McConnell v. Hunt Sports Enterprises

Ohio Court of Appeals, Tenth Appellate District · Corporations

CorporationsLimited liability companiesOperating agreementsFiduciary dutiesDeclaratory judgmentsLLCoperating agreementmembers may compete

Facts

CHL was an Ohio limited liability company formed to invest in and operate an NHL franchise, and its operating agreement provided that members were not restricted from engaging in any other business venture, including one competitive with CHL. After a public arena-financing plan failed, Nationwide proposed a private arena lease, but Hunt Sports Group repeatedly found the lease unacceptable and did not timely accept it. McConnell then agreed to proceed with the franchise if Hunt would not, signed the revised lease term sheet in his own capacity, and the NHL ultimately awarded the Columbus franchise to McConnell's group rather than CHL. Hunt Sports Group later acted in CHL's name to file litigation without obtaining the member approval required by the operating agreement.

Issue

Did CHL's operating agreement permit McConnell and Wolfe Enterprises to compete against CHL for the NHL franchise, and if so, did that competition nevertheless constitute breach of contract, breach of fiduciary duty, or tortious interference? The court also considered whether Hunt Sports Group breached the operating agreement by acting on CHL's behalf without member approval, whether CHL was properly dissolved, and whether attorney fees were properly awarded under the declaratory judgment statute.

Rule

When an LLC operating agreement plainly states that members may engage in any other business venture, including one competitive with the company, members may compete with the LLC without breaching the agreement merely by doing so. Because fiduciary duties arise from the parties' undertaking, an operating agreement may define the scope of those duties, so conduct expressly authorized by the agreement is not itself a fiduciary breach, though wrongful methods of competition may still be. Under the operating agreement here, actions taken on behalf of the LLC required the specified member approval, and attorney fees under R.C. 2721.09 are permissible only when further relief based on a declaratory judgment is necessary or proper.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakefront Analytics LLC, an Ohio company based in Cleveland, was formed to develop and market hospital billing software. Its operating agreement states: "Members shall not be prohibited from engaging in any other business venture of any nature, including any venture competitive with the Company." Member Nora Patel later forms a separate company in Columbus and wins a hospital contract that Lakefront had also pursued, without using Lakefront's money or confidential materials.

If Lakefront sues Nora for breaching the operating agreement solely because she competed for and obtained the contract, which is the best answer?

Explanation. The majority held that an LLC operating agreement may plainly allow members to engage in any other business venture, including one competitive with the company. The word "other" means ventures other than the LLC itself, not ventures outside the LLC's line of business. So competition alone, when expressly authorized, does not breach the agreement.