The Business Divorce Law ReportOperating agreements form the foundation of a well-functioning partnership or LLC. These agreements define the roles, responsibilities, and rights of members or partners, as well as the processes for managing the business.
When one party breaches the terms of an operating agreement, it can disrupt operations, harm relationships, cause financial damages to the company or other owners and threaten the integrity of the business.
Resolving these disputes requires a careful analysis of the agreement’s provisions and the actions in question. At Weiner Law Group, Jay McDaniel and the Business Divorce Practice Group specialize in addressing breaches of operating agreements.
Whether through litigation or negotiation, we work to hold parties accountable, protect your rights, and preserve the long-term viability of the business.
What Is a Breach of an Operating Agreement?
A breach of an operating agreement occurs when a partner or member violates the terms set forth in the agreement. This can involve anything from failing to fulfill basic obligations to acting outside the scope of authority granted by the agreement.
Common Types of Breaches
Failure to Contribute Capital
- When a member or partner fails to provide the agreed-upon financial contributions or resources, it can disrupt the business’s operations and growth.
Unauthorized Actions
- Engaging in transactions, signing contracts, or making decisions without proper authority or approval violates the operating agreement’s governance provisions.
Misuse of Business Assets
- Using company resources for personal gain or in ways not authorized by the agreement is a serious breach.
Violation of Non-Compete Clauses
- Members or partners who engage in competing ventures while still part of the business breach their fiduciary duties and the agreement’s terms.
Failure to Distribute Profits
- Deliberately withholding or misallocating distributions owed to members or partners violates the terms of many agreements.
Refusal to Share Financial Information
- Denying access to financial records or reports when required by the agreement is another form of breach that can harm trust and transparency.
Legal Remedies for Breach of Operating Agreements
When a breach occurs, legal remedies may include enforcing the terms of the agreement, seeking compensation for damages, or removing the violating party from the business.
Specific Performance
- The court may order the breaching party to fulfill their obligations under the operating agreement.
- Example: Requiring a member to make a delayed capital contribution.
2. Monetary Damages
- If the breach results in financial harm to the business or other members, the breaching party may be held liable for damages.
3. Dissociation
- For severe breaches, courts may order the removal of the violating member or partner from the business, requiring a buyout of their ownership interest.
Judicial Dissolution
- In extreme cases, a breach may justify dissolving the business entirely, liquidating assets, and distributing proceeds among members or partners.Declaratory Judgment
- Courts can provide clarity on disputed provisions of the operating agreement, ensuring compliance and preventing future breaches.
How We Handle Breach of Operating Agreement Disputes
Jay McDaniel and the Business Divorce Practice Group at Weiner Law Group provide comprehensive legal services to address breaches of operating agreements, including:
1. Negotiating Resolutions
- Many disputes can be resolved without litigation. We work to negotiate settlements that restore compliance with the agreement while minimizing costs and preserving relationships.
2. Enforcing Agreement Terms
- We take swift action to enforce the provisions of operating agreements, ensuring that all members or partners uphold their obligations.
3. Filing and Defending Lawsuits
- When litigation becomes necessary, we aggressively represent our clients in court to hold breaching parties accountable and protect the business’s integrity.
4. Amending and Strengthening Agreements
- We help businesses amend operating agreements to address vulnerabilities exposed during disputes, reducing the likelihood of future breaches.
5. Navigating Buyouts and Dissociation
- In cases where breaches irreparably harm the business, we assist with the removal and buyout of offending members, ensuring fair compensation and compliance with state laws.
Challenges in Breach of Operating Agreement Cases
Ambiguities in the Agreement
Poorly drafted agreements can make it difficult to prove a breach. We analyze these agreements and use supporting documentation to build a strong case.
Proving Financial Harm
Quantifying damages from a breach often requires detailed financial analysis. As a Certified Valuation Analyst, Jay McDaniel provides expert guidance in assessing the impact of breaches on the business’s value.
Defending Against Counterclaims
Breaching parties often respond with counterclaims, alleging that others violated the agreement or fiduciary duties. We develop strategies to counter these claims and protect our clients.
Protecting Against Future Breaches
Prevention is always the best strategy. We help clients take proactive steps to avoid future breaches:
1. Drafting Clear and Comprehensive Agreements
Operating agreements should define roles, responsibilities, and processes in unambiguous terms, leaving little room for interpretation.
2. Implementing Dispute Resolution Mechanisms
Including provisions for mediation or arbitration can help resolve conflicts before they escalate into litigation.
3. Regularly Reviewing and Updating Agreements
Businesses evolve, and agreements must adapt accordingly. Regular reviews ensure that agreements remain relevant and enforceable.
Why Work With Jay McDaniel and Weiner Law Group?
Extensive Experience
With over 30 years of experience handling disputes in closely held businesses, Jay McDaniel has the expertise to address even the most complex breaches.
Tailored Solutions
Every dispute is unique, and we develop customized strategies that align with your business goals and needs.
Certified Valuation Expertise
As a Certified Valuation Analyst, Jay McDaniel provides unparalleled insight into the financial implications of breaches and ensures fair outcomes for all parties.
Closely Held Exit Planning Advisor
As a Certified Exist Planning Advisor, Jay McDaniel brings insight to the process of preparing agreements that serve the interests of the business and its owners, avoid conflicts and breaches.
Proven Results
We’ve successfully resolved breach of agreement cases for clients across a range of industries, from family-owned businesses to LLCs and partnerships.
FAQs About Breach of Operating Agreements
Q: What should I do if a partner breaches the operating agreement?
Document the breach, review the agreement’s provisions, and consult an attorney to determine your legal options for enforcement or resolution.
Q: Can I remove a member for breaching the operating agreement?
Yes, depending on the terms of the agreement and state laws, dissociation or removal may be possible for severe breaches.
Q: How long does it take to resolve a breach of agreement case?
The timeline varies. Some disputes can be resolved in weeks through negotiation, while litigation may take several months to over a year.
Q: Can operating agreements be enforced in court?
Yes, operating agreements are legally binding contracts, and courts can enforce their terms if a breach is proven.
Q: What happens if there is no operating agreement?
In the absence of an operating agreement, state laws govern the business’s operations and disputes.
Conclusion
A breach of an operating agreement can disrupt your business, but with the right legal strategy, you can enforce accountability and protect your company’s integrity. Jay McDaniel and the Business Divorce Practice Group at Weiner Law Group have the experience and expertise to resolve these disputes efficiently and effectively. Contact Jay McDaniel today to schedule a consultation and take the first step toward safeguarding your business.