What’s Going On?

An Ohio brewing group is in litigation. The two members of Hoof Hearted Brewing are in court over alleged breaches of the operating agreement. Whether breaches exist and whether the lawsuit exists, will come down to the language of the operating agreement.

Why I Might Care

This lawsuit is relevant to anyone with membership interest in a limited liability company as it is a real-time examination of how operating agreements playout. Some question the necessity of an operating agreement and others believe that a generic operating agreement is sufficient. This case is demonstrating the importance of having a well thought-out and articulately formed operating agreement for the longevity of the company and understanding of all members.

Some Deets

I’ll do my best to keep this somewhat fast and consumable. 

The LLC Members

Hoof Hearted Brewpub, LLC (aka Hoof Hearted Brewing) is owned by two members: (1) HH Columbus (2023 E, LLC); and (2) HH Marengo (Hoof Hearted Brewing, LLC). Hoof Hearted Brewing produces beer and operates a restaurant. HH Columbus and HH Marengo negotiated and executed an operating agreement. 

The Operating Agreement

Among a number of other rights and obligations within the operating agreement, the members agreed that HH Columbus maintained an option to invest in HH Marengo operations should keg production grow. 

The Problem

For our purposes, the problem is the interpretation of the language comprising the operating agreement. HH Columbus is arguing that HH Marengo has violated the operating agreement while HH Marengo disagrees. There is a debate as to whether “expansion” has occurred causing HH Columbus the ability to exercise a right to purchase interest in HH Marengo. HH Columbus is seeking an award greater than $25k due to its belief that it did not obtain a benefit associated with the alleged expansion.

HH Columbus’ Argument. Expansion means or is based on growing keg production “beyond 54 kegs of Product per day.” 

HH Marengo’s Argument. Expansion means or is “mutually agreed upon” and based on a formula.

What Do I Think?

I’ll let the court decide the meaning of language comprising the operating agreement because…well, that’s its job. That aside, I have a number of thoughts about operating agreements, a few are listed, below. 

1. Ensure an Operating Agreement Exists. First, if an LLC is going to be established, strongly consider developing an operating agreement. Operating agreements maintain various benefits including separating liabilities of company and members, articulating rights and benefits of members, establishing tax structures, and controlling of company activities. Regardless of whether the LLC has one member or multiple members, is created for single business operation, joint venture, or subsidiary, the operating agreement can benefit all. 
2. Negotiate the Operating Agreement. Once it has been agreed to develop an operating agreement, the members should engage in active negotiation. Operating agreements can be a bit cumbersome. But taking a moment to actually discuss each component of the operating agreement can save from a fraught future. Operating agreements are meant to be negotiated like any other contract. 
3. Make the Operating Agreement Clear. Once an operating has been developed, the members should ensure the language comprising the operating agreement is clearly articulated. If you cannot understand the operating agreement from reading the operating agreement, it may be necessary to return and clarify (less you find yourself in a case like Hoof Hearted). Also, ensure there are no competing provisions or, if so, that it is clear how inconsistencies will be resolved. Do not assume what another will understand and do not rely on inferences or implications; that is a sure way to find oneself wanting.

Side bar: An interesting underlying argument exists in this case regarding the evolution of Ohio Revised Code 1705 to 1706 and its impact on direct versus derivative actions. I must admit, I am interested in where the court lands because this could certainly influence how operating agreements are constructed (and because I may be a bit of nerd). 

Happy drafting, my friends!