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What Happens When the Terms of Your Georgia Entity’s Operating Agreement Are Ambiguous?

computerWhenever any business person or entity decides to create a new joint venture, the people behind that venture likely hope for great success. Sometimes these joint ventures do go on to yield positive results. Other times, however, the venture doesn’t work out. When joint ventures fail and break up, that can sometimes lead to litigation. When they do, the exact language that was contained in your operating agreement may prove to be the key to resolving the case. Whether your joint venture has failed and entered into the court system, or you are at the beginning phase and are fleshing out the terms of an operating agreement, it is important to make sure you have experienced Georgia business attorneys handling your case.

An example of a joint venture that didn’t meet with success and did trigger litigation was an Athens-based LLC formed to develop medical technology. Ownership of the joint venture was split equally between a holding company and another LLC, Healthy-IT, that was formed expressly for the purpose of entering into the joint venture. Specifically, the venture’s goal was to develop electronic medical record software.

Eventually, the venture devolved into a dispute, and the joint venture LLC, along with the holding company and others, sued Healthy and related entities for, among other things, breach of contract, breach of fiduciary duty, and misappropriation of trade secrets. The defendants filed a counterclaim that accused the plaintiff of breach of contract, among other things.

The plaintiffs asked the trial court to enter a summary judgment on the defendants’ breach of contract claim, which the trial court granted. In the appeal launched by the defendants, they alleged that the trial court should not have ended their breach of contract claim on summary judgment but should have allowed that claim to proceed to trial.

The appeals court agreed. The outcome came down to two paragraphs within the joint venture LLC’s operating agreement and the uncertainty they created. Healthy had argued that it was entitled to recover costs it had incurred in software development (up to $250,000), based upon Article I, Paragraph 9 of the operating agreement. That paragraph stated that all income from the joint venture should go, first, to pay off software development costs incurred by Healthy and, second, to reimburse costs incurred by the holding company.

On the other hand, Article I, Paragraph 4 stated that Healthy was entitled to reimbursement of its development costs up to $250,000, but this reimbursement would come from the sales of the software that the joint venture was to develop. Since the venture made exactly zero sales of its software, Healthy wasn’t entitled to any payment, the holding company argued.

The appeals court concluded that there was an ambiguity in the operating agreement created by the inclusion of both paragraphs 4 and 9. When your LLC operating agreement, or any contract, has an ambiguity within it, the courts will use the rules of contract construction and interpretation to determine how the agreement as a whole should be read. When an ambiguity cannot be resolved by using the rules of contract language construction, the case must go to a jury for them to decide what the true intent of the parties was. That was the case in this lawsuit. The rules of contract interpretation could not square away the ambiguity, so the case had to go to a jury so that it could receive the relevant evidence and make a finding about what the parties’ true intent was when they entered into the operating agreement.

Regardless of where you are in your joint venture, be it at the formation phase or at the litigation phase, you need reliable legal representation. The skilled Atlanta business litigation attorneys at Poole Huffman, LLC have been helping their clients protect their business interests for many years. Contact our attorneys online or by calling (404) 373-4008 to schedule your confidential consultation.

More blog posts:

Confirmation Letters – Avoiding Potential Conflict Regarding Agreement Terms, Atlanta Business Litigation Attorneys Blog, April 5, 2016

Property Investors Beware: “Self-Help” Evictions are Never an Option, Atlanta Business Litigation Attorneys Blog, June 18, 2015

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