Somewhere out on the grasslands of Big Sky Country, the controlling member of a cattle ranch organized as a Montana LLC is sighing "oy vey" instead of singing "yippie-yi-yo-ki-yay" after a recent decision by the Montana Supreme Court holding that the operating agreement’s arbitration clause does not require arbitration of another member’s petition for judicial dissolution of the LLC.  Gordon v. Kuzara, 2010 MT 275 (Dec. 21, 2010).

The case involves an application to dissolve Half Breed, LLC by one of the managing members (Gordon) based on allegations that the controlling member (Kuzara) engaged in a variety of misconduct including diversion of assets and improper accounting and tax reporting.  Kuzara responded with a motion to compel arbitration based on the following arbitration clause in the operating agreement:

Before an action may be brought by any member of the company challenging this agreement, any activity conducted pursuant to this agreement, or any interpretation of the terms of this agreement … one meeting of company members shall thereafter be held for the purpose of resolving a challenge. . . . [I]f a challenge cannot be resolved in such a meeting by a vote of a majority of actual member ownership interests, then the issue shall be submitted to a group of three arbitrators [for binding arbitration].

The trial judge denied arbitration on the grounds that judicial dissolution is a statutory remedy that only the courts are authorized to grant, and because the requested dissolution did not challenge any action pursuant to the operating agreement.

The Supreme Court’s affirmance of the lower court’s decision against arbitration makes the following, key points:

  • The issue is one of first impression in Montana.
  • The parties’ contract does not involve interstate commerce and the Federal Arbitration Act therefore does not apply.
  • A party cannot be forced to submit to arbitration any dispute that he has not agreed to submit.
  • The operating agreement’s arbitration clause "does not contain any provision addressing judicial dissolution".

Kuzara argued that Gordon’s application contained allegation’s of Kuzara’s misconduct and that dissolution was sought based on activity conducted "pursuant to" the operating agreement as expressly contemplated in the arbitration clause.  The Supreme Court disagreed, stating that

Kuzara misinterprets the purpose of the factual allegations in the Gordons’ Application for Dissolution.  The Gordons are not bringing a cause of action based on Kuzara’s conduct pursuant to the [operating agreement].  Rather, the Gordons merely cite examples of conduct that they claim make Half Breed no longer economically feasible . . . for the purpose of establishing that dissolution is appropriate under [the dissolution statute].  The mere fact that the conduct warranting dissolution consists of Kuzara’s activities or that a court may look to the [operating agreement] for guidance in determining whether the activities alleged amount to a substantial frustration for the LLC, does not mean that the Gordons are seeking anything other than judicial dissolution pursuant to [the statute].

The decision cites a case from Georgia (Georgia Rehabilitation Center, Inc. v. Newnan Hospital, 658 S.E.2d 737 (2008)), in which that state’s Supreme Court denied arbitration of a petition for judicial dissolution of an LLC, despite a broad arbitration clause ("any dispute, controversy or claim arising out of or in connection with, or relating to" the Operating Agreement), because another provision in the agreement, specifying events of dissolution, did not include judicial dissolution.  A vigorous dissent in that case, quoting from the dissolution statute, noted:

I do not see how a decision maker, be he a judge or an arbitrator, can decide whether it is "reasonably practicable" to carry on the business "in conformity with" the existing Articles of Organization and Operating Agreement without analyzing those two documents in detail and determining the legal effect of many of their provisions in light of current circumstances.

I haven’t researched and don’t know whether Montana and Georgia courts generally are more hostile to arbitration than New York courts.  This blog previously featured posts about New York decisions ordering arbitration of dissolution petitions in the presence of broad arbitration clauses not unlike those in the Kuzara and Georgia cases (read here and here).  On the other hand, I’ve also written about one New York decision denying arbitration despite a broad clause where, not unlike Kuzara, a collateral provision in the agreement used limiting language that the court effectively incorporated into the arbitration clause (read here).

The most direct way to avoid such controversy regardless of the jurisdiction is to insert express language in the arbitration clause itself, e.g.:

Any controversy or claim arising out of or relating to this agreement, including but not limited to an application for judicial dissolution, shall be settled by arbitration administered by . . .

But even absent such express reference to dissolution, so long as the parties use a standard broad arbitration clause, and so long as there’s no other express provision in the agreement that implies a right to go to court for dissolution, it’s highly likely that the court will grant a motion to compel arbitration of a dissolution petition — if not in Big Sky Country, at least in the Empire State.

Doug Batey (LLC Law Monitor blog) adds some good commentary on the Kuzara case here.