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Razin v. A Milestone, LLC

District Court of Appeal of Florida
67 So.3d 391, 2011 WL 3364362, 2011 Fla. App. LEXIS 12309 (2011)
ELI5:

Rule of Law:

An unambiguous provision in an LLC operating agreement granting one managing member controlling authority in the event of a disagreement is enforceable, even when that member has a potential conflict of interest, so long as the provision does not eliminate the statutory duty of loyalty.


Facts:

  • Sheldon Razin and Ashwini K. Bahl were the two managing members of A Milestone, LLC.
  • Razin provided a $1,000,000 unsecured loan to Milestone.
  • Milestone's operating agreement stated that as long as Razin's loan was outstanding, his decision would control in any disagreement between the managers.
  • Milestone defaulted on the loan, failing to repay it by the due date.
  • Razin sent a notice of default and a demand for payment to Milestone.
  • A disagreement arose, and Razin, invoking his authority under the operating agreement, held a meeting and voted to retain attorney Todd K. Norman to represent Milestone in the collection action Razin intended to file.
  • Bahl objected, citing a conflict of interest, and retained a different attorney, Michael J. McDermott, to represent Milestone.

Procedural Posture:

  • Sheldon Razin filed a collection action against A Milestone, LLC in the trial court.
  • Razin retained attorney Todd K. Norman to represent Milestone; concurrently, Ashwini K. Bahl retained attorney Michael J. McDermott to represent Milestone.
  • Both attorneys filed motions in the trial court to disqualify the other from representing Milestone.
  • The trial court entered nonfinal orders disqualifying both Norman and McDermott.
  • The trial court also appointed a custodian to retain new counsel for Milestone and to act as a tie-breaker on management decisions.
  • Razin appealed the trial court's nonfinal orders to the Florida Second District Court of Appeal (the intermediate appellate court).
  • McDermott intervened and filed a cross-appeal of the same orders.

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Issue:

Does a provision in an LLC operating agreement, which grants a managing member who is also a creditor of the LLC the controlling vote in any management disagreement while his loan is outstanding, authorize him to select counsel for the LLC in a collection action he brings against it?


Opinions:

Majority - Morris, Judge

Yes. An unambiguous contractual provision granting one member controlling authority in a disagreement is enforceable as written. The plain language of Article VII, section 1 of the operating agreement gave Razin controlling authority over any decision, including the retention of counsel, while his loan was outstanding. Bahl agreed to this provision in exchange for the loan, and parties are free to waive potential conflicts of interest; courts are powerless to rewrite an unambiguous agreement to make it more reasonable for one party. Razin's action did not violate his statutory duty of loyalty, as Florida law permits a manager's conduct to further their own interest without constituting a breach of duty. Furthermore, the trial court erred in finding the managers' meeting lacked a quorum or sufficient notice, as it improperly applied the sections of the operating agreement pertaining to members, not managers.



Analysis:

This decision emphasizes the principle of freedom of contract within the flexible framework of a limited liability company. It affirms that courts will enforce the plain language of an operating agreement, even if it creates a significant conflict of interest for one member. The ruling distinguishes between exercising a bargained-for contractual right and a per se breach of the statutory duty of loyalty, establishing that an action furthering a manager's own interest is not automatically a violation if it aligns with an explicit contractual right. This precedent reinforces the importance of careful drafting in operating agreements, as parties will be held to the terms they negotiate, including those that allocate decisive power to an interested party.

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