Condo v. Conners
2011 WL 6318980, 266 P.3d 1110 (2011)
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Rule of Law:
An anti-assignment clause in a closely-held LLC's operating agreement, even without specific words such as 'void' or 'invalid,' renders a member powerless to make a non-conforming assignment. Such a purported assignment is legally ineffective, not merely a breach of contract.
Facts:
- Thomas Banner, Thomas Conners, and George Roberts were members of a limited liability company called the Hut at Avon, LLC ('the Hut Group').
- The Hut Group's operating agreement contained an anti-assignment clause requiring the prior written approval of all members for any member to 'sell, assign, pledge or otherwise transfer any portion of its interest.'
- As part of a divorce settlement, Banner agreed to assign his right to receive monetary distributions and his voting rights in the Hut Group to his ex-wife, Elizabeth Condo.
- Banner sought approval for the assignment from Conners and Roberts, but they refused to provide their consent.
- Despite the lack of consent, Banner and Condo executed a second version of the assignment agreement that was not contingent on the other members' approval.
- After learning of the unapproved assignment, Conners and Roberts contacted Banner and expressed their concern that it violated the operating agreement.
- Subsequently, Conners and Roberts negotiated with and purchased Banner's entire membership interest in the Hut Group for $125,000.
Procedural Posture:
- Elizabeth Condo sued Thomas Conners, George Roberts, and their attorney in a Colorado trial court for tortious interference with contract and civil conspiracy.
- The trial court granted summary judgment for the defendants, finding the underlying assignment from Banner to Condo was invalid.
- Condo, as the appellant, appealed the decision to the Colorado Court of Appeals.
- The Court of Appeals affirmed the trial court's judgment, holding that the assignment was void because it violated the express terms of the operating agreement's anti-assignment clause.
- Condo petitioned the Colorado Supreme Court for a writ of certiorari, which was granted.
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Issue:
Does an assignment of a membership interest in a closely-held LLC, made in violation of an operating agreement's anti-assignment clause that does not contain express language declaring such transfers 'void' or 'invalid,' have legal effect?
Opinions:
Majority - Chief Justice Bender
No, an assignment made in violation of an LLC operating agreement's anti-assignment clause has no legal effect. In the context of a closely-held LLC, an anti-assignment clause divests a member of the power to make an unapproved assignment, rendering any such attempt void. The court rejected the argument that the clause only applied to duties and not rights, finding the language 'any portion of its interest' was broad enough to cover the right to distributions. The court also declined to adopt the 'modern approach' which would require 'magic words' like 'void' or 'invalid' to nullify an assignment. Instead, guided by Colorado's LLC statute requiring courts to give 'maximum effect' to operating agreements, the court prioritized freedom of contract and the right of members in a closely-held entity to control their membership. This context and the plain language of the agreement showed the parties' intent was to render Banner powerless to assign his interest without consent.
Concurring - Justice Eid
No, the assignment had no legal effect, but the majority's reasoning overcomplicates the issue. The court did not need to analyze the 'classical' versus 'modern' approaches of general contract law because the Colorado LLC statute is dispositive. The statute mandates that courts give 'maximum effect' to the enforceability of an operating agreement. Giving 'maximum effect' to a clause that expressly prohibits assignment without consent means any purported assignment in violation of that clause is void from the outset. The statute provides a clear answer, and resorting to broader, case-by-case contract law principles introduces unnecessary uncertainty into LLC law.
Analysis:
This decision solidifies the strength of anti-assignment clauses in Colorado LLC operating agreements, elevating the principles of freedom of contract and 'pick your partner' above the general public policy favoring the free alienability of property rights. By holding that such clauses remove a member's very power to assign, the court provides certainty to members of closely-held entities that unapproved third parties cannot be forced upon them. The ruling signals that courts will strictly enforce the bargained-for terms of operating agreements, potentially making it harder for creditors or other third parties to claim interests transferred in violation of such clauses.
