Business Associations

Flippo v. CSC Associates III, LLC

Supreme Court of Virginia, 2001
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Facts:

CSC, a general partnership of siblings, formed a partnership, FLTC, with their uncles, the Flippos. CSC converted its interest in FLTC to an LLC, and FLTC was also converted to an LLC, with CSC and the Flippos as three members and Carter Flippo as manager. Two years later, the Flippos considered creating individual LLCs to hold their interests in FLTC, but CSC rejected their requests.

Carter Flippo consulted with the law firm of MWBB, which advised him that he could create a joint venture with Flippo Lumber Corporation and transfer all of its assets to the joint venture, resulting in its dissolution under its operating agreement. LLCs could then hold the Flippos interests in the new venture, and CSC's approval would not be required.

Carter Flippo then did this and informed CSC of it, and CSC sued every other party to recover FLTC's assets, remove Carter Flippo as manager, to enjoin further efforts to dissolve FLTC, and to recover damages for breach of fiduciary duty. Carter Flippo also sued to dissolve FLTC and distribute its assets and the suits were consolidated.

Procedural History:

Trial court held that Carter Flippo breached his fiduciary duties to FLTC and violated the operating agreement thereof and rejected the Flippos' arguments. It awarded CSC $12,860.64 in compensatory and $350,000 in punitive damages, as well as $178,349.02 in attorneys' fees and $9,166.75 in sanctions. It also prohibited the Flippos from serving as managers and installed CSC instead.

Issues:

  • Did Carter Flippo breach his fiduciary duty to CSC?

  • Were punitive damages proper?

  • Should FLTC be dissolved?

  • Were sanctions appropriate?

Flippos Arguments:

  • The Flippos were relying on legal advice when they did the acts in good faith, so a statute protects them from liability.

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    [T]he trial court erred in awarding $350,000 in punitive damages against Carter Flippo because

    1. there was no evidence of Carter Flippo's net worth,
    2. reliance on advice of counsel should be a defense to punitive damages, and
    3. the evidence was insufficient to show that Carter Flippo acted with malice or wantonness.

Reasoning:

  • The Flippos' cited statute is taken out of context and does not apply. MWBB was not representing FLTC at the time, and the advice sought was not related to the business interests of FLTC. Carter Flippo was seeking his own personal goals, not those of the company. MWBB's advice is therefore irrelevant to the statute, and the Flippos are not protected from liability.

    1. While evidence of a party's net worth is admissible, it is not required. Carter Flippo's interest in FLTC alone was sufficient to establish that the punitive damage award was not destructive.
    2. Good faith reliance of counsel is only a factor to be considered in determining punitive damages. It is not an absolute defense.
    3. The trial court found that the Flippos were seeking to break the LLC after not getting their way, not acting in the best interests of it. This was characterized as "secretive, concealed, dishonest" and "an attempt to steal property worth millions of dollars." While such actions are not illegal, illegality is not required. It shows actual malice by acting in complete disregard of FLTC and CSC's interests regardless.

  • The issue of replacing managers violating FLTC's operating agreement was not properly preserved on appeal.

  • While the FLTC partnership allowed a member to dissolve it at any time, the FLTC LLC's operating agreement is different. It allows members to elect to continue the LLC without purchasing the resigning member's share.

  • The Flippos' fraud allegations were baseless. The cited letter was merely an opinion and invited correction. This directly conflicts with the proposition that the changes were made with an intent to mislead, which is a prerequisite for fraud. The trial court did not err in awarding sanctions based on this.

Holding:

  • Yes, Carter Flippo breached his fiduciary to CSC.

  • Yes, punitive damages were proper.

  • No, FLTC should not be dissolved.

  • Yes, sanctions were appropriate.

Judgment:

Affirmed.