. Actual authority may be express or implied. When a principal explicitly authorizes the agent to perform certain acts, the agent has express authority. However, most actual authority is implied: a principal implicitly permits the agent to do those things that are “reasonably necessary” for carrying out the agent's express authority. In contrast, a principal also may be bound by actions taken that are “completely outside” of the agent's actual authority, if the principal allows the agent to appear to have the authority to bind the principal. Such a circumstance is called “apparent authority.” 20 For a principal to be bound by an agent's action, the principal must take some affirmative step, either to grant the agent authority or to create the appearance of authority. An agent's actions, standing alone and without some action by the principal, cannot create authority to bind the principal…. Here, the key issue is whether the principal—ChemRex—took sufficient action to create the appearance of authority on the part of McDonald. Apparent authority requires that the principal engage in some conduct that the principal “ ‘should realize’ ” is likely to cause a third person to believe that the agent has authority to act on the principal's behalf. Although the focus of that inquiry is on the principal's conduct, the third party need not receive information respecting either the nature or the extent of that conduct directly from the principal: “ ‘The information received by the third person may come directly from the principal by letter or word of mouth, from authorized statements of the agent, from documents or other indicia of authority given by the principal to the agent, or from third persons who have heard of the agent's authority through authorized or permitted channels of communication.’ ” Thus, information that has been channeled through other sources can be used to support apparent authority, as long as that information can be traced back to the principal. A principal can create the appearance of authority “by written or spoken words or any other conduct * * *.” For example, when a principal clothes an agent with actual authority to perform certain tasks, the principal might create apparent authority to perform other, related tasks. Additionally, by appointing an agent to a position that carries “ ‘generally recognized duties[,]’ ” a principal can create apparent authority to perform those duties. Similarly, when a distant principal places an agent “in charge of a geographically distinct unit or branch[,]” that may lend weight to a finding of apparent authority, depending on the circumstances. For example, if the principal structures its organization so that the “branch manager”—or territory manager— “makes decisions and directs activity without checking elsewhere in the organization[,]” that may create apparent authority to commit the principal to similar transactions. Id. We turn to the application of those principles to the actions of ChemRex at issue here. Using the standards discussed above, we conclude that there is sufficient evidence in the record to support the jury's finding that McDonald acted with apparent authority when he warranted the stucco system to plaintiffs. The first issue is whether ChemRex took sufficient steps to create the 21 apparent authority to provide a warranty. Significantly, ChemRex gave McDonald actual authority to help in processing warranties and to communicate with customers—about warranties—using ChemRex letterhead. Indeed, McDonald used that authority to confirm, in his July 1999 letter, that plaintiffs had a five-year warranty. Furthermore, ChemRex clothed McDonald with the title of “territory manager” and gave him the actual authority to visit job sites and to solve problems, such as plaintiffs' rust problem, that he found there. McDonald also had the authority to sell an additional product intended to address the very performance at issue here and to answer plaintiffs' questions about the system, which he did in response to plaintiffs' stated concerns. The next issue is whether there was evidence from which the jury could have concluded that those actions by ChemRex reasonably led plaintiffs to believe that McDonald was authorized to provide the warranty. ChemRex argues that McDonald's title could not have led plaintiffs to believe that McDonald was so authorized, because plaintiffs were unaware of that title until after construction was completed. However, Taylor testified that he believed that McDonald “was the person that was in charge of or supervising this area, the coastal area. He was the guy that you had to get your answers from.” He also stated that he knew that McDonald “represented” ChemRex. It is not necessary that plaintiffs knew McDonald's exact title; they knew generally that McDonald was in charge of the geographical area in which their project was located and that he represented ChemRex. In any event, McDonald used his title of territory manager for Oregon when signing the July 1999 letter confirming the five-year warranty. Because, as discussed below, the jury was permitted to find that plaintiffs relied on that letter, it is further evidence that plaintiffs knew of McDonald's position. ChemRex also implies that McDonald's position is irrelevant because ChemRex did not directly inform plaintiffs of that position. But it was not necessary that plaintiffs learn of McDonald's position directly from ChemRex; receiving that information through an intermediary, such as a contractor, would be sufficient. The general contractor knew that McDonald was the territory manager for Oregon, or “[ChemRex] for Oregon, so to speak,” and the stucco installer knew that he was in charge of the “Oregon area.” It was permissible for the jury to infer that plaintiffs learned the information from the general contractor and the stucco installer. Because of McDonald's position and his actual authority to help allay plaintiffs' concerns about rust, it was reasonable for plaintiffs to infer that one of the ways in which McDonald had authority to allay their concerns was by warranting the system for five years. That is particularly 22 true here, because there was evidence in the record that five years was a reasonable length of time for such a warranty. The third issue is whether plaintiffs reasonably relied on McDonald's apparent authority to provide the warranty. ChemRex does not dispute that plaintiffs relied on McDonald's statements and conduct at the September 1998 meeting in moving forward with the construction project. However, ChemRex argues that the evidence was insufficient to show that plaintiffs had relied on the 1999 letter, because construction already had been completed when plaintiffs received the letter. We disagree. Plaintiffs' general contractor testified that it was customary to obtain all warranties in writing before completing the “close-out” process and paying the retainage. Although he could not recall specifically whether that had happened here, he was confident that that procedure had been followed. Further, plaintiffs' stucco installer testified that he had asked for the warranty in writing because of plaintiffs' concerns, and Taylor testified that obtaining the warranty in writing was “important” to him. Although the evidence does not conclusively demonstrate that plaintiffs relied on the letter from McDonald, the jury was entitled to find, from the evidence discussed above, that plaintiffs did so rely. In sum, plaintiffs presented sufficient evidence for the jury to find that McDonald had apparent authority to provide the warranty on ChemRex's behalf. … The decision of the Court of Appeals is reversed, and the case is remanded to the Court of Appeals for further proceedings. Unabridged: p. 443 insert new note 5 (renumbering other notes): Abridged: p. 257 add as note 5 5. Of course, as noted in the introductory materials to this chapter, to be imputed, the knowledge of the agent must be acquired in the course of the agency relationship. A good example of how this principle operates is evident in Trustees of Chicago Plastering Institute Pension Trust v. Elite Plastering Co., Inc., 603 F.Supp.2d 1143, 1150 (N.D.Ill. 2009). A lawyer represented a company (G & J) in the sale of its assets. At the time, he was also representing G & J in connection with a lawsuit brought against it by a pension trust alleging that G & J failed to make required contributions to the trust. The buyer of G & J’s assets asked the lawyer to form a corporation to acquire the assets and, with the consent of G & J, the lawyer did so. The lawyer at no time revealed the pending lawsuit against G & J to the buyer. The trust, in a lawsuit against the buyer claiming the buyer should be liable for G & J’s contributions under a theory of 23 successor liability, argued that the lawyer’s knowledge of the trust’s suit against G & J should be imputed to the buyer because he served, albeit briefly, as the buyer’s lawyer. The court rejected the argument, noting that the lawyer’s work for the buyer was very limited—simply doing the paperwork for incorporation. The performance of these “ministerial acts,” the court said, did not create “a duty to warn [the buyer] about all potential pitfalls of the sale.” Unabridged: p. 500 add of the end of the section titled “Joint Ventures”: Abridged: p. 290 add to the end of the section titled “Joint Ventures”: New York courts, however, have adopted a more nuanced definition of joint venture, summarized in In re Cohen, 422 B.R. 350, 377 (E.D.N.Y. 2010): A joint venture is “ ‘an association of two or more persons to carry out a single business enterprise for profit, for which purpose they combine their property, money, effects, skill and knowledge.’ ” A party seeking to establish the existence of a joint venture under New York law must demonstrate the following elements: (1) the existence of a specific agreement between two or more persons to carry on an enterprise for profit; (2) evidence in the agreement of the parties' intent to be joint venturers; (3) a contribution of property, financing, skill, knowledge, or effort by each party to the joint venture; (4) some degree of joint control over the venture by each party; and (5) the existence of a provision for the sharing of both profits and losses. The existence of a joint venture is generally a question of fact. The party asserting the existence of the joint venture bears the burden of proof to establish these elements. Failure to establish any element of the joint venture will be fatal to the party asserting the existence of the joint venture. Unabridged: p. 501 insert new note 2 and renumber current note 2 as note 3: Abridged: p. 291 delete note 2 and replace with the following: 2. While a partnership may be created by an oral agreement, the one year provision of the Statute of Frauds may render that agreement unenforceable. For instance, if the partners orally agreed to have a partnership for a period of, say, three years, that agreement may fall within the Statute of Frauds and be held unenforceable. On the other hand, if the parties orally agreed to a partnership of indefinite duration (even one that contemplated a long-term endeavor), the agreement would not violate the one-year provision of the Statute of Frauds because a partner may die within a year. See, e.g., Leon v. Kelly, 618 F.Supp.2d 1334 (D.N.M. 2008)(citing New Mexico law). 24 Unabridged: p. 520 add a new note before Fairway Development case: Abridged: p. 305 add a new note before Fairway Development case: NOTE In 2011, the New Jersey appellate court considered a case that it characterized as presenting facts “that are the converse” of those in Mazzuchelli. In Whitfield v. Bonanno Real Estate Group, 17 A.3d 855, 862 (Super.Ct.App.Div. 2011), the plaintiff was an employee of Time Warner and was injured in a slip and fall in the parking lot of her employer. She recovered on a workers compensation claim against Time Warner. Plaintiff then sued a number of other parties, including a partnership that owned the property. The partnership consisted of Time Warner (her employer), which owned 98.99% of the partnership, and Time Warner cable, a wholly-owned subsidiary of Time Warner, which owned the balance. The appellate court, relying solely on an interpretation of the workers compensation statute, held in favor of the plaintiff. New Jersey had adopted RUPA in 2000, but the court did not cite or rely on it. In terms of partnership law, does the case present an issue that is distinct from that posed in Mazzuchelli? Assuming (counterfactually) that the partnership law did not change, are Whitfield and Mazzuchelli distinguishable? Unabridged: p. 535 insert at the beginning of the note: Abridged: no change In Faegre & Benson, LLP v. R & R Investors, 772 N.W.2d 846 (Ct.App.Minn. 2013), the four partners of R & R Investors transferred their partnership interests to David and Mary Klug in February 2000. The Klugs continued the business of the partnership under the same name and, in 2004, transferred their partnership interests to Strangis and Kass. One asset of the partnership that pre-dated the Klugs’ acquisition was a claim against the federal government for breach of contract. That claim arose in 1997, but was dismissed by the U.S. Court of Federal Claims in 1999. The U.S. Supreme Court reinstated the claim in 2002 and it was settled in 2006. The Minnesota appellate court held that the claim remained an asset of R & R Investors throughout the relevant time period, finding that the same result would obtain under both UPA and RUPA. The court noted that under UPA, when the Klugs acquired their interests in R & R Investors, technically a new partnership was created. But under UPA “absent an agreement to the contrary, the partnership property of the dissolved partnership became the property of the partnership continuing the business without the need for a separate devise.” Id. at 855. 25 Unabridged: p. 690 add to the end of note 1: Abridged: no change Without mentioning the Ederer case, the California appellate court reached a contrary conclusion in Rappaport v. Gelfand, 129 Cal.Rptr.3d 670 (Cal.App. 2011), holding that the trial court erred when it held the remaining partners in a limited liability partnership liable for the buy-out price owing to a dissociating partner. The California appellate court relied on the plain language of RUPA sec. 306. Unabridged: p. 722, insert new note 1 and renumber notes that follow: Abridged: p. 427, insert new note 1 and renumber notes that follow: 1. In Robertson v. Jacobs Cattle Co., 830 N.W.2d 1913 (Neb. 2013) the trial court ordered the dissociation (expulsion) of certain partners whose conduct, the court found, frustrated the economic purpose of the partnership and rendered it not reasonably practicable to carry on the partnership business. The Nebraska Supreme Court affirmed. The factual basis for this legal conclusion was, however, less than convincing. The partnership was in the business of leasing farmland and the partners were also the lessees. The dissociated partners defaulted on their lease payments and, on that basis, the trial court concluded that they should be expelled. Their default, however, was not in their capacities as partners. The partnership presumably could have terminated the leases for nonpayment and leased the property to other lessees. The Nebraska courts thus gave a fairly broad and generous (to the partnership) reading of the Nebraska equivalent of RUPA §601(5). Unabridged: p. 722 add to note 1 (new note 2) the following after the sentence describing Owen v. Cohen: Abridged: p. 427 add to note 1 (new note 2) the following after the sentence describing Owen v. Cohen: For an example of dissention between partners, in this case siblings, that, in the court’s view, justified judicial dissolution, see Russell Realty Associates v. Russell, 724 S.E.2d 690 (Va. 2012). 26 Unabridged: p. 730 insert after note: Abridged: p. 429 insert after note: ESTATE OF COHEN, ex rel. PERELMAN v. BOOTH COMPUTERS Superior Court of New Jersey, Appellate Division 421 N.J.Super. 134, 22 A.3d 911 (2011) Before CARCHMAN, GRAVES and ST. JOHN, Js. CARCHMAN, P.J.A.D. In this appeal, we address the question of whether, under the facts presented, a family partnership agreement that provides for a buyout based on net book value may be enforced where the disparity between book value and market value is significant. In deciding this issue, we consider the difference between book value and market value as well as addressing the issue of whether the disparity between the two renders the agreement unconscionable and unenforceable. We conclude, as did the trial judge, that the formula utilized in calculating net book value was appropriate, the buyout agreement was enforceable, and the disparity between book value and market value does not render the agreement unconscionable. Plaintiff Estate of Claudia Cohen, by its executor, Ronald Perelman, appeals from a judgment awarding $178,000 for Claudia’s interest in defendant Booth Computers (Booth), a family partnership in which her brother, defendant James Cohen, was also a partner. Plaintiff argues that the trial judge erred in finding that, under the buyout provision of Booth’s partnership agreement, it was entitled to only the net book value of Claudia’s interest in the partnership, as reflected in Booth’s financial statement at the time of Claudia’s death, rather than the fair market value of that interest, which plaintiff claims was $11,526,162. .... I. These are the relevant facts developed during the trial of this dispute. Robert Cohen, Claudia and James’s father, amassed a considerable fortune through his ownership and control of various business entities, including the Hudson News group of 27 companies, a distributor of newspapers and magazines. He and his wife, Harriet, were the parents of three children—Claudia, Michael and James. According to James, Robert requested a partnership agreement be prepared for the benefit of his children. The agreement was not negotiated but presented to the children for signature. Apparently, the partnership was formed by Robert to purchase and lease computer equipment, but this never came to fruition. At the time of Booth’s formation, Claudia was twenty-seven, Michael twenty-one, and James nineteen. James did not know who drafted the agreement but assumed that it was his father’s attorney. He received the document from his father but did not recall whether he understood all its provisions, including paragraph sixteen, which governed buyouts of the partners. He did understand that the general concept of the partnership was to create a vehicle to produce income for the children. Neither he nor his siblings consulted an attorney before signing the agreement. The agreement created Booth Computers and provided in part: 11. The Partnership shall maintain books and records setting forth its financial operations and said books and records shall reveal all monies received and expended on behalf of the Partnership. Such books shall be kept on a calendar year basis and shall be closed and balanced at the end of each year. An audit shall be made at the end of each year, or more often, as desired by the Partners. .... 13. Each of the Partners recognizes and agrees that one of the reasons he has entered into this Partnership is the personal and family relationship which exists among all Partners and that none of the partners wishes to enter into a partnership with non-family members. In furtherance of the foregoing, each of the Partners covenants and agrees that during his lifetime he shall not sell, assign, transfer, mortgage, pledge, encumber or otherwise dispose of all or any part of his interest in the Partnership, except upon the terms and conditions and subject to the limitations as hereinafter set forth in Paragraphs 14 and 15 of this Agreement. The agreement also contained a buyout provision, to be implemented under certain conditions: 15. In the event of the divorce or separation of any Partner who is married, and upon the death of any Partner, the remaining or surviving Partners shall be obligated to purchase, in equal shares, and the divorced Partner or Partner whose marriage is being terminated, or the estate of a deceased Partner, as the case may be, shall be obligated to sell the entire 28 interest in the Partnership theretofore owned by such Partner at the price and upon the terms and conditions hereinafter set forth in this Paragraph 15; (A) The price at which such Partnership interest shall be sold shall be the value thereof, determined in accordance with the provisions of Paragraph 16; .... 16. The purchase price of any part or all of a Partner’s interest in the Partnership shall be its value determined as follows: (A) Each of the Partners has considered the various factors entering into the valuation of the Partnership and has considered the value of its tangible and intangible assets and the value of any goodwill which may be present. With the foregoing in mind, each of the Partners has determined that the full and true value of the Partnership is equal to its net worth plus the sum of FIFTY THOUSAND ($50,000.00) DOLLARS. The term “net worth” has been determined to be net book value as shown on the most recent Partnership financial statement at the end of the month ending with or immediately preceding the date of valuation; (B) The value of any interest in the Partnership which is sold and transferred under the terms of this Agreement shall be determined by multiplying the full and true value of the Partnership as above determined by that percentage of the capital of the Partnership which is being sold and purchased hereunder. .... Claudia died on June 15, 2007. On July 13, 2007, Ronald Kochman, another of Robert’s attorneys, sent a letter on James’s behalf implementing the buyout in the sum of $177,808.50 [based on the formulas in the partnership agreement]. We now address the issue of valuation. Plaintiff asserts that the trial judge erred in finding that defendants were entitled to specific performance of the buyout provision based on book value rather than fair market value. .... To establish a right to specific performance, the party seeking the relief must demonstrate that the contract in question is valid and enforceable at law, and that the terms of the contract are 29 clear. Here, defendants claim that the buyout provision is clear so that they are entitled to specific performance of the buyout provision of the partnership agreement. Book value is defined as: Accounting terminology which gives a going-concern-value for a company. It is arrived at by adding all assets and deducting all liabilities and dividing that sum by the number of shares of common stock outstanding.... The valuation at which assets are carried on the books, that is, cost less reserve for depreciation. [Black’s Law Dictionary 165 (5th ed.1979).] Fair market value is defined as “[t]he amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts ... in the open market....” Black’s Law Dictionary 537 (5th ed.1979). While book value reflects the cost of the asset as reflected on the entity’s books, fair market value reflects the asset’s value in the open market. It is not unusual for the two values to vary and in many instances, as here, differ substantially. We recognize the disparity between net book and fair market value, yet the controlling factor as to which buyout method is applicable is the language of the partnership agreement. Plaintiff further asserts that the language of the buyout clause at issue here called for fair market value, not book value. It contends that the clause equated “net book value” with “full and true value,” and that the latter contemplated market value. However, the term “full and true value” was merely a descriptive phrase indicating that what followed was full and true value, specifically, net book value. We will not torture the language of a contract to create an ambiguity. Plaintiff also suggests that fair market value should have been utilized because the language of the buyout provision was ambiguous. There is no single definition of book value that can be applied in all cases. In this instance, use of the term “net worth” in addition to “book value” did create some confusion. Yet, these terms have been found to be synonymous. See N.J.S.A. 54:10A–4(d) (providing that net worth means the aggregate of the values disclosed by the books of the corporation). Moreover, the partnership agreement specifically states that “the term ‘net worth’ has been determined to be net book value....” .... 30 The trial judge’s determination that Claudia’s shares should be bought out at book value, rather than fair market value, was supported by both substantial credible evidence and the applicable law. The judge did not err in holding that defendants established their entitlement to specific performance of the buyout provision as a matter of law. .... Plaintiff contends that the trial judge erred in not finding defendants’ buyout price to be unconscionable given the “gross disparity” between the cost approach they utilized and the fair market value approach plaintiff seeks. It points to the result of the judgment, whereby James will take sole possession of an asset worth sixty times greater than the amount paid to Claudia’s estate. .... The first factor, procedural unconscionability, includes age, literacy, lack of sophistication, hidden or unduly complex contract terms and bargaining tactics. The second factor, substantive unconscionability, “simply suggests the exchange of obligations so one-sided as to shock the court’s conscience.” New Jersey case law “clearly include[s] both the procedural and substantive unconscionability concepts,” but those concepts are applied flexibly. .... While there is a dearth of authority in New Jersey addressing the issue of unconscionability in the context of price disparity, other jurisdictions generally hold that disparity in price alone does not constitute unconscionability. .... Disparity in price between book value and fair market value, where a buyout provision is clear, is not sufficient to “shock the judicial conscience” and to warrant application of the doctrine of unconscionability. This view is consistent with the basic principle that where the terms of the contract are clear, it is not the court’s function to make a better contract for either of the parties. We reiterate what is critical about this agreement and its terms. This was a family partnership created by and funded (except for the modest contributions by the children) by Robert for the benefit of his children according to his terms. He intended the beneficiaries to be family members and understood that the buyouts would require the children to provide funds to the other children. The possibility or even probability that a surviving child would be the ultimate 31 beneficiary of the assets of the partnership was apparent on the face of the agreement. Judge Contillo did not abuse his discretion by finding that the buyout provision was not unconscionable. Affirmed. Unabridged: Insert as note 4 on p. 764, renumbering current note 4 as note 5: Abridged: no change 4. Calculating goodwill is more an art than a science. In Dixon v. Crawford, McGilliard, Peterson & Yelish, 262 P.3d 108 (Wash.App. 2012), the appellate court accepted the trial court’s use of the “excess earnings method” of valuing goodwill in a law partnership, which the court described as follows: The capitalization of the difference between [the earnings of the partners] and the sum of the remaining partners’ individual replacement values provides an accurate reflection of the goodwill value of the firm as a whole. This formulation leaves many questions unanswered. For instance, if the “earnings of the partners” includes the earnings of the dissociating partner, would that not overvalue goodwill unless that partner’s replacement value is also subtracted? And what factors enter into “capitalization”? The lower court considered future risk and growth. But how are these amounts to be determined? Finally, how would one calculate the “replacement value” of a lawyer? These uncertainties also indicate the importance of careful drafting. Unabridged: p. 764 add new section 8: Abridged: p. 439 add as new note 6 8. Calculation of Buy-out Price under RUPA § 701 In Robertson v. Jacobs Cattle Co., 830 N.W.2d 191 (Neb. 2013), the Nebraska Supreme Court upheld the decision of the trial court to expel various partners on the basis that their conduct made it not reasonably practical to carry on the business of the partnership with them. The expelled partners were the plaintiffs in the trial court, seeking dissolution of the partnership. The defendants counterclaimed, seeking to expel the plaintiffs. The defendants prevailed in the trial court and were the appellees before the Nebraska Supreme Court. In the portion of the opinion set forth below, the Nebraska Supreme Court considered the proper way to calculate the buy-out 32 price for the appellants’ partnership interests, applying RUPA § 701(b). Of interest in this case is the interplay between the provisions of RUPA and the partnership agreement, in which the allocation of profits did not necessarily track the partners’ relative interest in partnership capital. The court wrote: The remaining issues pertain to the district court's calculation of the buyout price which the dissociated partners are to receive for their interests in the partnership. This price is governed by [RUPA § 701(b)], which provides: The buyout price of a dissociated partner's interest is the amount that would have been distributable to the dissociating partner [RUPA § 807(b)] if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date. Interest must be paid from the date of dissociation to the date of payment. [RUPA § 807(b)] provides in pertinent part: Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business. In settling accounts among the partners, profits and losses that result from the liquidation of the partnership assets must be credited and charged to the partners' accounts. The partnership shall make a distribution to a partner in an amount equal to any excess of the credits over the charges in the partner's account. A partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partner's account but excluding from the calculation charges attributable to an obligation for which the partner is not personally liable under [section 306]. [The court then determined that the date of dissociation was the date that the trial court entered its order granting the defendants’ counterclaim seeking expulsion of the complaining partners.] The land owned by the partnership is a capital asset. Under the operative partnership agreement, the partners each had a capital account. The value of the capital account was “directly proportionate to [each partner's] original Capital contributions as later adjusted for draws taken from the Partnership.” At the time of dissociation, the capital account of each appellant was approximately 5.33 percent of the total capital in the partnership. Each partner also had an income account under the partnership agreement. Net profits and net losses of the partnership were to be “credited or debited to the individual income 33 accounts [of each partner] as soon as practicable after the close of each fiscal year.” The agreement provided that the “term[s] ‘net profits' and ‘net losses' shall mean the net profits and net losses of the Partnership as determined by generally accepted accounting principles.” It further noted that “[t]he net profits and net losses of the Partnership” were distributable or chargeable “to each of the Partners in proportion to the votes they have.” Under the agreement, [appellants had] a total of eight votes. Thus, appellants each had a 12.5 percent share of net profits and losses in their income account. The district court expressly found that appellants' “interests in the partnership shall be purchased by the partnership as required by [RUPA § 701(b)].” In its ruling, the district court considered the value of the partnership's assets, including the appreciated value of the land, less the partnership's liabilities, and arrived at a liquidation value for the partnership. It then accepted appellees' argument that the proper buyout price was calculated by applying each partner's capital account percentage to the partnership's total liquidation value. On appeal, appellants agree the buyout was to be calculated pursuant to [RUPA § 701)] and agree with the district court's liquidation value of the partnership. But they argue the district court erred in calculating the buyout price because it did not consider how the hypothetical capital gain realized from treating the land as though it had been sold on the date of dissociation would flow to each partner based on the partnership agreement's allocation of net profits and losses. Appellants contend the proper calculation results in each of them receiving a buyout equal to 12.5 percent of the liquidation value of the partnership. Appellants' argument rests on two premises: (1) that a capital gain would be realized upon a hypothetical selling of the partnership land pursuant to [RUPA § 701(b)], which would constitute “profits” within the meaning of [RUPA § 807(b)], that the hypothetical profit would constitute “net profits” within the meaning of paragraph 11 of the partnership agreement. [RUPA § 701(b)] provides that the buyout price of a dissociated partner's interest is to be based on the amount that “would have been distributable to the dissociating partner” under [RUPA § 807(b)] “if, on the date of dissociation, the assets of the partnership were sold at ... liquidation value ... and the partnership were wound up as of that date.” [RUPA § 807(b)] then provides that “profits and losses that result from [such] liquidation of the partnership assets must be credited and charged to the partners' accounts.” 34 It is clear from the plain language of [RUPA § 701(b)] that the proper calculation must be based upon the assumption that the partnership assets, here the land, were sold on the date of dissociation, even though no actual sale occurs. Here, the initial question is whether selling the partnership land on the date of dissociation would result in a capital gain and “profits” in the context of [RUPA § 807(b)]. We consider this to be a question of statutory interpretation. The term “capital gain” means “profit realized when a capital asset is sold or exchanged.” The term “profit” is generally defined as the “excess of revenues over expenditures in a business transaction.” We are required to give the language of a statute its plain and ordinary meaning. Accordingly, we conclude that the capital gain which would be realized upon a hypothetical liquidation of the partnership's land on the date of dissociation (as required by [RUPA § 701(b)]) would constitute “profits” within the meaning of the phrase in[RUPA § 807(b)]. The remaining question is how those “profits” should be “credited and charged to the partners' accounts” in this particular situation. Appellants contend that it must be done pursuant to paragraph 11 of the partnership agreement, which specifically states how “net profits” and “net losses” “as determined by generally accepted accounting principles” are to be distributed to the partners. But there is no expert testimony equating this type of capital gain to “net profits” under “generally accepted accounting principles.” ... We conclude that the district court erred in refusing to consider evidence on this issue, and we reverse that portion of its order calculating the amount of the buyouts and remand the cause with directions for the court to reconsider the buyout calculations after receiving appellants' evidence on this issue. In this respect, we note that RUPA eliminates the distinction in [the original Uniform Partnership Act] between the liability owing to a partner in respect of capital and the liability owing in respect of profits. Section 807(b) [of RUPA] speaks simply of the right of a partner to a liquidating distribution. That implements the logic of RUPA Sections 401(a) and 502 under which contributions to capital and shares in profits and losses combine to determine the right to distributions. NOTE Calculating the buy-out price for lawyer dissociating from a law firm presents distinct challenges. In Rappaport v. Gelfand, 129 Cal.Rptr.3d 670 (Cal.App. 2011), the appellate 35 court was faced with an appeal from the trial court’s decision valuing two assets of the law firm, a contingent fee for a case on appeal and, in a second case, a fee for which the firm had a lien but faced litigation from the client. In both instances, the court said that the applicable test was “the sale price of the separate assets based upon their market value as determined by a willing and knowledgeable buyer and a willing and knowledgeable seller, neither of which is under any compulsion to buy or sell.” To determine this “market value,” the appellate court held that it was appropriate to consider expert testimony. With respect to valuing the contingent fee for the case on appeal, for instance, the expert for the dissociated lawyer opined that the case, for which the trial court awarded $900,000 in damages, was worth between 85% and 95% of that amount. He chose a settlement value of 90%, or a 10% discount from the award. He then discounted the contingent fee to which the firm would be entitled by the same amount. The trial court accepted this calculation and the appellate court affirmed. Unabridged: Insert as the second paragraph of the Note on p. 767: Abridged: p. 443 add as second paragraph to the note: In Bushard v. Reisman, 800 N.W.2d 373 (Wis. 2011), the plaintiff (Bushard), one of two partners, sent a notice of dissolution to his co-partner (Reisman), who continued to operate the business for several years thereafter. Reisman sent regular distributions of profits to Bushard and, after a period of time, started to pay himself a salary. Bushard challenged the appropriateness of Reisman’s drawing a salary and prevailed. Reisman argued that the court should make an equitable exception to the “no compensation” rule, but the court declined to do so, finding that UPA was clear on this point and left no room for judicial creativity. In addition, the court found that Bushard had never consented to a continuation of the business, so that the value of the business would be fixed at the date of dissolution (which occurred when Bushard sent his notice). Consequently, Reisman could not credit those distributions against a hypothetical valuation of the business as of the date of dissolution. If and when Reisman finally wound-up the business, Bushard would be entitled to half of the proceeds realized in the liquidation. Unabridged: Insert on p. 772 after first full paragraph: Abridged: p. 447 add as third paragraph to section on Termination: As noted above, until the partnership is “terminated,” it continues for the purpose of windingup its affairs. But what constitutes “termination”? This issue arose in Curley v. Kaiser, 962 36 A.2d 167 (Conn.App. 2009), where the court noted that merely liquidating the assets of the partnership was not enough. The assets had to be distributed before the partnership could be deemed terminated. Unabridged: Insert at p. 812 before Section 2: Abridged: no change c. Piercing the Veil of a Limited Partnership A widely accepted principle in corporate law is that the “veil” of a corporation may be “pierced,” meaning that, under certain circumstances, the limited liability (the veil) that is afforded to shareholders and others may be ignored (pierced). Veil-piercing is an equitable doctrine developed by the courts to address situations in which shareholders or others affiliated with a corporation have “abused” the privilege of operating in a corporate form by using the corporation to perpetrate a fraud or injustice. See, generally, Mark J. Loewenstein, Veil Piercing to Non-owners: A Practical and Theoretical Inquiry, 41 Seton Hall Law Review 839 (2011). The courts have considered whether this doctrine should be applied to limited partnerships so that limited partners may be held liable for the debts and obligations of the partnership, essentially adding to RULPA § 303 circumstances under which a limited partner may be liable to third parties. In the following case, the New Jersey court embraced the doctrine. CANTER v. LAKEWOOD OF VOORHEES Superior Court of New Jersey, Appellate Division. 420 N.J.Super. 508, 22 A.3d 68 (2011) SIMONELLI, J.A.D. This is a nursing home negligence action arising from injuries sustained by plaintiff Sanford Canter at the Lakewood of Voorhees Nursing Home, a New Jersey licensed long-term care facility (the nursing home). By leave granted, defendant Seniors Healthcare, Inc. (SHI) appeals from the denial of its motions for partial summary judgment and reconsideration on the issue of whether corporate veil-piercing principles apply to a New Jersey limited partnership, or alternatively, whether there is a genuine issue of material fact as to whether plaintiff established the veil-piercing factors. We hold that equitable principles, such as veil piercing, may apply to a New Jersey limited partnership but in limited circumstances, such as where a limited partner takes or attempts action not within the safe harbor of N.J.S.A. 42:2A–27b, or dominates and uses the limited partnership 37 to perpetrate a fraud, injustice, or otherwise circumvent the law. Because the record does not establish such circumstances, we reverse. We begin by explaining the relationship between the various entities and individuals involved in this matter. Defendant Lakewood of Voorhees Associates LP (Lakewood) is a limited partnership formed in 1978 pursuant to the New Jersey Uniform Limited Partnership Law (1976) (NJULPL), N.J.S.A. 42:2A–1 to –73. At its inception, Lakewood was capitalized with at least $600,000. Lakewood owns and operates the nursing home. SHI is a Pennsylvania corporation incorporated in 1996. It is a limited partner of Lakewood and holds an 84.12% interest in the partnership. It also is the sole shareholder of defendant Ozal of Lakewood, Inc. (Ozal) and defendant Seniors Management–North, Inc. (SMN). Ozal is a New Jersey corporation incorporated in 1999. Ozal is Lakewood’s general partner and holds a 1% interest in the partnership. SMN is a New Jersey corporation incorporated in 2000. SMN provides accounting, billing, group purchasing, support and professional-consulting services to the nursing home pursuant to a management agreement. Its employee, Cherly Carnes, is the nursing home’s administrator who controls the nursing home’s day-to-day operations. SMN has no ownership interest in Lakewood, but receives a management fee pursuant to the management agreement. SMN also manages nine other nursing homes in New Jersey, Pennsylvania and the District of Columbia. Defendant Steven Lazovitz is Ozal’s sole director. He is also a director, officer and majority shareholder of SHI. He is a former general and limited partner of Lakewood and former officer of SMN. Lazovitz executed the original management agreement on behalf of Lakewood when he was the general partner. Lenard Brown and Robert Sall are directors and employees of SHI and former officers of SMN. SMN paid the salaries of Brown, Sall and Lazovitz until they were placed on SHI’s payroll. SHI pays their salaries from the corporate overhead fees it receives from SMN. Plaintiff’s expert opined, in part, that Lakewood, SHI and SMN “operate as one seamless long[-]term care organization,” and SHI and SMN “exercised significant control” over Lakewood’s operation. Realizing that plaintiff may use this opinion to impose liability on SHI for Lakewood’s negligence, SHI filed a motion for partial summary judgment contending, in part, that corporate veil-piercing principles do not apply to a limited partnership, such as Lakewood, and the NJULPL alone governs a limited partner’s liability to third parties.3 Alternatively, SHI contended that even if corporate veil-piercing principles could apply to a limited partnership, there was no genuine issue of material fact that SHI did not dominate 3 Although all defendants moved for partial summary judgment, only SHI sought leave to appeal. Thus, we limit this opinion to SHI. 38 Lakewood or use Lakewood to perpetrate a fraud, injustice, or otherwise circumvent the law. Focusing on the interrelationship between the various entities and individuals, the motion judge applied corporate veil-piercing principles to a limited partnership. The judge concluded there was a genuine issue of material fact as to whether SHI controlled Lakewood, sufficient to hold SHI, Lakewood’s limited partner, liable to third parties for Lakewood’s negligence. The judge made the following findings to support this conclusion: (1) SHI is SMN’s and Ozal’s sole shareholder; (2) SHI owns approximately 84% of Lakewood, whereas Ozal only owns 1%; (3) the entities did not observe corporate formalities; (4) there is “extensive commonality of ownership and of officer involvement” among the entities; and (5) Lakewood did not carry liability insurance, regardless of whether it was required to have such insurance. The judge also concluded, Because of various factors ... the nature and extent of the control here exhibited ultimately by [SMN] and the interconnection between these various entities and the persons involved with respect to them, I am left to conclude that, in terms of [SHI’s] role as a limited partner, there is a genuine issue of material fact as to its overall role in this enterprise and specifically whether it, [SHI], is effectively the general partner ... of Lakewood ... or the equivalent thereof. Again, I acknowledge the respect that is to be afforded to corporate [form] or the equivalent thereof in the context of a limited partnership ... and yet, when there is direct involvement in the conduct, I am satisfied that [SHI] is not entitled to ... summary judgment ... because I am not convinced, as a matter of law, that that’s the case. [SHI] may be effectively a general partner, given the nature of this arrangement and, ... otherwise, because of the interrelationship with all the other entities—and I say this with respect to all these entities—summary judgment in its favor is not appropriate. Notably, the judge did not find that SHI was substantially involved in Lakewood’s day-today operations; rather, he found that SMN and its employees are involved in Lakewood’s day-today operations. Also, the judge made no finding whether SHI used Lakewood to perpetrate a fraud, injustice, or otherwise circumvent the law. The judge subsequently denied SHI’s motion for reconsideration. SHI then filed a motion for leave to appeal from the denial of both motions, which we granted. On appeal, SHI contends the judge erred in applying corporate veil-piercing principles to Lakewood, a limited partnership. It argues that only the NJULPL applies in this case and its “safe harbor” provision, N.J.S.A. 42:2A– 27b, shields SHI from any liability for Lakewood’s negligence. Alternatively, SHI contends that even if corporate veil-piercing principles could apply to a limited partnership, the judge: (1) erroneously found there was a genuine issue of material fact as to the first prong of the corporate veil-piercing test, that is, that SHI dominated Lakewood; and (2) failed to find the second prong, that is, that SHI used Lakewood to perpetrate a fraud, injustice, or circumvent the law. .... 39 [W]e are satisfied the judge properly concluded that corporate veil-piercing principles can apply to a limited partnership; however, the record does not support veil piercing in this case. N.J.S.A. 42:2A–27a shields a limited partner from liability for the limited partnership’s obligations except under two circumstances: (1) where the limited partner is “also a general partner,” or (2) where a limited partner “participat[es] in the control of the business[.]” N.J.S.A. 42:2A–27a. However, where “the limited partner’s participation in the control of the business is not substantially the same as the exercise of the powers of a general partner, he is liable only to persons who transact business with the limited partnership with actual knowledge of, and reliance on, his participation in control.” Ibid. N.J.S.A. 42:2A–27a is modeled after § 303(a) of the Revised Uniform Limited Partnership Act (1976) (RULPA), which effected changes to the original 1916 Act because of a determination that it is not sound public policy to hold a limited partner who is not also a general partner liable for the obligations of the partnership except to persons who have done business with the limited partnership reasonably believing, based on the limited partner’s conduct, that he is a general partner. [Uniform Limited Partnership Act (1976) § 303 Comment, 6B U.L.A. 182 (2008).] N.J.S.A. 42:2A–27a “sharply limits the circumstances under which the exercise of ‘control’ could lead to imposition of general partner liability on a limited partner.” Zeiger v. Wilf, 333 N.J.Super. 258, 276, 755 A.2d 608 (App.Div.), certif. denied, 165 N.J. 676, 762 A.2d 657 (2000). Consistent with the sharp limitations of N.J.S.A. 42:2A–27a, N.J.S.A. 42:2A–27b provides a “safe harbor” provision.4 It establishes certain activities, in which a limited partner may engage, which do not constitute participation in control of the limited partnership’s business within the meaning of N.J.S.A. 42:2A–27a. Included within those safe harbor activities are: (1) being or serving as a shareholder of a general partner; (2) “[c]onsulting with or advising a general partner with respect to any matter, including the business of the limited partnership;” or (3) being a contractor, an agent or employee of the limited partnership. N.J.S.A. 42:2A–27b(1)–(2), (6). New Jersey has not addressed whether corporate veil-piercing principles can apply to a limited partnership. However, N.J.S.A. 42:2A–2 provides that the NJULPL “shall be so interpreted and construed as to effect its general purpose to make uniform the law of those states which enact it.” Accordingly, we look to other states that have adopted the RULPA to see how they apply corporate veil piercing in the limited partnership context. 4 N.J.S.A. 42:2A–27b is modeled after § 303(b) of the RULPA, which “is intended to provide a ‘safe harbor’ by enumerating certain activities which a limited partner may carry on for the partnership without being deemed to have taken part in control of the business.” Uniform Limited Partnership Act (1976) § 303 Comment, supra, at 182. Since 1976, the safe harbor list has expanded over the years to reflect case law and recent developments demonstrating when limited partners should not be subjected to general liability. Ibid. 40 Absent authority in this State, we consult Delaware corporate law for guidance. [Citing Delaware law, the court concluded that Delaware would apply corporate veil-piercing principles to a Delaware limited partnership.] We agree that corporate veil-piercing principles can be applied to a New Jersey limited partnership under appropriate circumstances. However, to pierce the veil there must be evidence that the limited partner participated in the control of the limited partnership’s business by taking or attempting action not within the safe harbor of N.J.S.A. 42:2A–27b or dominated the limited partnership and used the limited partnership to perpetrate a fraud or injustice, or otherwise circumvent the law. Both prongs of the domination test must be established by clear and convincing evidence. To determine the issue of dominance in the veil-piercing context, “courts consider whether ‘the parent so dominated the subsidiary that it had no separate existence but was merely a conduit for the parent.’ ” In making this determination, “courts engage in a fact-specific inquiry considering whether the subsidiary was grossly undercapitalized, the day-to-day involvement of the parent’s directors, officers and personnel, and whether the subsidiary fails to observe corporate formalities, pays no dividends, is insolvent, lacks corporate records, or is merely a facade.” “As a general principle, ... the control issue frequently boils down to the limited partner’s role in the day-to-day functioning of the business and that partner’s decision-making authority versus the role of the general partner.” Ownership alone is not enough for piercing. In addition, “the mere fact that several corporations may be subsidiaries of one parent does not prevent their individual identities from being respected.” This court has previously observed that a limited partner of a limited partnership does not assume general partner liability even if the partnership’s limited partners were also the sole shareholders, officers and directors of a corporate general partner, and by acting on behalf of the general partner they controlled the activities of the limited partnership. It is only when one entity owns an interest in another entity “ ‘for the purpose of control, so that the subsidiary company may be used as a mere agency or instrumentality for the [holding] company, [that the owner] will be liable for injuries due to the negligence of the subsidiary.’ ” The hallmarks of domination for an illegitimate purpose “are typically the engagement of the subsidiary [here, the limited partnership] in no independent business of its own but exclusively the performance of a service for the parent [or here, the majority limited partner] and, even more importantly, the undercapitalization of the subsidiary [limited partnership] rendering it judgmentproof.” Undercapitalization means “capitalization very small in relation to the nature of the business of the corporation and the risks ... attendant to such businesses. The adequacy of capital is to be measured as of the time 41 of formation of the corporation. A corporation that was adequately capitalized when formed, but which subsequently suffers financial reverse is not undercapitalized.... Adequate capitalization is a question of fact that turns on the nature of the business of the particular corporation....” The undercapitalization factor is key “in determining corporate dominance” because it provides an inference as to whether the business entity “ ‘was established to defraud its creditors or other improper purpose[s] such as avoiding the risks known to be attendant to a type of business.’ ” Contrary to the judge’s findings, SHI does not participate in the control of Lakewood’s business within the meaning of N.J.S.A. 42:2A–27a by being or serving as a shareholder of Ozal. See N.J.S.A. 42:2A–27b(1), (6). Nor does SHI participate in the control of Lakewood’s business because it owns SMN, which controls Lakewood’s day-to-day operations. SHI’s mere ownership of SMN, without more, does not demonstrate SHI’s involvement in Lakewood’s day-to-day operations, nor does it demonstrate domination. Also, even if SMN’s control of Lakewood could somehow be imputed to SHI, being a contractor for Lakewood does not constitute participation in the control of Lakewood’s business. Further, the commonality of ownership and officer involvement does not establish participation in the control of Lakewood’s business. There is nothing wrong with Lazovitz being or serving as Ozal’s officer or director, while at the same time being or serving as SHI’s officer, director, or shareholder. There is also nothing wrong with the structuring of the various entities in this case. Where individuals set up “legitimate business structures to further their personal and business plans” and “d[o] not use their partnerships to commit fraud or defeat the ends of justice[,]” the veilpiercing doctrine will not apply. Finally, there is no evidence demonstrating that plaintiff believed, let alone knew, that SHI controlled either Lakewood or the nursing home, or that plaintiff had any dealings with SHI that may justify a finding of liability under N.J.S.A. 42:2A–27a. By contrast, in OTR [Assoc. v. IBC Servs., 801 A.2d 407 (App. DW.)], supra, this court held that veil piercing was appropriate where (1) the parent company’s domination and control of the subsidiary company was patently clear, (2) the plaintiff believed it was dealing with the parent company and not the subsidiary and did not discover the fact of separate corporate entities until much later in the business dealings, and (3) the subsidiary affirmatively and intentionally led the plaintiff to believe it was transacting business with the parent company. In OTR, “in every functional and operational sense, the subsidiary had no separate identity [from the parent company].” Id. at 56, 801 A.2d 407. Here, however, there is no evidence that Lakewood had no separate identity from SHI. Thus, no liability can be imposed on SHI. The question then is whether there is other evidence establishing that SHI dominated 42 Lakewood and used Lakewood to perpetuate a fraud, injustice, or otherwise circumvent the law. There is no evidence that SHI dominated Lakewood and used Lakewood to perpetuate a fraud or injustice, or otherwise circumvent the law. To the contrary, it is clear that Lakewood was sufficiently capitalized at its inception and has a separate existence from SHI. Long before SHI and SMN were organized in 1996 and 2000, respectively, Lakewood was organized as a limited partnership in 1978 for the legitimate business purpose of owning and operating a nursing home. Lakewood is not insolvent and has assets and income; it has a license to operate the nursing home, owns the property on which the nursing home is located, and earns income from the nursing home’s clients. Lakewood also has approximately 240 employees, independent certified public accountants that prepared its financial statements, its own bank accounts, and it enters into contracts in its own name. It also has the right to terminate the management agreement with SMN. There also is no evidence of a commingling of funds. There is also no evidence that Lakewood failed to observe limited partnership formalities (as opposed to corporate formalities). Neither the limited partnership agreement, nor the NJULPL, require annual meetings. Compare N.J.S.A. 42:2A (not requiring annual meetings of a limited partnership), with N.J.S.A. 14A:5–2 (requiring annual meetings of the shareholders of a corporation). Also, unlike corporation law, which requires corporations to “keep books and records of account and minutes of the proceedings of its shareholders,” N.J.S.A. 14A:5–28(1), the NJULPL has no such requirement, see N.J.S.A. 42:2A–9. Therefore, it is irrelevant that Lakewood had no annual meetings. We conclude that the judge erred in denying summary judgment to SHI. .... The evidence in this case, even taken in a light most favorable to plaintiff, is insufficient to establish a genuine issue of any material fact such that Lakewood’s veil should be pierced to impose liability on SHI for Lakewood’s negligence. Reversed. QUESTION Should the court have added, essentially, another basis for liability for a limited partner when the statute already addressed the issue of the potential liability of a limited partner? 43 Unabridged: p. 821 insert before paragraph introducing Anglo American: Abridged: no change In CML V, LLC v. Bax, 6 A.3d 238 (Del.Ch. 2013), the Delaware Chancery Court was faced with the question of whether a creditor of an LLC had standing to maintain a derivative action. The court ultimately ruled that it did not, in an opinion that is excerpted in Chapter 15 below. In the course of that opinion, the court discussed whether creditors of a limited partnership have standing to maintain a derivative action on behalf of the partnership. In the course of addressing that question, the court examined the history of derivative actions in limited partnerships, writing: The debate over limited partner derivative standing dates back over a century. In 1822, New York adopted the country's first limited partnership statute. In 1916, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) promulgated the original Uniform Limited Partnership Act (“ULPA”). Id. Every state except Louisiana eventually adopted it in some form, with Delaware following suit in 1973. ULPA did not explicitly authorize derivative actions, and courts split on whether a limited partner could sue derivatively. The majority rule recognized that limited partners could sue derivatively by analogizing them to stockholders and trust beneficiaries.... In 1973, Delaware was the last state to adopt ULPA. While taking much from the uniform act, the Delaware drafters included a number of unique provisions, including express statutory authorization for limited partner derivative actions. … Comparing Section 1732 of the LP Act [authorizing limited partners to bring derivative actions] with Section 327 of the DGCL [Delaware General Corporation Law] reveals close parallels. Both are non-exclusive statutes. Section 1732(a) establishes a nonexclusive right of a limited partner to sue derivatively (“An action may be brought in the right of a limited partnership to procure a judgment in its favor by a limited partner.”). In language paralleling Section 327, Section 1732(b) then provides that “[i]n any such action”-i.e., an action in which the plaintiff is a limited partner-the contemporaneous ownership requirement must be met. Delaware's original foray into derivative standing for alternative entities thus tracked Section 327, authorized limited partner derivative actions and imposed restrictions on them, but did not otherwise purport to limit who could sue derivatively. In 1976, NCCUSL promulgated RULPA, which was “intended to modernize the prior uniform law while retaining the special character of limited partnerships…Following Delaware's example, RULPA added provisions addressing a limited partner's right to 44 maintain a derivative action, which became RULPA Sections 1001 to 1004. Section 1001, entitled “Right of Action,” stated: A limited partner may bring an action in the right of a limited partnership to recover a judgment in its favor if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed. RULPA, supra, § 1001, 6B U.L.A. 370. Section 1002, entitled “Proper Plaintiff,” provided: In a derivative action, the plaintiff must be a partner at the time of bringing the action and (i) at the time of the transaction of which he complains or (ii) his status as a partner had devolved upon him by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the transaction. RULPA, supra, § 1002, 6B U.L.A. 378. NCCUSL's derivative standing provisions mark the first use of exclusive language. I have not been able to discern why NCCUSL drafted the derivative standing provisions in this fashion. The prefatory note to the 1976 version of RULPA states simply that “Article 10 of the Act authorizes derivative actions to be brought by limited partners.” RULPA, supra, Prefatory Note, 6B U.L.A. 5. The commentary to Sections 1001 and 1002 remarks only that the respective sections are “new.” RULPA, supra, §§ 1001, 1002, 6B U.L.A. 370, 378. To a reader aware of Section 327 and the contemporaneous ownership requirement, it is not immediately clear that NCCUSL intended Sections 1001 and 1002 to be exclusive. Read literally, Section 1001 is not exclusive. It states only that “[a] limited partner may bring an action in the right of a limited partnership.” It does not say that no one else can sue in the name of the limited partnership, only that a limited partner may sue if the general partners with authority to sue have refused, or if efforts to make them sue would not be likely to succeed. If anything, Section 1001 appears geared towards adopting the corporate requirement of demand futility [that is, demand is excused if it would futile to make a demand]. Section 1002 follows immediately after Section 1001 and limits the circumstances under which a partner can sue by imposing the contemporaneous ownership requirement. Although it stated that a plaintiff “must be a partner,” Section 1002 focuses principally on the timing of ownership. Of the section's 66 words, 56 address this subject. 45 Given the close connection between Sections 1001 and 1002 and the obvious intent to transplant the demand and contemporaneous ownership requirements into the LP corpus, one could readily imagine that the NCCUSL scribes did not consciously intend to change the rules of derivative standing. They simply may have wanted a straightforward, actively voiced provision. In other words, rather than pondering the subtleties of standing, they may have been heeding the guidance of grammarians. When presented with NCCUSL's work, however, the architects of the Delaware LP Act faced a clear choice. Unlike NCCUSL, which was writing on a blank slate, the LP Act already had a derivative action standing provision. Section 1732 was non-exclusive and closely tracked Section 327. The drafters did not have to go the RULPA route. When they presented Delaware's proposed version of RULPA to the General Assembly in 1982, it again included uniquely Delawarean sections. Yet the drafters chose to replace Section 1732 with the facially exclusive RULPA versions. In New York, the only other jurisdiction with a pre-RULPA derivative standing provision, the legislators retained their non-exclusive language. See N.Y. P'ship Law § 115-a. At least for Delaware, the decision to implement the RULPA provisions suggests a conscious intent to make statutory standing exclusive Unabridged: p. 827 add new note 2, renumbering current note 2 as note 3: Abridged: no change 2. Rules of civil procedure require corporate shareholders, before bringing a derivative action, to make a demand on the board of directors or allege with particularity why such a demand would be futile. See e.g., Rule 23.1 of the Federal Rules of Civil Procedure. These provisions apply to derivative actions filed by limited partners as well. See, e.g., Diamond v. Pappathanasi, 935 N.E.2d 340 (Mass.App.Ct. 2010). Unabridged: p. 844 insert new section: Abridged: p. 499 insert as new section 10: 11. Dissolution of a Limited Partnership ULPA provides that a limited partnership dissolves on the retirement, death or insanity of a general partner, unless the certificate permitted the remaining general partners to continue the business or all partners consent to the continuance of the business (ULPA § 20). Under RULPA, 46 dissolution is covered in Article 8. It provides for nonjudicial dissolution in § 801(e.g., at the time specified in the certificate of limited partnership; on the occurrence of events specified in the limited partnership agreement; on written consent of all partners; and, under certain circumstances, on the withdrawal of a general partner). Under § 802, a court may dissolve a limited partnership on application by a partner “whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.” This latter provision has been interpreted to mean that judicial dissolution is improper if the business can be conducted profitably even if there is dissension among the partners. See, e.g., Valone v. Valone, ___F.Supp.2d__ (N.D.Ga. 2010). Unabridged: p. 858 new note 4, renumbering other notes: Abridged: p. 512 new note 4, renumbering other notes: 4. In Norton v. K-Sea Transp. Partners L.P., __ A.3d __ (Del.2013), the Delaware Supreme Court considered a carefully drawn limited partnership agreement in the context of a challenge to an acquisition of the partnership. The plaintiff (Norton), a limited partner, complained about the way the consideration in the deal ($329 million) was divided between the general partner and the limited partners. The record suggested that the general partner’s interest may have been worth as little as $100,000, yet it received $18 million in the deal. The limited partnership agreement (LPA) required, among other things, that the general partner approve such a transaction and, in doing so, act in good faith. Under the LPA, the general partner acts in “good faith” if it reasonably believes that its action is in the best interest of, or at least, not inconsistent with, the best interests of the partnership. In accordance with a provision of the agreement, a committee of the board of directors of the partnership obtained an opinion from an investment banker (Stifel, Nicolaus & Co.) that the proposed deal was fair to the limited partners, but the opinion expressly did not consider the fairness of the consideration paid to the general partner. The general partner relied on this fairness opinion in recommending the deal to the limited partners and the court concluded that the general partner was “therefore conclusively presumed to have acted in good faith” when it approved the deal and submitted it to the limited partners for their approval. The court concluded its opinion with this observation: Norton [the plaintiff] willingly invested in a limited partnership that provided fewer protections to limited partners than those provided under corporate fiduciary duty principles. He is bound by his investment decision. Here, the LPA did not require [the general partner] to consider separately the… fairness [of the amount of consideration paid to it], but granted [the general partner] broad discretion to approve a merger, so long as it 47 exercised that discretion in “good faith.” Reliance on Stifel's opinion satisfied this standard. By opining that the consideration Kirby [the acquirer] paid to the unaffiliated unitholders [limited partners] was fair, Stifel's opinion addressed the fairness [of the payment to the general partner], albeit indirectly. Kirby presumably was willing to pay a fixed amount for the entire Partnership. If [the general partner] diverted too much value to itself, at some point the consideration paid to the unaffiliated unitholders would no longer be “fair.” Furthermore, the LPA does not leave…unitholders unprotected. [The general partner’s] approval merely triggered submission of the Merger to the unitholders for a majority vote. If the unitholders were dissatisfied with the Merger's terms, “their remedy [was] the ballot box, not the courthouse.” Here [the general partner] is conclusively presumed to have approved the Merger in good faith, and a majority of the unitholders voted to consummate it. The LPA required nothing more. Unabridged: p. 888 note 5 Abridged: no change [Sheffield Services, cited in the middle of note 5 of the unabridged edition, was overruled on other grounds by Weinstein v. Colborne Foodbotics, LLC, ___ P.3d ___ (Colo. 2013).] Unabridged: p. 915 add to the end of the carryover paragraph: Abridged: no change In Pappas v. Tzolis, 982 N.E.2d 576 (N.Y. 2012)(reproduced in Section B.4.d.iii above), the New York Court of Appeals upheld the terms of an operating agreement that protected what appeared to be sharp dealing by a member of an LLC who bought out his co-members. In the following case, the court confronted a provision that seemingly allowed unlimited competition, but consider whether that is a fair way to characterize the provision in question. 48 Unabridged: p. 933 insert after the Note Abridged: no change Default Fiduciary Duties in Delaware? From time to time, commentators have questioned whether managers (or members, in membermanaged LLCs) owe fiduciary duties to the members of the LLC. Commentators have suggested that the rights and obligations of members and managers ought to be set out in the LLC operating agreement. If that agreement fails to provide expressly for fiduciary duties, there is no basis for the courts to imply such duties. Chancellor Strine rejected that argument in Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 839, 849-56 (Del.Ct.Ch. 2012), and the Delaware Supreme Court did not rule on the question. Chancellor reasoned as follows in Auriga Capital: The Delaware LLC Act does not plainly state that the traditional fiduciary duties of loyalty and care apply by default as to managers or members of a limited liability company. In that respect, of course, the LLC Act is not different than the DGCL [the Delaware corporate code], which does not do that either. In fact, the absence of explicitness in the DGCL inspired the case of Schnell v. Chris–Craft. Arguing that the then newly-revised DGCL was a domain unto itself, and that compliance with its terms was sufficient to discharge any obligation owed by the directors to the stockholders, the defendant corporation in that case won on that theory at the Court of Chancery level. But our Supreme Court reversed and made emphatic that the new DGCL was to be read in concert with equitable fiduciary duties just as had always been the case, stating famously that “inequitable action does not become legally permissible simply because it is legally possible.” The LLC Act is more explicit than the DGCL in making the equitable overlay mandatory. Specifically, § 18–1104 of the LLC Act provides that “[i]n any case not provided for in this chapter, the rules of law and equity ... shall govern.” In this way, the LLC Act provides for a construct similar to that which is used in the corporate context. But unlike in the corporate context, the rules of equity apply in the LLC context by statutory mandate, creating an even stronger justification for application of fiduciary duties grounded in equity to managers of LLCs to the extent that such duties have not been altered or eliminated under the relevant LLC agreement. It seems obvious that, under traditional principles of equity, a manager of an LLC would qualify as a fiduciary of that LLC and its members. Under Delaware law, “[a] fiduciary relationship is a situation where one person reposes special trust in and reliance on the judgment of another or where a special duty exists on the part of one person to protect the 49 interests of another.” Corporate directors, general partners and trustees are analogous examples of those who Delaware law has determined owe a “special duty.” Equity distinguishes fiduciary relationships from straightforward commercial arrangements where there is no expectation that one party will act in the interests of the other. The manager of an LLC—which is in plain words a limited liability “company” having many of the features of a corporation—easily fits the definition of a fiduciary. The manager of an LLC has more than an arms-length, contractual relationship with the members of the LLC. Rather, the manager is vested with discretionary power to manage the business of the LLC. Thus, because the LLC Act provides for principles of equity to apply, because LLC managers are clearly fiduciaries, and because fiduciaries owe the fiduciary duties of loyalty and care, the LLC Act starts with the default that managers of LLCs owe enforceable fiduciary duties…. [O]ur cases have to date come to the following place based on the statute. The statute incorporates equitable principles. Those principles view the manager of an LLC as a fiduciary and subject the manager as a default principle to the core fiduciary duties of loyalty and care. But, the statute allows the parties to an LLC agreement to entirely supplant those default principles or to modify them in part. Where the parties have clearly supplanted default principles in full, we give effect to the parties' contract choice. Where the parties have clearly supplanted default principles in part, we give effect to their contract choice. But, where the core default fiduciary duties have not been supplanted by contract, they exist as the LLC statute itself contemplates. There are two issues that would arise if the equitable background explicitly contained in the statute were to be judicially excised now. The first is that those who crafted LLC agreements in reliance on equitable defaults that supply a predictable structure for assessing whether a business fiduciary has met his obligations to the entity and its investors will have their expectations disrupted. The equitable context in which the contract's specific terms were to be read will be eradicated, rendering the resulting terms shapeless and more uncertain. The fact that the implied covenant of good faith and fair dealing would remain extant would do little to cure this loss. The common law fiduciary duties that were developed to address those who manage business entities were, as the implied covenant, an equitable gap-filler. If, rather than well thought out fiduciary duty principles, the implied covenant is to be used as the sole default principle of equity, then the risk is that the certainty of contract law itself will be 50 undermined. The implied covenant has rightly been narrowly interpreted by our Supreme Court to apply only “when the express terms of the contract indicate that the parties would have agreed to the obligation had they negotiated the issue.” The implied covenant is to be used “cautious[ly]” and does not apply to situations that could be anticipated, which is a real problem in the business context, because fiduciary duty review typically addresses actions that are anticipated and permissible under the express terms of the contract, but where there is a potential for managerial abuse. For these reasons, the implied covenant is not a tool that is designed to provide a framework to govern the discretionary actions of business managers acting under a broad enabling framework like a barebones LLC agreement. In fact, if the implied covenant were used in that manner, the room for subjective judicial oversight could be expanded in an inefficient way. The default principles that apply in the fiduciary duty context of business entities are carefully tailored to avoid judicial second-guessing. A generalized “fairness” inquiry under the guise of an “implied covenant” review is an invitation to, at best, reinvent what already exists in another less candid guise, or worse, to inject unpredictability into both entity and contract law, by untethering judicial review from the well-understood frameworks that traditionally apply in those domains. Reasonable minds can debate whether it would be wise for the General Assembly to create a business entity in which the managers owe the investors no duties at all except as set forth in the statute and the governing agreement. Perhaps it would be, perhaps it would not. That is a policy judgment for the General Assembly. What seems certain is that the General Assembly, and the organs of the Bar who propose alteration of the statutes to them, know how to draft a clear statute to that effect and have yet to do so. The current LLC Act is quite different and promises investors that equity will provide the important default protections it always has, absent a contractual choice to tailor or eliminate that protection. Changing that promise is a job for the General Assembly, not this court. In response to this decision, the Delaware legislature amended its LLC Act in 2013 to confirm that, in certain circumstances, default fiduciary duties do apply. But the amendment was terse, to say the least, adding the underlined words to section 18-1104: In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern. 51 Unabridged: p. 939 insert before section b: Abridged: no change While the standing of a member of an LLC to maintain a derivative action is now well established, the standing of creditors to maintain an action is a matter of some controversy, as the next case indicates. CML V, LLC v. BAX Court of Chancery of Delaware 6 A.3d 238 (2010) LASTER, Vice Chancellor. I. FACTUAL BACKGROUND Plaintiff CML V, LLC (“CML”) lent funds to JetDirect Aviation Holdings, LLC (“JetDirect” or the “Company”). JetDirect was a private jet management and charter company that, through subsidiaries, provided charter services, prepaid memberships for charter flights, aircraft management services, and maintenance and fuel services. Beginning in 2005, as part of a roll-up strategy, JetDirect acquired a number of small to mid-sized charter and service companies. JetDirect’s aggressive expansion left it with a highly leveraged balance sheet and volatile cash flows. In 2006, JetDirect’s board of managers became aware of serious deficiencies in its accounting system. BKD LLP, JetDirect’s auditor, informed the Individual Defendants of nineteen “material weaknesses,” “significant deficiencies,” and “control deficiencies” in JetDirect’s internal controls. A year later, JetDirect’s new auditor, Ernst & Young LLP (“E & Y”) declined to complete its audit because JetDirect’s internal controls lacked sufficient integrity for E & Y to rely on the Company’s books. Most notable among these deficiencies was the failure of JetDirect’s management to properly collect and account for financial data from JetDirect’s subsidiaries. JetDirect’s internal control deficiencies were exacerbated when senior management attempted to consolidate the Company’s billing operations. The project was botched, and JetDirect’s billing cycle expanded dramatically. Accounts receivable increased more than six-fold, and it took up to sixteen weeks to gather financial data to report to the board. 52 In April 2007, CML loaned JetDirect $25,743,912, an amount later increased to $34,243,912. Despite lacking current information about JetDirect’s financial condition, the Company’s board approved four major acquisitions in late 2007. CML contends that if JetDirect’s managers had possessed accurate financial data, they would have seen that JetDirect lacked the working capital to finance the acquisitions. CML also contends that senior management hid adverse information from the board. In June 2007, JetDirect defaulted on its loan obligations to CML. By January 2008, JetDirect was insolvent. In late 2008, JetDirect’s managers began liquidating some of JetDirect’s holdings. According to CML, certain managers negotiated sales of JetDirect assets to entities they controlled, and the JetDirect board approved the interested sales without adequately reviewing their fairness. Based on these allegations, CML asserts derivatively in Count I that the Individual Defendants breached their duty of care by approving the late 2007 acquisitions without informing themselves of critical information about JetDirect’s financial condition. CML asserts derivatively in Count II that the Individual Defendants acted in bad faith by consciously failing to implement and monitor an adequate system of internal controls. Count II also alleges that a member of senior management hid critical information from the board. CML asserts derivatively in Count III that the Individual Defendants who benefited from the self-interested asset sales breached their duty of loyalty. In Count IV, CML asserts a direct claim against JetDirect for breach of its loan agreement with CML. If Counts I-III are successful, the Individual Defendants will pay damages to JetDirect, and CML can recover those funds under Count IV. II. LEGAL ANALYSIS “[T]he creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties.” N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del.2007) [hereinafter, “Gheewalla”]; accord Prod. Res. Gp., L.L.C. v. NCT Gp., Inc., 863 A.2d 772, 776 (Del.Ch.2004). When a corporation is insolvent, the creditors become “the principal constituency injured by any fiduciary breaches that diminish the firm’s value.” Gheewalla, 930 A.2d at 102 (quoting Prod. Res., 863 A.2d at 792). Under these circumstances, “equitable considerations give creditors standing to pursue derivative claims against the directors of an insolvent corporation.” Id. CML argues that the same equitable considerations entitle creditors to sue derivatively on behalf of an insolvent LLC. The Individual Defendants respond that the Delaware LLC Act precludes creditor standing. As demonstrated by this Court’s decisions and scholarly commentary, the 53 standing provisions in the alternative entity statutes have not been widely understood as barring derivative claims by creditors of an insolvent entity. To the contrary, many have assumed that creditor derivative standing exists. Nevertheless, the literal terms of the LLC Act control, and they bar a creditor of an insolvent LLC from suing derivatively. Although this Court may depart from the literal reading of a statute where such a reading is so inconsistent with the statutory purpose as to produce an absurd result, this is not such a case. A. The Plain Language Of The LLC Act … “If the statute as a whole is unambiguous, there is no reasonable doubt as to the meaning of the words used and the Court’s role is then limited to an application of the literal meaning of the words.” Coastal Barge Corp. v. Coastal Zone Indus. Control Bd., 492 A.2d 1242, 1246 (Del.1985). The LLC Act creates a statutory right to bring a derivative action. Section 18-1001, entitled “Right to Bring Action,” states: “A member or an assignee of a limited liability company interest may bring an action in the Court of Chancery in the right of a limited liability company to recover a judgment in its favor if managers or members with authority to do so have refused to bring the action or if an effort to cause those managers or members to bring the action is not likely to succeed.” 6 Del. C. § 18-1001. The following section, entitled “Proper Plaintiff,” provides: In a derivative action, the plaintiff must be a member or an assignee of a limited liability company interest at the time of bringing the action and: (1) At the time of the transaction of which the plaintiff complains; or (2) The plaintiff’s status as a member or an assignee of a limited liability company interest had devolved upon the plaintiff by operation of law or pursuant to the terms of a limited liability company agreement from a person who was a member or an assignee of a limited liability company interest at the time of the transaction. 6 Del. C. § 18-1002. Under the plain language of Section 18-1002, a plaintiff “must be a member or an assignee.” Section 18-1001 similarly refers only to “a member or an assignee.” The only Delaware treatise to comment directly on how these provisions affect creditors states: “Under Sections 18-1001 and 18-1002, [an LLC] creditor is not a proper plaintiff in a derivative suit.” Robert L. Symonds, Jr. & Matthew J. O’Toole, Delaware Limited Liability Companies § 9.09, at 9-61 n.270 (2007). .... The exclusive language of Section 18-1002 contrasts with the non-exclusive language of Section 327 of the Delaware General Corporation Law (the “DGCL”), 8 Del. C. § 327. Section 327 is the 54 only provision in the DGCL that addresses derivative actions. It provides: “In any derivative suit instituted by a stockholder of a corporation, it shall be averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which such stockholder complains or that such stockholder’s stock thereafter devolved upon such stockholder by operation of law.” 8 Del. C. § 327. .... Under the plain language of Section 18-1002, standing to bring a derivative action is limited to “a member or an assignee.” Read literally, Section 18-1002 denies derivative standing to creditors of an insolvent LLC. B. A Dog That Has Not Barked As compelling as a literal reading of Section 18-1002 might seem, it encounters an awkward fact: Despite the ostensibly obvious implications of the statute, virtually no one has construed the derivative standing provisions as barring creditors of an insolvent LLC from filing suit. Particularly in light of Production Resources and Gheewalla, an exclusive reading of Section 181002 would cause LLC derivative actions to differ markedly from their corporate cousins. If practitioners widely understood the derivative standing provisions to have this effect, one would expect treatises, articles, and commentaries to call attention to that fact. .. In the years since Production Resources and Gheewalla, one also would expect courts to have encountered parties raising the statutory provisions as a defense. Yet the universe of authorities favoring the nostanding position consists of (i) a single sentence at the end of a footnote in one Delaware treatise, see Symonds & O’Toole, supra, § 9.09, at 9-61 n.270, and (ii) abbreviated treatment in an unreported district court decision. .... Many commentators, by contrast, have assumed that creditors of an insolvent LLC can sue derivatively. In light of this assumption, they have debated vigorously whether an LLC agreement can limit the fiduciary duties that the creditors would invoke. That question never arises if creditors lack standing to sue under Section 18-1002. .... C. Other Sources Of Authority Delaware Supreme Court decisions empower this Court to resolve any apparent tension between the plain language of the LLC Act and the commonly held understanding of the provisions decisively in favor of the statutory language. “If a statute is unambiguous, there is no need for 55 judicial interpretation, and the plain meaning of the statutory language controls.” Eliason v. Englehart, 733 A.2d 944, 946 (Del.1999). The derivative standing provisions of the LLC Act, however, are not uniquely Delawarean provisions, nor are they artifacts of the LLC statute. Rather they are part of widely adopted uniform acts where consistent interpretation and stable commercial expectations have particular salience. A context-free reading of those provisions risks a content-skewed result. Although I could resolve this case on plain meaning alone, I also have considered (i) how parallel provisions of other alternative entity statutes have been interpreted, (ii) the source and development of the alternative entity derivative standing provisions, and (iii) whether enforcing the plain meaning of Section 18-1002 would create an absurd result at odds with the overarching purpose and framework of the LLC Act. Each line of inquiry supports applying Section 18-1002 as an exclusive provision that limits derivative standing to LLC members and assignees. 1. The Comparable Provisions Of The LP Act The Delaware Limited Partnership (“LP”) Act contains derivative standing provisions phrased identically to Sections 18-1001 and 18-1002, except for substituting terms relevant to the entity covered, such as “partner” and “limited partnership” for “member” and “limited liability company.” See 6 Del. C. §§ 17-1001 & 17-1002. This comes as no surprise. The LLC Act was “modeled on the popular Delaware LP Act.” Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 290 (Del.1999). “In fact, its architecture and much of its wording is almost identical to that of the Delaware LP Act.” Id. In framing derivative standing in exclusive terms, Sections 17-1001 and 17-1002 of the Delaware LP Act track the comparable derivative action provisions in the Revised Uniform Limited Partnership Act (“RULPA”). A leading treatise on RULPA regards the derivative standing provisions as exclusive: “A person must be a limited partner to bring a derivative suit under R.U.L.P.A. § 1001. R.U.L.P.A. § 1002 restates this requirement (‘must be a partner at the time of bringing the action’)....” Alan R. Bromberg & Larry E. Ribstein, 4 Bromberg and Ribstein on Partnership § 15.05(g), at 15:67 (2010-2 Supp.). . . . . [The Court described the history of derivative actions in limited partnerships, reproduced in Ch. 14, Section D above, concluding that creditors of a limited partnership lack standing to bring a derivative action.] 3. No Statutory Conflict CML argues that I should disregard the literal language of Section 18-1002 because, under Delaware Supreme Court precedent, a statute will be deemed ambiguous “if a literal reading of the statute would lead to an unreasonable or absurd result not contemplated by the legislature.” In addition, “the literal meaning of a statute is not to be followed when it departs from the true 56 intent and purpose of the statute and to conclusions inconsistent with the general purpose of the act.” In re Opinions of the Justices, 88 A.2d 128, 134 (Del.1952); accord Darling Apartment Co. v. Springer, 22 A.2d 397, 402 (Del.1941). CML argues that a plain reading of Section 18-1002 generates an absurd distinction between insolvent corporations, where creditors can sue derivatively, and insolvent LLCs, where they cannot. CML further contends that Sections 181001 and 18-1002 were so clearly intended to transport the demand and contemporaneous ownership requirements into the world of LLCs that it would be inconsistent with that more limited purpose to apply the statute more broadly as an exclusive provision. I cannot agree. As a threshold matter, there is nothing absurd about different legal principles applying to corporations and LLCs. … I also cannot conclude that the derivative standing provisions were adopted solely to transpose the corporate demand and contemporaneous ownership tunes into an alternative entity key. Delaware’s decision to replace Section 1732 with the RULPA provisions suggests an intent to make standing exclusive, and this is how the provisions subsequently were interpreted when LP assignees attempted to sue. When the alternative entity statutes were amended in 1998, the drafters could have returned to the open-ended language of the Section 1732. The evolution of Delaware’s derivative standing provisions suggests a conscious decision to make the statutes exclusive. Nor does barring creditor derivative standing conflict with the overarching purpose or structure of the LLC Act. According to the LLC Act itself, “[i]t is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” 6 Del. C. § 18-1101(b). . . . Creditors generally are presumed to be “capable of protecting themselves through the contractual agreements that govern their relationships with firms.” Prod. Res., 863 A.2d at 787. “Creditors are often protected by strong covenants, liens on assets, and other negotiated contractual protections.” Id. at 790. To limit creditors to their bargained-for rights and deny them the additional right to sue derivatively on behalf of an insolvent entity comports with the contractarian environment created by the LLC Act. The LLC Act includes specific statutory features that appear designed (at least in part) with creditors in mind, and which creditors can use to obtain additional rights and protections. First, the LLC Act authorizes an LLC agreement to “provide rights to any person, including a person who is not a party to the [LLC] agreement, to the extent set forth therein.” 6 Del. C. § 18-101(7). A creditor therefore can bargain for express contractual rights in the LLC agreement while remaining a non-party to the agreement. 57 Creditors also can use Section 18-101(7) in other ways. In a departure from the contract law rule against penalty clauses, Section 18-306 of the LLC Act provides that members may be subjected “to specified penalties or specified consequences” for breaching the LLC Agreement or “[a]t the time or upon the happening of events specified in the [LLC] agreement.” 6 Del. C. § 18-306. Combining this authority with Section 18-101(7) enables creditors to bargain for penalties and consequences for members upon the occurrence of specific events or if creditors’ rights are breached. Other LLC Act provisions offer similar points of entry for creditor protections. See, e.g., 6 Del. C. § 18-402 (“Unless otherwise provided in [an LLC] agreement, the management of [an LLC] shall be vested in its members.... [A] manager shall cease to be a manager as provided in [an LLC] agreement.”). Second, Section 18-1101 enables creditors to expand their available remedies. Under Section 181101(c), “[t]o the extent that, at law or in equity, a member or manager ... has duties (including fiduciary duties) to a limited liability company ..., the ... duties may be expanded or restricted or eliminated by provisions in the [LLC] agreement.” 6 Del. C. § 18-1101(c) (emphasis added). Although typically cited for authorizing the restriction or elimination of legal duties, this section likewise authorizes the expansion of legal duties. An LLC agreement conceivably could provide for duties triggered by insolvency that would include an obligation to preserve assets for creditors. If a creditor is willing to become a party to the LLC agreement, then it might be able to make creative use of Section 18-1101(c) of the LLC Act. Third, other provisions of the LLC Act offer creditors additional opportunities to secure protection. Section 18-303(b) provides that notwithstanding the general protection of limited liability provided by the LLC Act, a member or manager may agree in the LLC agreement “or under another agreement” to be “obligated personally for any or all of the debts, obligations and liability of the limited liability company.” 6 Del. C. § 18-303(b). This provision could be used in lieu of or to supplement personal guarantees for a particular debt. Similarly, Section 18-215 authorizes an LLC agreement to “establish or provide for the establishment of 1 or more designated series of ... [LLC] ... assets” that may carry “separate rights, powers or duties with respect to specified property or obligations of the [LLC] or profits and losses associated with specified property or obligations.” 6 Del. C. § 18-215(a) & (b). This provision could be used in lieu of or to supplement security interests in a particular asset. In each of these cases, a creditor can protect its enhanced rights through a provision conditioning the approval of any amendment to the LLC agreement on creditor consent or the satisfaction of conditions. See 6 Del. C. § 18-302(e) (“If [an LLC] agreement provides for the manner in which it may be amended, including by requiring the approval of a person who is not a party to the [LLC] agreement or the satisfaction of conditions, it may be amended only in that manner or as otherwise permitted by law....”). 58 Fourth, and along different lines, a creditor of an LLC can protect itself by seeking the appointment of a receiver…. Fifth, despite the lack of derivative standing, a creditor possesses a statutory right to enforce a member’s obligation to make a contribution to the LLC. Subject to statutory limitations, if a creditor extends credit to an LLC in reliance on a member’s obligation to make a contribution to the LLC or to return a distribution in violation of the LLC Act, then the creditor may enforce the obligation to the extent of the creditor’s reasonable reliance. 6 Del. C. § 18-502(b). “Thus, in proper circumstances, [an LLC] creditor in effect may be placed in a position similar to that of the company itself in enforcing rights against members for contributions and returns.” Symonds & O’Toole, supra, § 15.02, at 15-7. Under Section 18-505, usury is not a defense to an obligation of a member or manager to the LLC arising under the LLC agreement. See 6 Del. C. § 18-505. A member is obligated to make its required contributions to the LLC even if the member cannot perform because of death, disability, or some other reason. See 6 Del. C. § 18-502(a). .... In light of the expansive contractual and statutory remedies that creditors of an LLC possess, it does not create an absurd or unreasonable result to deny derivative standing to creditors of an insolvent LLC. The outcome does not frustrate any legislative purpose of the LLC Act; it rather fulfills the statute's contractarian spirit. III. CONCLUSION Counts I-III are dismissed because CML lacks derivative standing. Count IV is dismissed for lack of jurisdiction, subject to CML’s right to transfer the action to the Delaware Superior Court. See 10 Del. C. § 1902. IT IS SO ORDERED. Unabridged: p. 949 add to the end of the carryover paragraph: Abridged: p. 596 add to the end of the first paragraph: Note that under these statutes the obligation of a member receiving an improper distribution is to return that distribution to the LLC and, therefore, presumably only the LLC has standing to sue to recover such a distribution. Weinstein v. Colborne Foodbotics, ___ P.3d __ (Colo.Sup.Ct. 2013)(creditor lacks standing to sue for an improper distribution); accord, Rev O, Inc. v. Woo, 725 S.E.2d 45 (N.C.App. 2012). 59 Unabridged: p. 949 delete Condo v. Connors (Colo.Ct.App.) and replace with: Abridged: p. 596 delete Condo v. Connors (Colo.Ct.App.) and replace with: CONDO v. CONNERS Supreme Court of Colorado 266 P.3d 1110 (2011) Chief Justice BENDER delivered the Opinion of the Court. …. This appeal arises out of Thomas Banner's attempted assignment of a portion of his membership interest in the Hut Group to his former wife, Elizabeth Condo. Banner was a member of the Hut Group with a one-third ownership interest. As part of Condo and Banner's divorce settlement, Banner agreed to assign Condo his right to receive monetary distributions from the Hut Group. Additionally, Banner and Condo agreed that Banner would vote against all issues that required unanimous consent, unless Condo directed him to do otherwise, effectively assigning Condo his voting interest in the Hut Group. Before executing this assignment to Condo, however, Banner first sought approval from the other members of the Hut Group, Thomas Conners and George Roberts. Article 10.1 of the Hut Group's operating agreement expressly provides that “a Member shall not sell, assign, pledge or otherwise transfer any portion of its interest in [the Hut Group]” “without the prior written approval of all of the Members.” Additionally, Article 10.2 states: “If at any time any Member proposes to sell, assign or otherwise dispose of all or any part of its interest in the [LLC], such Member ... shall first obtain written approval of all of the Members to such transfer pursuant to [Article] 10.1 ....” Accordingly, Banner drafted an instrument assigning his right to distributions and effectively transferring his voting right to Condo and sought the approval of Conners and Roberts. This first draft of the assignment explicitly recognized the LLC's anti-assignment clause (Article 10.1) and provided that the instrument was “subject to and conditional upon the Company's delivery of its consent hereto” and that “[i]f such consent is not obtained ... this assignment shall be of no further force and effect.” Conners and Roberts refused to consent to the assignment. In response, Banner and Condo drafted and executed a second instrument (the “Banner assignment”). This second draft similarly assigned Banner's right to receive distributions and effectively transferred Banner's voting interest to Condo. In contrast to the first draft, however, 60 the second draft did not acknowledge the Operating Agreement's anti-assignment clause and was not contingent on the consent of the other members. Conners and Roberts did not receive notice that Banner and Condo executed this second draft of the assignment, and the Banner assignment was submitted to the divorce court without any showing that it was in compliance with Article 10.1 of the Operating Agreement. When Conners and Roberts learned of the unapproved Banner assignment, they contacted Banner and expressed their concern that it violated the terms of the Operating Agreement. Conners and Roberts sent Banner a letter explaining their unease that the assignment would effectively make Banner a noncontributing member of the Hut Group and would eliminate any incentive Banner had to assist in the Hut Group's continued financial success. To resolve these issues, Conners and Roberts, allegedly with the aid of their attorney, Wendell Porterfield, offered to buy-out Banner's interest in the Hut Group. After some negotiation, Banner agreed to sell his entire interest to Conners and Roberts for $125,000. Thereafter, Condo sued Conners, Roberts, and Porterfield for tortious interference with contract and civil conspiracy. Her claims were based on the theory that (1) she was validly assigned the right to receive distributions from the Hut Group and (2) the defendants had conspired with Banner in bad faith to buy his interest at a “fire-sale” price and thereby destroy the value of her right to receive Banner's monetary distributions. Thus, Condo alleged that the defendants had conspired to interfere with the Banner assignment. In granting summary judgment for all defendants, the trial court reasoned that both of Condo's claims turned on the existence of a valid assignment predating Banner's sale to Conners and Roberts. It ruled that the Banner assignment was invalid because it was made without the consent of Conners and Roberts. The trial court held that Banner's assignment to Condo was void as against public policy because his failure to receive the consent of the other members constituted bad faith in corporate dealings. Condo appealed, and the court of appeals affirmed on other grounds…. Condo petitioned this court for certiorari review of the court of appeals' decision, and we granted her petition…. A. Review under Contract Principles and the Terms of this Operating Agreement. Before addressing each of Condo's arguments on appeal, we address a threshold issue raised by the defendants, who claim that an LLC operating agreement should not be interpreted in accordance with prevailing contract law. The defendants argue that an LLC operating agreement more closely resembles a constitution or charter than a contract because it serves as an organic 61 document for the LLC. Thus, the defendants assert that an operating agreement is much more than a multilateral agreement among the members and that it instead serves as a “super-contract” that explicitly restricts the power of any member to transfer any interest without complying with its express terms. Consequently, the defendants argue that Banner lacked the authority to assign his interest under the express terms of the Operating Agreement and any potential exception found within contract law is irrelevant. We disagree. …. [T]he Operating Agreement itself is framed in terms of a multilateral agreement among the members and it is appropriate to interpret it in light of prevailing principles of contract law. Accordingly, we review the Operating Agreement in light of such principles. In interpreting a contract, our primary goal is to determine and effectuate the reasonable expectations of the parties….When the terms of an operating agreement do not conflict with existing law, Colorado law mandates that we give “maximum effect to the principle of freedom of contract and to the enforceability of [the terms].” In the present operating agreement, Article 10.1 expressly states that “a Member shall not sell, assign, pledge or otherwise transfer any portion of its interest in [the Hut Group]” “without the prior written approval of all of the Members.” (Emphasis added). Similarly, Article 10.2 states: “If at any time any Member proposes to sell, assign or otherwise dispose of all or any part of its interest in the [LLC], such Member ... shall first obtain written approval of all of the Members to such transfer....” Condo does not dispute the language of Articles 10.1 and 10.2 of the Operating Agreement nor does she dispute that Conners and Roberts never consented to the Banner assignment. Although Condo concedes that the assignment appears to contravene the terms of the antiassignment clause, she makes two alternative arguments as to why the unapproved Banner assignment was legally effective. First, Condo asserts that the assignment did not violate the antiassignment clause because the clause should be narrowly interpreted to prohibit only nonconforming assignments of contractual duties. Thus, she concludes, the anti-assignment clause does not apply to an assignment of contractual rights. Second, Condo alternatively argues that even if the Banner assignment did violate the anti-assignment clause, the nonconforming assignment is legally binding nonetheless. This argument, Condo contends, has its genesis in the modern approach to anti-assignment clauses, which Condo urges this court to adopt in light of the modern credit-based economy and the public policy in support of the alienability of contract rights. We address each of these arguments in turn. B. Application of this Anti–Assignment Clause 62 Condo argues that we should narrowly interpret the Operating Agreement's anti-assignment clause such that it only applies to the assignment of membership duties and places no limit on the ability of a member to assign his or her membership rights. Condo claims that the present antiassignment clause does not apply to the transfer of Banner's right to receive monetary distributions. Condo argues that unlike an assignment of Banner's duties to the Hut Group, the assignment of his right to distributions has no effect on the ownership interests of Conners and Roberts. In the present context, however, this interpretation is too narrow given the plain meaning of the Hut Group's anti-assignment clause. Further, in the context of an LLC operating agreement, Colorado law compels us to give “maximum effect” to the terms of the operating agreement. § 7–80–108(4). As mentioned, Article 10.1 of the Hut Group Operating Agreement expressly states that “a Member shall not sell, assign, pledge or otherwise transfer any portion of its interest in [the Hut Group]” “without the prior written approval of all of the Members.” (Emphasis added). Under Colorado law, a membership interest in an LLC is statutorily defined to include the “right to receive distributions of such company's assets.” § 7–80–102(10). Additionally, Article 4 of the Operating Agreement explicitly sets forth the manner and timing of the Hut Group's mandatory distributions, which thus creates a right that each member may enforce under the Operating Agreement. Because the right to receive distributions is a component of the membership interest, it is impossible to read Article 10.1's express limitation on the transfer of “any portion” of a membership interest as anything other than a restriction on the assignment of such a right. …[T]the present anti-assignment clause appears to have intentionally employed the broadest possible language to prevent the unconsented transfer of any membership interest. Hence, we agree with the court of appeals that the right to receive distributions, which is statutorily and contractually defined to be a portion of the membership interest, falls within the express application of the anti-assignment clause to “any portion” of the membership interest. Any other result would fail to give “maximum effect” to the language selected by the members in Article 10.1. C. Application of the Modern Approach to this Anti–Assignment Clause Having concluded that the Operating Agreement's anti-assignment clause applies to the transfer of both rights and duties, we address whether the unapproved Banner assignment was void or whether it became legally effective despite its failure to comply with the anti-assignment clause. If the anti-assignment clause rendered Banner powerless to make a nonconforming assignment, the assignment was void and the present claims cannot stand. If, in contrast, Banner had the 63 power but not the right to make the assignment, the assignment can be said to have occurred— albeit wrongfully—and Condo's present claims against the defendants may survive summary judgment. As emphasized, under the LLC statutes, we give “maximum effect” to the terms of the Operating Agreement. The Operating Agreement's anti-assignment clause provides that: “without the prior written approval of all of the Members ... a Member shall not sell, assign, pledge or otherwise transfer any portion of its interest in the Company.” (Emphasis added.) Giving “maximum effect” to this clause does not resolve whether this anti-assignment clause functions as (1) a duty not to assign without consent or (2) renders each member powerless to assign without consent. Accordingly, we resolve this issue by examining the classical and modern approaches to antiassignment clauses. Ultimately, pursuant to prevailing Colorado case law and in light of the approach set forth in the Restatement (Second) of Contracts, we conclude that the language of the Operating Agreement and the context of the present dispute rendered Banner powerless to make the unapproved Banner assignment. We first note that the court of appeals resolved this issue by looking to what it considered to be our application of the classical approach in Parrish Chiropractic Centers, P.C. v. Progressive Casualty Insurance Co., 874 P.2d 1049, 1051 (Colo.1994), and extending this principle to the context of an anti-assignment clause in an LLC operating agreement. Condo, ––– P.3d at ––––. Under the classical approach, an assignment made in violation of an express anti-assignment clause is void ab initio because the assignor is powerless to make a nonconforming transfer. See id. Now, Condo urges us to depart from Parrish Chiropractic and adhere to the modern approach as set forth in Rumbin v. Utica Mutual Insurance Co., 254 Conn. 259, 757 A.2d 526 (2000). Under the modern approach, an anti-assignment clause creates a duty by which a party is contractually obligated to refrain from making a nonconforming assignment, but does not restrict the power of a member to nevertheless do so. Id. at 530–31. Instead of classifying a nonconforming assignment as void, the modern approach treats this unlawful act as a breach of the duty not to assign, which can then be enforced by the other party or parties to the contract through a breach of contract action. Id. As adopted in Rumbin, the modern approach allows for parties to contractually restrict the power—again, as opposed to the right—to assign, but such a clause will only render the parties powerless to assign when it expressly states that any nonconforming assignment is “void” or “invalid.” … The Restatement, however, does not adopt the strict “magic words” approach, and instead states that whether an anti-assignment clause merely creates a duty not to assign turns on the language 64 used and the context in which the contract is made. Restatement (Second) of Contracts § 322(2)(a) (1981)…Thus, although the Restatement is similar to Rumbin in that it creates a presumption in favor of treating an anti-assignment clause as a duty not to assign, given specific language in an anti-assignment clause and under the appropriate circumstances, it allows that an anti-assignment clause may render the parties powerless to assign, even in the absence of “magic words.” Applying our previous holding in Parrish Chiropractic and considering the rationale underlying the Restatement approach, we hold that the Operating Agreement rendered the parties powerless to assign any portion of the membership interest without the consent of all other members. Two of the rationales we applied in Parrish Chiropractic are pertinent to our resolution of the present matter. First, we highlighted the strong public policy in favor of freedom of contract—that is, the ability of a party to contractually restrict the ability of other parties to assign their rights and/or duties. Parrish Chiropractic, 874 P.2d at 1054. Second, we emphasized “the corollary right of the [nonassigning party] to deal only with whom it contracted.” Id. at 1054–55. Thus, we applied the classical approach in Parrish Chiropractic to afford contracting parties the maximum flexibility to shape their contract within the confines of the law, while simultaneously allowing for the option of increased predictability and stability in contractual relations through the use of an anti-assignment clause. See id. …. Accordingly, and in light of the strong public policy favoring the freedom of contract, we agree that the plain meaning of the Operating Agreement's anti-assignment clause rendered Banner powerless to make the unapproved assignment to Condo. Further, in the context of a closely-held LLC, such as the Hut Group, there is also a clear public policy in favor of allowing the members to tightly control who may receive either rights or duties under the operating agreement. … Given these circumstances and the plain meaning of the Operating Agreement, we hold that the nonconforming Banner assignment had no legal effect and cannot support Condo's underlying claims of tortious interference with contract and civil conspiracy. Accordingly, summary judgment was appropriate. Unabridged p. 952 and Abridged p. 599: delete the description of Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC v. Brewer in section 5 (Exit Privileges). This case was reversed on appeal, 705 S.E.2d 757 (N.C.App. 2011), with the appellate court holding 65 that the trial court improperly ruled that the plaintiffs should be estopped to deny that they had withdrawn from the limited liability company. Estoppel, the appellate court held, is an equitable doctrine that was unavailable because the defendants (who had sought to invoke the doctrine) had an adequate remedy at law – judicial dissolution. Unabridged: p. 959 insert at the end of section 7: Abridged: p. 600 insert at the end of section 7: In 2013, Delaware amended its LLC Act to confirm that a charging order is the sole and exclusive remedy by which a judgment creditor of a member may satisfy a judgment, whether the LLC has one member or more than one member. Unabridged: p. 975 insert after first paragraph of note 2: Abridged: p. 610 insert after first paragraph of note 2: A more typical example where the court did order dissolution is Venture Sales, LLC v. Perkins, 86 So.3d 910, 916 (Miss. 2012). The LLC was formed in 2000 to develop raw land that the parties contributed to the LLC. For various reasons, no development had taken place by 2010, when one of the members sought judicial dissolution. The trial court concluded that it was not reasonably practicable to carry on the business of the LLC in conformity with its articles of organization or operating agreement and, therefore, dissolution was appropriate under the Mississippi LLC act. The Mississippi Supreme Court agreed, noting that because the property remained undeveloped for 10 years and the defendants presented no evidence that development would occur within the foreseeable future, the LLC could not “meet the purpose for which it was formed.” What is noteworthy is that the courts did not to take a theoretical and abstract perspective as to the meaning of “reasonably practicable” and opted instead to determine whether it was likely that the LLC would achieve its purpose. 66