LLC Operating Agreement Arbitration Clauses are Only Enforceable Against Those Party to the Agreement

As a firm of Chicago and Orland Park business attorneys, Lubin Austermuehle handles litigation for companies in a wide range of industries. Our Schaumburg business lawyers recently came across a case from St. Clair county that is of interest to LLC’s and those businesses who include arbitration clauses in their business agreements.

The Plaintiff in Trover v. 419 OCR, Inc. was a member of a limited liability company, Fair Oaks Development Group LLC (FODG) that planned to develop the land owned by FODG. Plaintiff was advised by counsel that the company would benefit from a tax perspective should the company transfer its interest in the land to Defendant 419 OCR, Inc. and allow that company to develop the land. Relying upon that alleged tax advice and the representations of Defendant, Plaintiff allegedly allowed FODG to sell and assign its interest in the land to Defendant 419 OCR, Inc., who later transferred parts of the land to Defendant O’Fallon Group. The sale was executed by a written agreement, but Plaintiff alleged that there was an additional oral agreement between the parties that was never put in writing. Under this oral agreement, Defendants were allegedly to pay Plaintiff a to-be-determined sum of money in addition to the price of the land. Defendants eventually developed the land and made a profit, but allegedly never paid any of the sums from the oral agreement.

Plaintiff then filed a shareholder derivative action on behalf of FODG alleging breach of contract, fraud, breach of fiduciary duty, and corporate waste. Defendants filed a motion to compel binding arbitration based upon the arbitration provisions contained within the operating agreement governing FODG. The trial court denied the Defendants’ motion to compel arbitration, and in response, Defendants filed for an interlocutory appeal on the arbitration issue.

The Appellate Court performed a de novo review of the motion to compel arbitration because the trial court did not hold an evidentiary hearing or make any factual findings. The Court examined the operating agreements that contained the arbitration provisions and found that, while the land transaction in question fell within the scope of the provisions, Defendants 419 OCR and the O’Fallon Group were not parties to those agreements and therefore were not bound by them. Thus, the Court upheld the trial court’s denial of arbitration for the breach of contract claims as to those two Defendants.

Next, the Court examined whether the claims for breach of fiduciary duty brought on behalf of FODG were bound by the arbitration clauses. The Court found that FODG was not a party to its own operating agreement because no signatories on the agreements indicated that they were signing on behalf of the LLC. As such, the claims brought on behalf of FODG were not bound by the arbitration clause and the Court denied the motion as to the breach of fiduciary duty claims. The Court then reversed the trial court’s denial as to the fraud cause of action because the individual Defendants and Plaintiff both signed the operating agreement and were bound by the arbitration provision contained therein.

Trover v. 419 OCR, Inc. contains important information for limited liability companies and the members of those organizations. The holding in this case indicates that an arbitration clause in the operating agreement of an LLC can only be enforced against those who were party, or are successor in interest to a party to the agreement. Additionally, it is important to note that an LLC itself is not a party to its own operating agreement without express language indicating that it is.

Lubin Austermuehle is a full-service litigation firm based in the Chicagoland area that focuses on handling all of the legal issues confronting businesses in today’s world. We represent plaintiffs and defendants, LLC’s and corporations, and we have experience representing clients in matters ranging from shareholder disputes to breach of contract claims. Our attorneys have more than twenty years of experience in business litigation and have won favorable verdicts in “bet the business” lawsuits. Lubin Austermuehle has Chicago and Bolingbrook business litigation lawyers who can identify and understand the legal issues in a dispute, no matter how complex they may be. We will use our resources and knowledge to formulate a plan of action that will help further your interests, resolve your problems, and get you back to growing your business. If your business is being sued or you are seeking preventative legal advice, call Lubin Austermuehle now. For a consultation, call 630-333-0333 or send us an email through our website.

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