ATTORNEYS FOR APPELLANTS
Gene R. Leeuw
John M. Mead
Indianapolis, Indiana
ATTORNEYS FOR APPELLEES
Edward L. Murphy, Jr.
Diane C. Bauer
Fort Wayne, Indiana
__________________________________________________________________
IN THE
SUPREME COURT OF INDIANA
__________________________________________________________________
APPLE GLEN CROSSING, LLC, )
APPLE GLEN INVESTORS, LP, )
BOBECK REAL ESTATE COMPANY, )
INC. AND H. DUANE BOBECK, )
)
Appellants (Plaintiffs Below), ) Indiana Supreme Court
) Cause No. 02S05-0207-CV-397
v. )
) Indiana Court of Appeals
TRADEMARK RETAIL, INC. ) Cause No. 02A05-0103-CV-110
APPLE GLEN CROSSING, LLC, and )
TERRY MONTESI, Individually )
)
Appellees (Defendants Below). )
__________________________________________________________________
APPEAL FROM THE ALLEN SUPERIOR COURT
The Honorable Nancy Eschoff Boyer, Judge
Cause No. 02D01-0101-CP-158
__________________________________________________________________
ON PETITION TO TRANSFER
__________________________________________________________________
March 7, 2003
BOEHM, Justice.
Apple Glen Crossing is a shopping center developed by a limited
liability company whose minority member also served as manager of the LLC
under the LLC’s Operating Agreement. The LLC and its majority member
attempted to remove the manager, claiming the manager breached the
Operating Agreement by incurring obligations to contractors without prior
approval. The trial court in this case granted the manager’s request for a
preliminary injunction preventing its removal. The court, in part,
reasoned that once the LLC ordered the obligations paid, the alleged breach
of the Operating Agreement was “cured” and the LLC no longer had the power
to remove the manager. We granted transfer in this case to reaffirm the
longstanding rule that a principal who honors an obligation wrongfully
incurred by its agent may nevertheless enforce its remedies against the
agent for the wrongful action. However, for different reasons, we affirm
the trial court’s grant of the preliminary injunction and remand this case
for further proceedings.
Factual and Procedural Background
Apple Glen Investors, LP (AGI) is an Indiana limited partnership
that, until 1998, was the sole owner of a piece of undeveloped real estate
in Fort Wayne. In May of that year, AGI teamed up with a Texas
corporation, Trademark Retail, Inc., to form a limited liability company,
Apple Glen Crossing, LLC, organized under the Indiana Business Flexibility
Act. The purpose of the LLC was to develop the property into a shopping
center now known as Apple Glen Crossing. AGI became the majority (65%)
member of the LLC, and the parties entered into an “Operating Agreement”[1]
that provided for Trademark to become the sole “manager.” [2]
Under the Operating Agreement, Trademark could make “Major Decisions”
only with unanimous approval of the “Members.” Among the actions defined
by the agreement to be a Major Decision was the “[e]ntering into or
amending any contract . . . where the payments to be made . . . are
reasonably anticipated to exceed $10,000 in any one calendar year.” The
agreement also spelled out the procedure for obtaining approval of Major
Decisions: (1) Trademark was to give AGI notice of its recommendation; (2)
AGI then had five days after receiving the notice to object to Trademark’s
recommended course of action; and (3) if no timely objection was made,
Trademark’s recommendation was deemed approved. In addition, a separate
Development, Marketing and Management Agreement (“Management Agreement”)
entered into between Trademark and the LLC stated: “[Trademark] shall
assist [the LLC] and/or [the LLC’s] Architect in preparing change orders
for the Project, but no change order exceeding $5,000 could be made without
[the LLC’s] consent.” The parties dispute the meaning of “change orders,”
an issue more fully discussed in Part III. The term is not defined in the
Management Agreement but also appears in the contract between the LLC and
Irmscher, Inc., the contractor hired to construct Apple Glen Crossing.
In the ordinary course of construction at Apple Glen Crossing,
Trademark only occasionally provided AGI with copies of the change orders
submitted by Irmscher for payment, and AGI neither expressly approved nor
objected to the change orders it received. The result was that much of the
construction went forward with only Trademark’s specific approval, but
without any objection from AGI. That changed on September 12, 2000, when
counsel for AGI sent a letter to the Executive Vice President of Trademark
objecting to change orders it had received apparently on September 6.[3]
That letter stated:
Trademark’s request for Apple Glen Investors’ consent to Change
Orders 39, 43, and 46-52 that was submitted by T.C. Beardslee on
behalf of Trademark was received on September 6, 2000, by Apple Glen
Investors while Duane Bobeck [president of AGI’s general partner,
Bobeck Real Estate] was out of the country as you well know. Apple
Glen Investors objects to and withholds its consent from the proposed
changes.
The documents you submitted indicate these change orders were
already approved by Trademark. Because Trademark was not authorized
to undertake this action without the unanimous agreement of the
members of Apple Glen Crossing, Trademark has again breached the
Operating Agreement. Furthermore, Trademark has failed to provide
sufficient information to Apple Glen Investors in order for it to make
a determination on the propriety or necessity of these changes had the
request been properly and timely submitted.
On the basis of these facts, Apple Glen Investors withholds
it[s] consent and objects to Change Orders 39, 43, and 46-52.[4]
Although AGI objected to the change orders, it later directed Trademark to
pay them.
On September 15, 2000, AGI’s counsel sent a second letter to
Trademark stating that “[b]ased on the events of default detailed in my
letter to you of September 12, 2000, Trademark Retail, Inc. is hereby
notified by Apple Glen Investors, L.P. that as of today Trademark is
removed as manager of Apple Glen Crossing, LLC.” AGI also purported to
terminate both the LLC Operating Agreement and the Management Agreement
between the LLC and Trademark.
At a meeting of the LLC members on October 18, 2000, AGI voted to
“acknowledge and approve” the removal of Trademark as manager of the LLC
and appoint itself as manager. However, the records of the project
remained at Trademark’s office in Texas and Trademark continued to hold
itself out as the manager of the LLC. On October 26, 2000, AGI filed a
complaint against Trademark in Allen Circuit Court essentially seeking to
enforce its decision to discharge Trademark as manager of the LLC. On
November 7, 2000, Trademark filed its own separate complaint in Allen
Superior Court seeking, in part, a preliminary injunction enjoining AGI
from removing Trademark as manager. Those cases were consolidated in
Superior Court and on December 22, 2000, AGI moved for a preliminary
injunction against Trademark’s continuing to act as manager of the LLC.
After a three-day hearing, the trial court concluded that “AGI’s removal of
Trademark [in the September 15, 2000, letter] was void” because AGI did not
give Trademark the 15 days required under the Operating Agreement or the 30
days under the Management Agreement to cure any default. The trial court
also held that “[s]ince the change orders were paid at the direction of AGI
. . ., the Event of Default has been cured and cannot form a legal basis
for removing Trademark as manager of the LLC, or of the shopping
center.”[5] The Court of Appeals agreed with this reasoning. Apple Glen
Crossing, L.L.C. v. Trademark Retail, Inc., 760 N.E.2d 1109, 1117 (Ind. Ct.
App. 2001).
I. Standard of Review
The grant or denial of a preliminary injunction rests within the
sound discretion of the trial court, and our review is limited to whether
there was a clear abuse of that discretion. Ind. Family & Soc. Servs.
Admin. v. Walgreen Co., 769 N.E.2d 158, 161 (Ind. 2002). To obtain a
preliminary injunction, the moving party has the burden of showing by a
preponderance of the evidence that: (1) the movant’s remedies at law are
inadequate, thus causing irreparable harm pending resolution of the
substantive action; (2) the movant has at least a reasonable likelihood of
success at trial by establishing a prima facie case; (3) threatened injury
to the movant outweighs the potential harm to the nonmoving party resulting
from the granting of an injunction; and (4) the public interest would not
be disserved. Id. If the movant fails to prove any of these requirements,
the trial court’s grant of an injunction is an abuse of discretion. Id.
II. An Agent’s Liability to its Principal
We agree with the Court of Appeals that the trial court’s enjoining
the removal of Trademark as manager was within its discretion. However, as
to the issue of Trademark’s “reasonable likelihood of success at trial,” we
disagree with the trial court’s and the Court of Appeals’ reasoning.
Specifically, we hold that a principal’s paying an obligation improperly
incurred on its behalf by its agent does not constitute a waiver of the
principal’s objection to the agent’s action or bar the principal’s claims
against the agent. Therefore, Trademark will not succeed at trial by
claiming it could not be fired as manager after the LLC ordered the
objectionable change orders paid. However, we agree with Trademark’s
contention that its approving the “change orders” objected to by the LLC
did not constitute a “Major Decision” as that term is defined by the
Operating Agreement, and therefore gave the LLC no grounds to remove
Trademark as manager.
An Indiana LLC is expressly authorized to outline in an “operating
agreement” provisions defining the authority of its “manager.” See Ind.
Code § 23-18-4-1(b); id. § 23-18-4-4. The LLC’s Operating Agreement named
Trademark as the LLC’s manager and included provisions modifying the
ordinary power of a principal “to revoke an agent’s authority at any time.”
1 Indiana Law Encyclopedia, Agency § 7, at 456 (2002). Under that
agreement, Trademark could be terminated for an “Event of Default” only if
the default was not cured within 15 days after notice from the LLC
specifying the event.[6] The parties agree that the September 12, 2000,
letter constituted notice of a claimed “Event of Default,” although they
disagree as to whether Trademark actually was in default.
Trademark acted as manager of the LLC, and as such was an agent of the
LLC. The trial court held that any “Event of Default” allegedly caused by
Trademark’s approving change orders 39, 43, and 46-52 was cured by the
LLC’s subsequently ordering Trademark to pay them. This decision was
presumably grounded in the notion that a principal may be estopped from
alleging the illegality of an agent’s acts when the principal ratifies
those acts. Id. § 13, at 466.
As this Court stated in Koval v. Simon Telelect, Inc., 693 N.E.2d
1299, 1304 (Ind. 1998), a principal is bound by the acts of a general agent
if the agent acted within the usual and ordinary scope of the business in
which it was employed, even if the agent may have violated the private
instructions the principal may have given it.[7] See also 3 Am. Jur. 2d
Agency § 73, at 487 (2002) (“An agent has the implied authority to do
business on the principal’s behalf in accordance with the general custom,
usage, and procedures in that business.”). Whether or not Trademark was in
default of the Operating Agreement by unilaterally authorizing the change
orders, unless Irmscher was on notice of the limited authority,[8] the LLC
was obligated to pay Irmscher for the work already authorized by Trademark
as the LLC’s agent. But to the extent the trial court concluded payment to
Irmscher effected a “cure” of any unauthorized payment, we disagree. It is
well established that an agent who wrongfully binds its principal may be
subject to termination and may also remain liable to the principal in
accordance with the terms of their agreement, despite the principal’s
obligation to the third party. Harold Gill Reuschlein and William A.
Gregory, Agency and Partnership § 81, at 133-34 (“If . . . the principal
was compelled to ratify . . . to protect his own interests the agent is not
relieved of liability. . . . Even though the ratification . . . operates to
relieve the agent of liability for damages, the breach . . . by the agent
stands and the principal still retains his right to discharge the agent.”);
Restatement (Second) of Agency § 101(b) (1958) (ratification of the
unauthorized action does not preclude a claim against the agent if the
ratification is necessary “to protect . . . [the principal’s] interests.”).
We need not address the issue of the agent’s liability for damages here.
For our purposes today the point is that the LLC’s honoring its obligation
to Irmscher cannot be considered a “cure” of Trademark’s alleged default
that precludes Trademark’s removal.
III. The Effect of Approving Change Orders
The trial court defined “change orders” as “requests for construction
work payments.” At oral argument, counsel for Trademark expanded on the
trial court’s definition by stating that the change orders were essentially
invoices of work actually completed by Irmscher, and not the “entering into
or amending of” a contract, i.e., not a “Major Decision.” This seems
essentially correct.
The term “change orders” was used in the construction contract with
Irmscher in a variety of ways. On some occasions, the term was used in the
traditional sense as the means by which the LLC, if it chose, could order
Irmscher to change the project itself, its lump sum cost, or the contract’s
time schedule. When used in this manner, it is easy to see how the change
orders would constitute amendments to the construction contract with
Irmscher that would need LLC approval. In fact, the change order forms
submitted by Irmscher for payment stated: “The said Contract as hereby
amended shall remain in full force and effect.”
However, the construction contract also provided a different use for
these documents entitled “change order.” When it came to the cost of
construction, the contract estimated “Lump Sum Amounts” (termed
“allowances”) the LLC could expect to pay for various parts of the project.
The costs actually incurred were represented by a succession of “change
orders” that Irmscher submitted to Trademark, as manager of the LLC, for
payment. For example, a change order would state the “original project
costs” as “$0,” state the amounts charged by the previous “change orders”
(e.g., $6,429,928.26), the amount charged under the current change order
(e.g., $3,484.50), and the total cost of the project to date
($6,433,412.76). The effect of this is that what a change order termed a
“project cost adjustment” was merely a tally of the costs incurred since
the previous change order and a running total of all the costs to date, and
not necessarily a change in anything originally agreed to by the LLC or
Irmscher. This was the pricing mechanism contemplated by the construction
contract, which stated: “The Lump Sum price for the Project is to be
determined by change order to this contract.” “Change orders” could also
account for a cost reduction, as reflected in change order 51, which
reflected a negotiated price reduction of $1,569.50 from earlier project
costs.
The “change orders” objected to by the LLC were in this latter
category and amounted to requests for progress payments. Their net effect
was not the “entering into” of a new construction contract or “amending”
the original contract with Irmscher. Rather, these documents appear to be
in substance, as Trademark’s counsel put it, invoices to be paid pursuant
to pricing already contemplated by the contract for various stages of
Irmscher’s work. As such, Trademark’s approval of these amounts did not
constitute “Major Decisions” under the contract. Therefore, we agree with
the trial court’s conclusions that (1) the LLC’s letter of September 12,
2000, stated no basis upon which it could properly terminate Trademark; and
(2) Trademark has demonstrated a reasonable likelihood of success at trial.
Conclusion
We affirm the trial court’s grant of a preliminary injunction
enjoining the removal of Trademark as manager of the LLC, and remand this
case for further proceedings.
SHEPARD, C.J., and DICKSON, SULLIVAN, and RUCKER, JJ., concur.
-----------------------
[1] “Operating agreement” of a limited liability company is defined by the
Indiana Code as “any written or oral agreement of the members as to the
affairs of a limited liability company and the conduct of its business that
is binding upon all the members.” Ind. Code § 23-18-1-16.
[2] The Act contemplates a “manager” if the Articles of Organization so
provide. Ind. Code § 23-18-1-14. In practical terms, AGI’s approval was
required for all Major Decisions. This type of restraint on the actions of
an LLC manager is contemplated by Indiana Code section 23-18-4-1(b), which
states: “If the articles of organization provide for a manager . . .,
except to the extent that the operating agreement reserves the authority to
any members . . ., the manager . . . [has] the authority to manage the
business or affairs of the limited liability company.” (Emphasis added.)
See also I.C. § 23-18-4-5 (“Members may enter into an operating agreement
to regulate or establish any aspect of the affairs of the limited liability
company or the relations of the members and managers, if any, including
provisions establishing . . . [t]he manner in which the business and
affairs of the limited liability company shall be managed . . . .”).
[3] According to the letter, AGI appears to have sent its objection six
days after receiving notice of Trademark’s action, one day after the five
days required under the terms of the Operating Agreement. Trademark has
not argued in the trial court or on appeal that AGI’s objection was too
late, instead focusing on whether AGI provided enough time to cure the
alleged defect, and the issue, if there is one, is therefore waived.
[4] Those change orders were for the following amounts: number 39
($74,077.50); number 43 ($110,324.50), number 46 ($63,225.36), number 47
($3,832.95); number 48 ($14,025); number 49 ($22,110); number 50 ($19,338);
number 51 (minus $1,726.45); and number 52 (minus $9,960.72).
[5] The trial court also addressed other “events of default” raised by AGI,
but found that (1) they were not the basis upon which Trademark was
purportedly removed by AGI’s September 15 letter, and (2) AGI’s other
complaints were raised well after the time for objection had passed. We
agree with those conclusions.
[6] “Event of Default” is defined as “[t]he failure to observe or comply
with any provision or covenant in this Agreement or the [Management]
Agreement, and such default is not cured within 15 days of the date Notice
of such default is given, which Notice shall specify with reasonable
particularity the basis for the default claimed.”
[7] The principal’s obligation to the third party is also predicated on the
third party’s ignorance that the agent was exceeding its authority. Koval,
693 N.E.2d at 1304.
[8] “Where a third party knows, or should know, that an agent is exceeding
his or her authority, the principal will not be bound.” 1 Indiana Law
Encyclopedia, Agency § 21, at 475 (2002) (citing Prairie Heights Educ. v.
Bd. of Sch. Trustees of Prairie Heights Cmty. Sch. Corp., 585 N.E.2d 289
(Ind. Ct. App. 1992)).