Will your LLC’s Anti-Assignment Clause withstand Scrutiny?
In Condo v. Conners, 266 P.3d 1110 (Colo. 2011) the Colorado Supreme Court addressed the
issue of whether the assignment of voting rights and rights to receive distributions of an LLC
interest was ineffective because it violated the anti-assignment clause of the LLC’s operating
agreement.
Background
Thomas Banner attempted to assign a portion of his membership interest in the Hut Group to his
former wife Elizabeth Condo. Banner was a 1/3rd member of the Hut Group. As part of their
divorce, Banner drafted an assignment of his right to receive monetary distributions and his
voting interest in the Hut Group to Condo. This assignment referenced Article 10.1 of the Hut
Group’s operating agreement that stated “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 the
Members.” Accordingly, Banner sought the approval of the assignment from the other members
of the Hut Group, Thomas Conners and George Roberts. Conners and Roberts refused to
consent to the assignment.
In response, Banner drafted a different assignment that similarly assigned Banner’s right to
receive distributions and transferred Banner’s voting interest to Condo. This second assignment
agreement, however, did not reference the anti-assignment clause in the operating agreement.
Banner and Condo executed this agreement without notice or approval from Conners or Roberts.
When Conners and Roberts learned of the unapproved assignment, they contacted Banner and
expressed their concern that it violated the operating agreement. Ultimately, after some
negotiation, Banner sold his entire interest in the Hut Group to Conners and Roberts for
$125,000.
Subsequently, Condo sued Conners and Roberts for tortious interference with contract and civil
conspiracy. Her claims alleged 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 below market value, which destroyed the value of her right to receive Banner’s monetary
distributions.
Issue for the Supreme Court
The Colorado Supreme Court had to decide, among other issues, whether Colorado courts should
construe contractual anti-assignment clauses under the “classical approach” or the “modern
approach.”
Classical Approach
Under the classical approach, courts interpret anti-assignment clauses as a restriction on the
power of any member to assign an interest, and thus any nonconforming assignment has no legal
effect.
Modern Approach
In contrast, the modern approach provides that, absent “magic words” stating that any
nonconforming assignment is “void” or “invalid,” an anti-assignment clause merely imposes a
contractual duty upon each member to refrain from assigning any contractual interest. Thus,
members retain the power to willfully breach the duty, allowing the transfer to be legally
effective, and leaving the non-assigning parties with the remedy of bringing a breach of contract
action against the party that wrongfully assigned the interest.
Court’s Holding
The Court applied the classical approach and held that the Operating Agreement in this case
rendered Banner powerless to assign any portion of his membership interest without the consent
of all other members. Although the Court applied the classical approach, the Court also noted
that the opinion does not stand for a blanket rejection of the modern approach to assignments.
Rather, the Court’s opinion narrowly held that the modern approach did not apply under the
specific facts in this case. In support of its holding, the Court cited to the Restatement (Second)
of Contracts § 322(2)(a), which generally provides that the modern approach is necessarily
dependent on the circumstances and the express terms of the operating agreement. In other
words, the Court held that whether the classical approach or the modern approach should be
applied depends upon the express or presumed intentions of the parties, which must be
ascertained from the entire contract and the surrounding circumstances.
Takeaway: The Court’s willingness to apply the modern approach or the classical approach
depending on the circumstances is yet another example of the importance of careful drafting. If
your intention is to make any non-conforming assignment void, incorporating the “magic
words” in the anti-assignment provision of an operating agreement (i.e., stating that any nonconforming assignment is “void” or “invalid”) appears advisable.