Kraft v. Limestone Partners, LLC

Cite as 2017 Ark. App. 315
ARKANSAS COURT OF APPEALS
DIVISION III
No. CV-16-910
Opinion Delivered May 17, 2017
MIKE KRAFT
APPELLANT APPEAL FROM THE FAULKNER
COUNTY CIRCUIT COURT
V. [NO. 23CV-13-135]
LIMESTONE PARTNERS, LLC HONORABLE MIKE MURPHY,
APPELLEE JUDGE
REVERSED AND REMANDED
N. MARK KLAPPENBACH, Judge
Appellant Mike Kraft filed suit against appellee Limestone Partners, LLC (Limestone),
of which he is a member, for breach of contract. Kraft alleged that Limestone had breached
its operating agreement by failing to make guaranteed payments and provide promised
benefits to him. The Faulkner County Circuit Court granted summary judgment to
Limestone and dismissed Kraft’s complaint. Kraft now appeals, and we reverse and remand.
Limestone was formed in 2004 by Kraft and Mike Coats for the purpose of opening
a new restaurant. The operating agreement executed by the members in 2004 reflected that
Coats owned a 39.5 percent interest, Kraft owned a 25.5 percent interest, and four other
members owned smaller interests.1 Section 6.11 of the operating agreement provides as
follows:
1
At the time of the lawsuit, Coats’s share was 36 percent, and Kraft’s share was 24
percent.
Cite as 2017 Ark. App. 315
6.11. Guaranteed Payments to Members Participating in Management. At
least initially, Mike Coats and Mike Kraft shall be the only Members actively
participating in management of the Company. Mike Coats shall be paid a guaranteed
annual payment, paid in equal monthly installments, of $95,000.00, and Mike Kraft
shall be paid a guaranteed annual payment, paid in equal monthly installments, of
$85,000.00. These guaranteed payments shall not be changed except upon unanimous
consent of all of the Members, and shall be paid in accordance with the Company’s
payroll practices for its other employees. These Members participating in management
shall also be provided with employee benefits made available by the Company to
other employees. Additionally, Mike Coats and Mike Kraft shall also receive a
combined monthly automobile allowance of $850.00 per month.
Kraft received guaranteed payments under this section until October 2012. The amount of
the payments had changed multiple times, but every change was made with unanimous
consent.2 On October 1, 2012, Kraft was informed by Coats and two other members that
he was being “terminated” from Limestone and would no longer receive guaranteed
payments. Kraft refused to sign termination and severance agreements, as well as a voluntary
disassociation and share-surrender agreement. He subsequently filed suit alleging that the
cessation of his payments without his consent was a breach of the agreement.
Kraft moved for summary judgment, arguing that the unambiguous language of the
operating agreement included no exceptions to the requirement of unanimous consent for
any change to his guaranteed payments. In his attached affidavit, Kraft attested that he had
participated in the management of Limestone from its formation until October 1, 2012, but
he had never been an employee of Limestone or its managing member. In his deposition,
2
The amount of Kraft’s guaranteed annual payment at the time such payments stopped
was $76,500.
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Coats said that Kraft was terminated from management because he had become
unproductive. Coats said that both he and Kraft met with the attorney who drafted the
operating agreement, and although Coats did not remember discussing the lines of section
6.11 with the attorney, the purpose of that provision was to protect him and Kraft because
they were the ones behind the concept.
Limestone responded and filed a cross-motion for summary judgment, arguing that
the guaranteed salary was available to Kraft only so long as he was “participating in
management,” as set forth in section 6.11, and that he was no longer participating in
management because he had been terminated from his employment as authorized by section
9.2. Section 9.2 provides in part as follows:
9.2 Death; Other Incapacity of a Member; or Termination or Resignation
of Employment. Upon the death, Incapacity of a Member, or Termination or
Resignation of Employment of a Member for any reason, the Company and the
remaining Members shall have the continuing option thereafter to acquire the
Membership Interest of the deceased, Incapacitated Member, or former employed
Member, at the price and on the terms as the Company, the remaining Members, the
formerly employed Member, and/or the personal representative, guardian or
analogous fiduciary (the “Representative”) of the deceased or Incapacitated Member,
as the cae [sic] may be, may mutually agree . . . .
Kraft responded that section 9.2 was merely a buyout provision and did not apply to him
because he was not an employee; instead, he provided services to the company in his capacity
as a member. He argued that pursuant to the Internal Revenue Code, guaranteed payments
are not a salary, and recipients of guaranteed payments are not employees. In a second
affidavit, Kraft attested that no member had asserted a right to acquire his membership
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interest under section 9.2.
Following a hearing, the trial court granted Limestone’s motion for summary
judgment and denied Kraft’s motion for summary judgment. The court’s order stated in part
that
despite the lack of precision found in the operating agreement, the agreement clearly
dealt with the rights, obligations and interest of “members,” not employees.
[Kraft] argues that [Limestone], specifically with regard to application of Section 9.2
of the operating agreement, is attempting to “mischaracterize” [Kraft’s] status as that
of an “employee” and thus subject to termination. But at the same time, [Kraft]
apparently contends that there is no mechanism by which a “member” may be
“terminated.” That is not the case.
Reading section 9.2 in the context of the full application of the agreement so that the
terms and phrases can be reconciled, certainly the termination of a member acting in
management is contemplated. Also, it does not seem to follow that the full agreement
could be read to include a scenario by which guaranteed payments under section 6.11
could never end, as the member receiving them would never agree to their cessation
- unless there was a mechanism to terminate a managing member under 9.2. The
Court finds there was such a mechanism.
Ordinarily, on appeal from a summary-judgment disposition, the evidence is viewed
in the light most favorable to the party resisting the motion, and any doubts and inferences
are resolved against the moving party. Abraham v. Beck, 2015 Ark. 80, 456 S.W.3d 744.
However, in a case where the parties agree on the facts, we simply determine whether the
appellee was entitled to judgment as a matter of law. Id. When parties file cross-motions for
summary judgment, as was done in this case, they essentially agree that there are no material
facts remaining, and summary judgment is an appropriate means of resolving the case. Id.
As to issues of law presented, our review is de novo. Id.
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When a contract is free of ambiguity, its construction and legal effect are questions of
law for the court to determine. Shamburger v. Shamburger, 2016 Ark. App. 57, 481 S.W.3d
448. When contracting parties express their intention in a written instrument in clear and
unambiguous language, it is the court’s duty to construe the writing in accordance with the
plain meaning of the language employed. Id. We must consider the sense and meaning of
the words used by the parties as they are taken and understood in their plain and ordinary
meaning. Spann v. Lovett & Co., 2012 Ark. App. 107, 389 S.W.3d 77. It is a well-settled
rule that the intention of the parties to a contract is to be gathered, not from particular words
and phrases, but from the whole context of the agreement. Id. On appeal from a trial
court’s determination of a purely legal issue, we must decide only if its interpretation of the
law was correct, as we give no deference to the trial court’s conclusion on a question of law.
Shamburger, supra.
Kraft argues that the plain language of the operating agreement prohibits the cessation
of his guaranteed payments without the unanimous consent of the members. He notes that
section 6.11 uses the word “shall” in two places: “Kraft shall be paid a guaranteed annual
payment,” and “[t]hese guaranteed payments shall not be changed except upon unanimous
consent of all of the Members.” “Shall” is defined as “[h]as a duty to” or “is required to,”
and when used in a contract provision, we have held that it means that compliance with that
provision is mandatory. Shamburger, 2016 Ark. App. 57, at 10, 481 S.W.3d at 454 (citing
Black’s Law Dictionary (10th ed. 2014)). Kraft contends that there are no provisions in the
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agreement that create an exception to the mandatory language of this provision. Limestone
argues that other provisions of the agreement authorize Kraft’s termination from management
and, consequently, the termination of his salary.
Section 6.1, titled “Management Rights,” provides in part that “[t]he Management
and control of the business and affairs of the Company shall be vested in the Members,
provided Mike Coats shall serve as the Managing Member with responsibility for
management and control of the day-to-day operations of the Company. The Managing
Member may be replaced by a Majority of the Members.” Although Kraft was never the
managing member, Limestone argues that a reasonable interpretation of the agreement
supports the fact that the same majority could replace or remove another member of the
company actively involved in its management. We do not find this argument persuasive.
The plain language of the agreement contemplates only the replacement of the managing
member, not the removal of any member who may be participating in management.
Moreover, this section does not provide any authority for a majority of members to change
the guaranteed payments of Kraft or Coats in disregard of the express terms of section 6.11
requiring unanimous consent.
Section 9.2 provides in part that
[u]pon the death, Incapacity of a Member, or Termination or Resignation of
Employment of a Member for any reason, the Company and the remaining Members
shall have the continuing option thereafter to acquire the Membership Interest of the
deceased, Incapacitated Member, or former employed Member . . . .
Limestone argues that this provision reflects the parties’ recognition that a member in the
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employment of the company could be terminated for any reason. Limestone contends that
Kraft was fired from “actively participating in management” as set forth in section 6.11 and
accordingly was no longer guaranteed the annual payments. Kraft maintains that section 9.2
is merely a buyout provision that does not apply to him because he was never an employee.
He further claims that it does not authorize the termination of any member’s right to
participate in management. We agree with Kraft. Section 9 is titled “Disposition of
Membership Interests.” Limestone concedes that disposition of Kraft’s interest is not an issue
in this case, and Kraft remains a member of the company. Although section 9.2 refers to the
fact that a member’s employment can be terminated, it does not address the removal of
members from management or the process by which members can be terminated. That
process is addressed by section 10, which is silent as to how a member can be involuntarily
removed absent bankruptcy, death, or an adjudication of incompetence.
Furthermore, section 6.11 does not tie Kraft’s rights under that section to employment
by the company. In fact, Kraft was not treated as an employee of the company. No Social
Security, Medicare, or state income taxes were withheld from his payments as is the custom
with an employee. Kraft is a member of the LLC, and his payments were guaranteed
payments much like guaranteed payments to a partner in a partnership.
Arkansas law requires that different clauses of a contract must be read together and the
contract construed so that all of its parts harmonize, if that is possible; giving effect to one
clause to the exclusion of another on the same subject is erroneous. Asbury Auto. Used Car
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Ctr., L.L.C. v. Brosh, 364 Ark. 386, 220 S.W.3d 637 (2005). The provisions relied on by
Limestone, however, do not apply to the same subject as section 6.11. Sections 6.1 and 9.2
are not applicable to Kraft’s circumstances and have no bearing on his rights under section
6.11. As Kraft notes, Limestone’s interpretation would render the unanimous-consent
requirement of section 6.11 meaningless by allowing a majority vote to exclude Kraft or
Coats from management, change their guaranteed payments, and force a sale of their
membership interests under section 9.2.
The plain language of the agreement provides in mandatory terms that Kraft’s
guaranteed payments cannot be changed without unanimous consent. A court cannot make
a contract for the parties but can only construe and enforce the contract that they have made.
Crittenden Cty. v. Davis, 2013 Ark. App. 655, 430 S.W.3d 172. We will not read into the
contract words that are not there, and we will not rewrite a contract or approve additional
terms that would, in effect, enforce a contract that the parties might have made, but did not
make. Id. Accordingly, we reverse and remand the trial court’s order granting summary
judgment to Limestone.
Reversed and remanded.
BROWN, J., agrees.
WHITEAKER, J., concurs.
PHILLIP T. WHITEAKER, Judge, concurring. I agree with the majority opinion
that this case should be reversed and remanded. I write separately, however, because I would
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do so for a different reason. As the majority notes, the parties in this case filed cross-motions
for summary judgment. The majority also notes that, generally speaking, when parties file
cross-motions for summary judgment, they “essentially agree that there are no material facts
remaining, and summary judgment is an appropriate means of resolving the case.” Abraham
v. Beck, 2015 Ark. 80, 456 S.W.3d 744. This court has stated, however, that the fact that
both parties have moved for summary judgment does not establish that there is no issue of
fact. Cranfill v. Union Planters Bank, N.A., 86 Ark. App. 1, 17, 158 S.W.3d 703, 713 (2004)
(citing Wood v. Lathrop, 249 Ark. 376, 459 S.W.2d 808 (1970)). In this case, I believe there
are questions of fact to be resolved.
Specifically, I would hold that there are conflicting facts as to whether appellant Mike
Kraft was a “manager” or an “employee” of Limestone. Kraft averred repeatedly that he was
not an employee, but Limestone argued otherwise. Although Mike Coats testified in his
deposition that he did not maintain “employee or personnel files” on himself or Kraft,
Limestone argued in its briefs to the circuit court that “by the express terms of the operating
agreement, both Mike Coats and Mike Kraft are deemed employees.”1 (Emphasis added.) Even
the circuit court noted Kraft’s argument that Limestone was trying to “mischaracterize” him
as an employee.
1
This was based on the language in paragraph 6.11 that the guaranteed annual
payments “shall be paid in accordance with the Company’s payroll practices for its other
employees” and that members participating in management “shall also be provided with
employee benefits made available by the Company to other employees.” (Emphasis added.)
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This court has stated that if conflicting testimony appears in the affidavits and
depositions that are filed, summary judgment may be inappropriate as the issues involved will
depend on the credibility of the witnesses. Clark v. Progressive Ins. Co., 64 Ark. App. 313,
321, 984 S.W.2d 54, 59 (1998) (citing 10A Charles Allan Wright, Arthur R. Miller & Mary
Kay Kane, Federal Practice and Procedure § 2726 at 440–47 (1998)). Because there was
conflicting testimony about Kraft’s status as a manager or an employee in the affidavits and
depositions, and because such status had some bearing on whether or how Limestone could
terminate Kraft, I would reverse and remand for the circuit court to resolve that material
question of fact.
Lax, Vaughan, Fortson, Rowe & Threet, P.A., by: Grant E. Fortson, for appellant.
Adkisson & Wilcox, LLP, by: William C. Adkisson, for appellee.
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