Hotel Titan Escapes Multi-Million Dollar Fla. Judgment Where No Joint Venture in Breach of Contract Case

In today’s featured case, the plaintiff construction firm contracted with a vacation resort operator in the Bahamas partly owned by a Marriott hotel subsidiary. When the resort  breached the contract, the plaintiff sued and won a $7.5M default judgment in a Bahamas court. When that judgment proved uncollectable, the plaintiff sued to enforce the judgment in Florida state court against Marriott – arguing it was responsible for the judgment since it was part of a joint venture that owned the resort company.  The jury ruled in favor of the plaintiff and against Marriott who then appealed.

Reversing the judgment, the Florida appeals court first noted that under Florida law, a joint venture is an association of persons or legal entities to carry out a single enterprise for profit.

In addition to proving the single enterprise for profit, the joint venture plaintiff must demonstrate (i) a community of interest in the performance of the common purpose, (ii) joint control or right to control the venture; (iii) a joint proprietary interest in the subject matter of the venture; (4) the right to share in the profits; and (5) a duty to share in any losses that may be sustained.

All elements must be established. If only one is absent, there’s no joint venture – even if the parties intended to form a joint venture from the outset.

The formation of a corporation almost always signals there is no joint venture. This is because joint ventures generally follow partnership law which follows a different set of rules than do corporations. So, by definition, corporate shareholders cannot be joint venturers by definition.

Otherwise, a plaintiff could “have it both ways” and claim that a given business entity was both a corporation and a joint venture. This would defeat the liability-limiting function of the corporate form.

A hallmark of joint control in a joint venture context is mutual agency: the ability of one joint venturer to bind another concerning the venture’s subject matter.  The reverse is also true: where one party cannot bind the other, there is no joint venture.

Here, none of the alleged joint venturers had legal authority to bind the others within the scope of the joint venture. The plaintiff failed to offer any evidence of joint control over either the subject of the venture or the other venturers’ conduct.

There was also no proof that one joint venture participant could bind the others. Since Marriott was only a minority shareholder in the resort enterprise, the court found it didn’t exercise enough control over the defaulted resort to subject it (Marriott) to liability for the resort’s breach of contract.

The court also ruled in Marriott’s favor on the plaintiff’s fraudulent inducement claim premised on Marriott’s failure to disclose the resort’s precarious economic status in order to  entice the plaintiff to contract with the resort.

Under Florida law, a fraud in the inducement claim predicated on a failure to disclose material information requires a plaintiff to prove a defendant had a duty to disclose information. A duty to disclose can be found (1) where there is a fiduciary duty among parties; or (2) where a party partially discloses certain facts such that he should have to divulge the rest of the related facts known to it.

Here, neither situation applied. Marriott owed no fiduciary duty to the plaintiff and didn’t transmit incomplete information to the plaintiff that could saddle the hotel chain with a duty to disclose.

Take-aways:

A big economic victory for Marriott. Clearly the plaintiff was trying to fasten liability to a deep-pocketed defendant several layers removed from the breaching party. The case shows how strictly some courts will scrutinize a joint venture claim. If there is no joint control or mutual agency, there is no joint venture. Period.

The case also solidifies business tort axiom that a fraudulent inducement by silence claim will only prevail if there is a duty to disclose – which almost always requires the finding of a fiduciary relationship. In situations like here, where there is a high-dollar contract between sophisticated commercial entities, it will usually be impossible to prove a fiduciary relationship.

Source: Marriott International, Inc. v. American Bridge Bahamas, Ltd., 2015 WL 8936529

 

LLC Members Not Liable to Deceased Member’s Estate; Partnership’s Assets Become LLC’s Upon Conversion

The First District recently examined the nature of a limited liability company (LLC) member’s personal liability and the requirements for converting a general partnership to an LLC.

In Daniel v. Ripoli, 2015 IL App (1st) 122607, a case with a labyrinthine fact pattern, an LLC member’s estate sued an accounting company LLC to recover distributions the estate claimed was owed the deceased member under the LLC operating agreement.

The LLC defended by asserting that the deceased’s distribution amount was permanently reduced before he died by an amendment to the operating agreement.  The trial court entered a money judgment of about $200,000 for the plaintiff and the LLC appealed.

Held: reversed.  The operating agreement’s amendment lessened the deceased member’s distribution amounts from the amendment date forward.

Rules/Reasons:

1/ In Illinois a contract can be modified by express agreement or by conduct.  A contractual modification that’s not expressly agreed to can be ratified by acquiescence in a course of conduct consistent with recognizing the modification;

2/ An LLC provides more insulation from liability for its members than does a corporation for its shareholders;

3/ Under Section 10-10(a) of Illinois’ LLC Act, 805 ILCS 180/10-10(a), LLC members aren’t liable for debts of the LLC unless (1) the articles of organization provide for personal liability; and (2) the member has consented in writing to the adoption of a personal liability provision;

3/ The failure of an LLC to observe usual corporate formalities in connection with the operation of its business is not a basis for imposing personal liability on LLC members or managers;

4/ When a general partnership converts to an LLC, all that’s required is each partner vote for the conversion.  The partnership does not need to also transfer all of its assets to the newly formed LLC;

5/ Once the conversion from partnership to LLC is complete, all debts and assets of the partnership automatically become those of the LLC;

7/ An LLC member can sue the LLC or another member for legal or equitable relief with or without an accounting to enforce the member’s rights under the LLC Act, the operating agreement or any other rights of the member;

8/ The death of an LLC member results in the member’s disassociation from the LLC;

9/ The LLC Act does not allow for a deceased member’s estate to sue the LLC or other LLC members on the deceased member’s behalf;

805 ILCS 180/10-10(a), (c), 180/15-20.

The court held that here, once the accounting general partnership converted to an LLC, the LLC members (who were the erstwhile partners) had no liability to non-members like the plaintiff.

Additionally, the parties’ conduct indicated a mutual recognition that the deceased’s distributions were reduced by the deceased member accepting lesser distributions for several years before he died.  The court then reversed the judgment against the LLC.

Afterwords:

A former LLC member’s estate has no standing to sue an LLC absent legislative decision to the contrary;

A partnership’s assets and liabilities become those of an LLC upon conversion to the LLC form;

Basic contract formation principles apply when determining LLC members’ rights and duties under an operating agreement.