McConnell v. Hunt Sports Enterprises

Ohio Court of Appeals
132 Ohio App. 3d 657, 725 N.E.2d 1193 (1999)

ELI5:

Rule of Law:

An operating agreement for a limited liability company may explicitly define the scope of fiduciary duties owed between members, and where such an agreement unambiguously permits members to compete with the company, such competition does not constitute a breach of fiduciary duty.

Facts:

Several parties, including John H. McConnell and Hunt Sports Group, formed Columbus Hockey Limited (CHL), a limited liability company, with the express purpose of acquiring a National Hockey League (NHL) franchise for Columbus.
CHL's operating agreement contained Section 3.3, titled 'Members May Compete,' which stated members were not restricted from engaging in any other business venture, 'including any venture which might be competitive with the business of the Company.'
CHL submitted an application to the NHL, which was contingent on securing a new arena to be funded by a public sales tax.
In May 1997, the sales tax ballot measure failed, jeopardizing the plan for the arena and, consequently, the franchise application.
Nationwide Insurance developed a private financing plan for the arena and presented a lease proposal to Hunt Sports Group, who they viewed as the lead entity for CHL.
Hunt Sports Group repeatedly rejected Nationwide's lease proposal as unacceptable, even as an NHL-imposed deadline for a viable arena plan approached.
After Hunt Sports Group failed to accept the lease, Nationwide's CEO informed McConnell of the impasse. McConnell stated that if Hunt Sports Group would not accept the lease terms to secure the franchise, he would.
At a final meeting on June 9, 1997, Hunt Sports Group again rejected the lease proposal. McConnell, along with other CHL members, accepted the terms, formed a new ownership group, and signed the lease, thereby securing the NHL franchise for themselves.

Procedural Posture:

John H. McConnell and Wolfe Enterprises, Inc. (plaintiffs) filed a complaint for declaratory judgment in the Franklin County Court of Common Pleas (trial court) against Hunt Sports Group (defendant).
Hunt Sports Group filed an answer and a counterclaim alleging breach of contract and breach of fiduciary duty.
The trial court granted summary judgment in favor of the plaintiffs on their declaratory judgment claim and on the defendant's breach of contract counterclaim, finding the operating agreement permitted competition.
Following a jury trial on the remaining claims, the trial court granted a directed verdict in favor of the plaintiffs.
The trial court entered a final judgment that also decreed the judicial dissolution of CHL and awarded attorney's fees to the plaintiffs.
Hunt Sports Group (appellant) appealed the trial court's final judgment to the Court of Appeals of Ohio, Tenth Appellate District.

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Issue:

Does a provision in a limited liability company's operating agreement that expressly permits members to compete with the company's business prevent a member's direct competition from constituting a breach of fiduciary duty?

Opinions:

Majority - Tyack, Judge.

No. A provision in an LLC operating agreement that expressly permits members to compete with the company's business is enforceable and defines the scope of the members' fiduciary duties. The court found Section 3.3 of the CHL operating agreement to be plain and unambiguous. Under principles of contract law, where a contract's language is clear, it must be enforced as written, as it is presumed to reflect the parties' intent. This specific contractual provision effectively modified the default common-law fiduciary duty of loyalty that would otherwise prohibit members from competing with the LLC. Therefore, McConnell's actions in forming a competing entity and acquiring the NHL franchise were explicitly permitted by the agreement all members had signed and did not constitute a breach of contract or a breach of fiduciary duty.

Concurring-in-part-and-dissenting-in-part - Peggy Bryant, Judge.

This opinion concurs with the majority's holding on the central issue that the operating agreement permitted competition and thus there was no breach of fiduciary duty. However, the opinion dissents from the majority’s reversal of the trial court’s award of attorney's fees. The dissent argues that the award was a 'necessary or proper' exercise of the trial court's discretion under the Declaratory Judgments Act. This is because McConnell's group was forced to file the action to protect the NHL franchise, which was under a 'cloud' due to Hunt Sports Group's threats of litigation, which in turn jeopardized the immediate construction of the arena and the viability of the entire project.

Analysis:

This case significantly clarifies the principle of freedom of contract within the context of limited liability companies. It establishes that members can 'contract around' certain default fiduciary duties, such as the duty of loyalty, through clear and unambiguous provisions in their operating agreement. The decision underscores the power of private ordering in corporate governance, empowering business associates to define the specific terms of their relationship. Consequently, this precedent emphasizes the critical importance of meticulous drafting of LLC operating agreements, as courts will enforce the plain language of such agreements even when it alters traditional fiduciary obligations.

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