Flippo v. CSC Associates III, L.L.C.

Present: All the Justices

F. CARTER FLIPPO, ET AL.

v. Record No. 002183 OPINION BY JUSTICE ELIZABETH B. LACY
June 8, 2001
CSC ASSOCIATES III, L.L.C.

FROM THE CIRCUIT COURT OF KING WILLIAM COUNTY
Thomas B. Hoover, Judge

In this appeal, two members of a limited liability

company seek reversal of a trial court's judgment entered in

consolidated cases holding one of the members liable for a

breach of fiduciary duty to the limited liability company,

barring both members from performing as managers of the

company, awarding compensatory and punitive damages, and

imposing sanctions pursuant to Code § 8.01-271.1. Because we

conclude that there was no abuse of discretion by the trial

court and no reversible error in the judgment, we will affirm

that judgment.

I. Facts

T. Frank Flippo owned timberlands in Hanover, Caroline,

King and Queen, and King William Counties. On his death in

1974, these properties were devised to his three children,

Arthur P. Flippo, F. Carter Flippo, and Lucy Flippo Wisely.

Carter Flippo, as executor of the estate, managed the

timberlands. Lucy Flippo Wisely conveyed her interest in the

timberlands to her three children, who held their interests in
the name of CSC Associates, a general partnership. In 1988,

Carter Flippo, Arthur Flippo, and CSC Associates created the

Flippo Land & Timber Company Partnership, to own and operate

the business.

In 1989, the Flippos and CSC Associates discussed

amending the partnership agreement to address issues of

partner withdrawal or death that were not covered in the

existing partnership agreement. A "restated partnership

agreement" was drafted which contained specific provisions

relating to the purchase of a member's shares by the remaining

members upon the death or withdrawal of a member. The

restated partnership agreement eliminated a paragraph

contained in the original partnership agreement allowing a

partner to terminate the partnership unilaterally and receive

an in kind distribution of the partnership's assets. The

restated partnership agreement, drafted by an attorney at the

law firm of McGuire Woods Battle & Boothe L.L.P. (MWBB), was

never executed.

In 1995, the Flippos agreed to permit CSC Associates to

hold its interest in the partnership as a limited liability

company, CSC Associates III, L.L.C. (CSC). Flippo Land &

Timber Company Partnership also was converted to a limited

liability company, Flippo Land & Timber Co., L.L.C (FLTC).

2
CSC, Arthur Flippo, and Carter Flippo were the members of

FLTC. Carter Flippo was named manager of FLTC.

In 1997, Carter and Arthur Flippo considered creating

individual limited liability companies to hold their interests

in FLTC for estate planning purposes. CSC rejected requests

by the Flippos to allow them to hold their interests in FLTC

through limited liability companies. Carter Flippo then

consulted with MWBB regarding other means by which they could

implement their estate planning goals. MWBB advised that

Carter Flippo could resign from FLTC, thereby forcing its

dissolution, or a joint venture could be formed between FLTC

and Flippo Lumber Corporation. Under the second approach,

Carter Flippo, as manager of FLTC, could then transfer its

assets to the joint venture, resulting in the dissolution of

FLTC under the terms of FLTC's Operating Agreement. MWBB

advised the Flippos that limited liability companies could

hold their interests in the new venture and that none of these

actions would require CSC's approval under the Operating

Agreement of FLTC.

The Flippos adopted the joint venture approach suggested

by MWBB, and, in October 1998, Carter Flippo informed CSC by

letter that, as manager of FLTC, he had accepted a proposal

from Flippo Lumber Corporation for FLTC to enter a joint

venture and had conveyed all of FLTC's property to the new

3
venture, Timber Enterprises, L.L.C. (Timber Enterprises). The

letter also informed CSC that FLTC had "dissolved" under

Article 13(a)(ii) of the Operating Agreement because FLTC had

contributed all of its non-cash assets to Timber Enterprises.

CSC was given the option of joining Timber Enterprises if it

agreed to the terms of that venture's Operating Agreement.

As a result of these events, CSC filed a bill of

complaint, individually and derivatively on behalf of FLTC,

against Carter Flippo, Arthur Flippo, FLTC, Flippo Lumber

Corporation, and Timber Enterprises. CSC sought to recover

FLTC's assets, to remove Carter Flippo as manager of FLTC, to

enjoin further efforts to dissolve FLTC or dispose of its

assets, and to recover compensatory and punitive damages for

breach of fiduciary duties by the Flippos. Prior to trial,

Timber Enterprises returned the assets it had received from

FLTC and the company was dissolved, thereby making the claims

against it moot.

The Flippos filed a separate amended bill of complaint

seeking the dissolution of FLTC and distribution of the assets

in kind on three alternative bases: (1) under Code § 13.1-

1047, because it was not reasonably practicable to carry on

the business of FLTC; (2) reformation of Article 13 of the

Operating Agreement based on mutual mistake; and (3)

rescission of the Operating Agreement based on CSC's alleged

4
fraud in the inducement. The Flippos submitted "contingent

resignations" which would be operative should the trial court

grant them relief by determining that Article 13 allowed a

member to resign under that Article and receive an in kind

distribution of the member's share of the assets. CSC filed a

motion for sanctions on the basis that the allegations of

mutual mistake of fact and fraud in Counts Two and Three of

the Flippos' amended bill of complaint were not well grounded

in fact or warranted by existing law or a good faith argument

for the extension, modification, or reversal of the existing

law.

The two suits were consolidated by agreement and an ore

tenus hearing was held. In CSC's suit, the trial court held

that Carter Flippo, assisted by Arthur Flippo, breached his

fiduciary duties to and violated the Operating Agreement of

FLTC in forming Timber Enterprises and in transferring FLTC's

assets to that company. The trial court awarded CSC its

attorneys' fees of $178,349.02 for prosecuting the action on

behalf of FLTC. Compensatory and punitive damages of

$12,860.64 and $350,000.00, respectively, were awarded against

Carter Flippo. The trial court also prohibited the Flippos

from serving as managers of FLTC and installed CSC in that

capacity.

5
 In ruling on the Flippos' amended bill of complaint, the

trial court denied the request for dissolution of FLTC and for

reformation or rescission of the Operating Agreement.

Accordingly, the trial court also rejected the Flippos'

"contingent resignations." Finally, the trial court granted

CSC's motion for sanctions, awarding an additional $9,166.75

in attorneys' fees. The Flippos assign error to the trial

court's determinations in both suits.

II. CSC's Suit

The Flippos assign error to the trial court's failure to

afford Carter Flippo protection from liability for a breach of

fiduciary duty pursuant to Code § 13.1-1024.1(B), to the award

of punitive damages against Carter Flippo, to the removal of

Carter and Arthur Flippo as managers, and to the designation

of CSC as manager of FLTC.

A. Breach of Fiduciary Duty

The Flippos assert in their first three assignments of

error that the trial court erred in failing to afford Carter

Flippo the defense from liability contained in subsection (B)

of Code § 13.1-1024.1 for acts the trial court held breached

Carter Flippo's fiduciary duty to FLTC. 1

1
The Flippos do not challenge the trial court's
determination that Carter Flippo's actions in forming Timber
Enterprises and transferring FLTC's assets to that company
constituted a breach of his fiduciary duty to FLTC.

6
 Subsection (B) of Code § 13.1-1024.1 provides in

pertinent part:

B. Unless a manager has knowledge or information
concerning the matter in question that makes
reliance unwarranted, a manager is entitled to
rely on information, opinions, reports or
statements, including financial statements and
other financial data, if prepared or presented
by:

. . . .

2. Legal counsel, public accountants, or
other persons as to matters the manager believes,
in good faith, are within the person's
professional or expert competence; . . . .

The Flippos assert that Carter Flippo relied on the legal

advice he received from MWBB when he accepted Flippo Lumber

Corporation's offer for a joint venture, created Timber

Enterprises, and transferred FLTC's assets to the joint

venture. Thus, the Flippos conclude that the trial court

erred in imposing liability on Carter Flippo for a breach of

fiduciary duties for acts taken in reliance on legal advice.

The Flippos apply this Code section out of context.

A manager, like a corporate director, is required to

discharge his duties in accordance with his "good faith

business judgment of the best interests of the limited

liability company." Code § 13.1-1024.1(A); see Code § 13.1-

690(A). By virtually identical language, Code §§ 13.1-

1024.1(B) and 13.1-690(B) afford managers and corporate

7
directors, respectively, protection from liability in the

exercise of that good faith judgment under certain

circumstances. We have held that a corporate director is

entitled to such protection from liability under Code § 13.1-

690(B) only for acts related to the exercise of business

judgment on behalf of the corporation of which he or she was

the director. Simmons v. Miller, 261 Va. 561, 544 S.E.2d 666

(2001). There is no basis to apply a different rule to

managers seeking protection from liability under Code § 13.1-

1024.1(B). In this case, therefore, to come within the

protection of subsection (B) of Code § 13.1-1024.1, the legal

advice which Carter Flippo received and acted upon must have

been advice sought in good faith for the benefit of the

company.

The trial court found that the legal advice sought by

Carter Flippo was not related to the business interests of

FLTC. MWBB was not representing FLTC when it advised Carter

Flippo to transfer the assets of FLTC to Timber Enterprises.

According to the trial court, MWBB was "representing their

long-time clients, Carter Flippo and Arthur Flippo." Not only

was the advice sought, delivered, and implemented for the

personal benefit of the Flippos, Carter Flippo testified at

trial that he thought the advice was not "very good" for FLTC.

8
 The Flippos' argument that the advice upon which it acted

involved acts which could "legally" be taken by a manager is

irrelevant to the prerequisite for protection under Code

§ 13.1-1024(B) — whether an act was taken with the intent of

benefiting the company. Furthermore, an act which is

otherwise legal may, nevertheless, breach one's fiduciary

duty. The advice relied and acted upon in this case was given

solely for the purpose of implementing the Flippos' personal

estate planning goals. Even if legal, the action was neither

sought nor taken with the intent of benefiting FLTC and, in

fact, had an adverse impact on the company. Following such

advice cannot be the basis for a defense under subsection (B)

of Code § 13.1-1024.1 to a violation of subsection (A) of that

section.

The Flippos also complain that the trial court erred in

imposing liability on Carter Flippo because MWBB was acting

under a conflict of interest as defined by the Code of

Professional Responsibility applicable to attorneys at the

time. See Former DR 5-105(C). We disagree. Although the

trial court suggested that MWBB had a conflict of interest

because it represented both the Flippos and FLTC, such

conflict did not affect the Flippos' motivation for seeking

the advice, the advice given, and the decision to follow that

advice. Carter Flippo's actions to further his estate

9
planning goals based on advice directed toward that end alone

violated his fiduciary duty. Any conflict of interest under

which MWBB operated was immaterial to Carter Flippo's conduct.

Accordingly, we conclude that the trial court did not err

in denying Carter Flippo the protection from liability

afforded by Code § 13.1-1024.1(B).

B. Punitive Damages

The Flippos next assert that the 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.

First, we reject the Flippos' contention that imposition

of punitive damages was improper because there was no evidence

of Carter Flippo's net worth. The purpose of punitive damages

is to punish the wrongdoer and warn others. Smith v. Litten,

256 Va. 573, 578, 507 S.E.2d 77, 80 (1998). Evidence of a

party's net worth is admissible because it is material to this

purpose and is relevant to a determination of the size of the

award and whether it is so large as to be destructive. Id.;

The Gazette, Inc. v. Harris, 229 Va. 1, 50-51, 325 S.E.2d 713,

746-47, cert. denied sub nom. Fleming v. Moore, 472 U.S. 1032

(1985). While evidence of net worth is relevant, the

10
appropriate amount of a punitive damage award can be

established by other evidence, and the lack of evidence of the

wrongdoer's net worth does not of itself defeat the punitive

damage award. In this case, the record showed that the

estimated value of the assets of FLTC exceeded nine million

dollars. Carter Flippo's one-third interest in FLTC alone was

sufficient to establish that the punitive damage award of

$350,000 was not destructive.

Next, while some jurisdictions have allowed good faith

reliance on advice of counsel to defeat the imposition of

punitive damages, such reliance generally has been treated

only as an appropriate factor to consider in determining

whether the requisite malice or wantonness needed to impose

punitive damages has been shown. 2 We agree that good faith

reliance on the advice of counsel is relevant, but it is not

an absolute defense to the imposition of punitive damages.

Cf. Pallas v. Zaharopoulos, 219 Va. 751, 755, 250 S.E.2d 357,

2
See, e.g., Stanton v. Astra Pharm. Prods., Inc., 718
F.2d 553, 580 (3d Cir. 1983)("[P]unitive damages may be
awarded 'only after consideration of the act itself, together
with all the circumstances, including the motive of the wrong-
doer, and the relations between the parties.'"); Hamilton
County Bank v. Hinkle Creek Friends Church, 478 N.E.2d 689,
691 (Ind. Ct. App. 1985)("Several other jurisdictions have
held that good faith reliance on the advice of counsel may
prevent imposition of punitive damgages. We agree . . . .
However, such is not an absolute defense." (citations
omitted)).

11
359 (1979) (good faith reliance on legal advice is absolute

defense to charge of malicious prosecution).

Finally, the Flippos argue that the trial court based its

award of compensatory damages on "the implementation of the

Timber Enterprises 'scam'" and, therefore, the punitive damage

award can stand only if Carter Flippo "made the Timber

Enterprises 'scam' a reality 'with malice or wantonness.' "

No such evidence is in the record, the Flippos contend,

because MWBB, not Carter Flippo, conceived the Timber

Enterprises "scam" and Carter Flippo simply followed the legal

advice given by MWBB. Citing Simbeck, Inc. v. Dodd Sisk

Whitlock Corp., 257 Va. 53, 508 S.E.2d 601 (1999), the Flippos

assert that their actions in this case were not shown to be

malicious or wanton, but were a legitimate "hard ball"

response to CSC's refusal to allow the Flippos to transfer

their interests in FLTC to limited liability companies and

realize their estate planning goals.

However, the trial court found that the Flippos "weren't

going [to MWBB] asking for advice as to what is in the best

interest of the LLC, they were asking what was the best way to

break this LLC after the younger members of the organization,

CSC, had not done what they wanted them to do." This action,

as characterized by the trial court, was "secretive,

concealed, dishonest" and "an attempt to steal property worth

12
millions of dollars." Punitive damages were assessed "because

of that clearly dishonest conduct."

In reviewing this decision, we make an independent review

of the record to determine whether it supports a finding of

actual malice or wantonness by clear and convincing evidence.

Williams v. Garraghty, 249 Va. 224, 236-37, 455 S.E.2d 209,

217 (1995). The record in this case is clear that the actions

taken by Carter Flippo were in response to CSC's refusal to

agree that the Flippos' interests in FLTC could be held by

limited liability companies. The record is also clear that in

order to realize their estate planning goals, the Flippos did

not want to withdraw their interests from FLTC under Article

10 of the Operating Agreement, but wanted to maintain control

of the timberlands which comprised the assets of FLTC. To

accomplish this objective, the Flippos sought and acted on

advice that resulted in divesting FLTC of the timberlands as

an asset. The Flippos purposely concealed these actions from

CSC; and the new venture, including ownership of the

timberlands by Timber Enterprises, was presented to CSC as a

completed transaction.

The Flippos argue that they did nothing illegal, but

illegality is not the test for punitive damages. Punitive

damages may be awarded if a defendant acted with actual malice

or such willful or wanton recklessness as to evince a

13
conscious disregard for the rights of others. Booth v.

Robertson, 236 Va. 269, 273, 374 S.E.2d 1, 3 (1988). Here,

the Flippos acted in conscious disregard of the interests of

FLTC and CSC. Furthermore, the fact that the scheme was

devised by MWBB does not alter the underlying reason why the

scheme was devised in the first place – the Flippos' desire to

implement their estate planning goals regardless of the

interests of FLTC and CSC and any duties they owed to those

entities.

Accordingly, we conclude that the trial court did not err

in awarding FLTC punitive damages against Carter Flippo.

C. Appointment of CSC as Manager of FLTC

In their sixth and seventh assignments of error, the

Flippos assert that in removing Carter Flippo as manager of

FLTC, disqualifying Arthur Flippo from serving as manager, and

installing CSC as manager, the trial court exceeded its

statutory authority and violated FLTC's Operating Agreement.

CSC asserts that this issue has not been preserved for appeal,

citing Rule 5:25.

The Flippos offer two grounds which they maintain place

this issue properly before us. First, they contend that they

raised the issue of the trial court's lack of authority to

take this action in their demurrer to Count Three of the bill

of complaint. In the demurrer, they asserted that Code

14
§§ 13.1-1024 and -1024.1 do not provide a cause of action for

the disqualification or removal of a member from serving as

the manager of a limited liability company. The trial court

did not rule on the demurrer, but the Flippos assert that they

properly preserved the issue for appeal because they objected

to the final order which "granted the relief the demurrer

challenged as inappropriate." The problem with this

contention, however, is not only that the Flippos never sought

a ruling on their demurrer, but also that the arguments

presented to the trial court on this issue after the filing of

the demurrer indicated that the Flippos abandoned any reliance

on the grounds stated in the demurrer to defeat imposition of

the relief sought by CSC in Count Three.

At trial, counsel for the Flippos did not argue that the

trial court could not remove Carter and Arthur Flippo as

managers. Rather counsel argued that he did not think "a case

has been made" for requiring Carter Flippo to step down as

manager or for dissociation of the Flippos. Counsel suggested

that further restrictions would be appropriate only if the

court were concerned about Carter Flippo's future actions as

manager and advised that restrictions contained in the consent

order entered by the trial court for the duration of the trial

would be appropriate.

15
 The Flippos' assertion that the evidence is insufficient

to support CSC's claim admitted the court's authority to grant

the relief sought and challenged only the proof burden of the

party seeking the relief. At no point in oral arguments to

the court, in post trial memoranda, or in objections to the

final order did the Flippos refer to their previously filed

demurrer or raise any objection to the relief sought by CSC in

Count Three based on the trial court's lack of authority to

remove or disqualify the Flippos as managers and to appoint

CSC as manager of FLTC. Thus, we conclude that the mere

filing of a demurrer and objecting to the final order under

the circumstances of this case did not comply with the

requirements of Rule 5:25 that objections must be "stated with

reasonable certainty at the time of the ruling."

The Flippos also argue that these assignments of error

are properly before us because they involve a challenge to the

subject matter jurisdiction of the trial court and, therefore,

can be raised at any time. Again we disagree. In this case,

the trial court concluded that the Flippos had breached their

fiduciary duties to FLTC and violated the Operating Agreement

in doing so. Code § 13.1-1023(C)(1) authorizes a court of

equity to enforce an operating agreement by relief "that the

court in its discretion determines to be fair and

appropriate." The Operating Agreement identified Carter and

16
Arthur Flippo as successive managers and also stated that

"[a]ll Members shall participate in the management of the LLC,

but they shall appoint one Member as a Manager." The trial

court was charged with construing the Operating Agreement and

enforcing it in a "fair and appropriate manner." Whether the

enforcement of the Operating Agreement as construed by the

trial court was "fair and appropriate" is a matter reviewable

on appeal for its correctness, but the initial decision was

fully within the subject matter jurisdiction of the trial

court to consider in the first instance.

Accordingly, for these reasons we conclude that the

issues raised in assignments of error six and seven were not

properly preserved in the trial court, and therefore we do not

consider them here. Rule 5:25.

III. The Flippos' Suit

In their amended bill of complaint, the Flippos' sought

the dissolution of FLTC and in kind distribution of its

assets. In Count One, the Flippos asked that FLTC be

dissolved pursuant to Code § 13.1-1047 because "it is not

reasonably practicable to carry on the business" of FLTC under

the Operating Agreement. In Count Three, the Flippos sought

rescission of the Operating Agreement, alleging that CSC

fraudulently induced the Flippos to agree to the Operating

Agreement by representing that CSC's proposed changes to

17
Article 13 did not materially change the Operating Agreement.

The Flippos allege such changes deprived them of a right to

resign and receive a distribution in kind of their one-third

interest in the assets. The trial court denied the Flippos'

requested relief for dissolution and rescission, finding,

respectively, that there was no evidence that the Operating

Agreement adversely impacted the operation of FLTC's business

and that CSC did not make any misrepresentations regarding the

changes it proposed to Article 13 of the Operating Agreement.

The Flippos have not assigned error to either of these

holdings.

In Count Two of their amended bill of complaint, the

Flippos asserted that "the parties were mutually mistaken as

to the effect of the changes proposed by CSC to Article 13 and

there was no meeting of the minds regarding that provision."

In developing this position at trial, the Flippos presented

evidence which, in their view, showed that provisions in the

previous partnership agreements as well as in Article 13 of

the current Operating Agreement were intended to, and did,

allow a partner or member to resign, force the dissolution of

the entity, and receive the distribution of the entity's

assets in kind. To secure the relief requested under Count

Two, dissolution and distribution in kind, the Flippos

tendered their resignations from FLTC "contingent" on the

18
trial court concluding that dissolution and distribution in

kind were authorized by the Operating Agreement. In response,

CSC maintained that although such rights were included in the

original partnership agreement, neither the restated

partnership agreement nor the subsequent FLTC Operating

Agreement ever contained a right to resign, force dissolution

of the partnership, and receive distribution of partnership

assets in kind.

The trial court found that Article 9 of the original

partnership agreement for the Flippo Land & Timber Company

Partnership specifically allowed a partner to terminate the

partnership and receive a distribution in kind, but the court

rejected the Flippos' contention that similar provisions were

included in the unexecuted restated partnership agreement.

The trial court found that CSC had no expectation that such

rights were included or were supposed to be included in the

restated partnership agreement or in the current Operating

Agreement. Furthermore, the trial court found that the

Flippos had no such expectation either. According to the

trial court, the Flippos instead expected CSC to leave FLTC

and be bound by the provisions of the Operating Agreement,

which would have given the Flippos the right to purchase CSC's

membership share at 85% of its appraised value. Thus, the

trial court found that the only mistake harbored by the

19
Flippos was in the "prediction of things that are going to

happen in the future."

Accordingly, the trial court held that "[t]here was no

mutual mistake of fact or law among the Flippos and CSC

regarding the FLTC Operating Agreement." The Flippos do not

assign error to this holding. Rather, they assert that the

trial court erred in its interpretation of FLTC's Operating

Agreement, specifically that Article 13's reference to Article

9 entitles the remaining members to an opportunity to purchase

the shares of a resigning member.

Article 13 has been characterized as unambiguous by the

Flippos, CSC, and the trial court, although the construction

of the provision varies with the reader. Article 13 states in

relevant part that dissolution of FLTC occurs on "the death,

resignation, bankruptcy, or dissolution of a Member, . . .

unless, within 90 days of such event, the procedures of

Article 9 are followed resulting in an election to continue

the LLC . . . ."

Article 9 provides that on the death of a member, the

remaining members may "elect to purchase" the interest of the

deceased member, or, if such interest is not purchased, a

majority of the remaining members "may elect to continue the

LLC." If the remaining members "do not make either of these

elections," the LLC will be dissolved.

20
 The Flippos maintain that the word "election" in Article

13 refers only to the election in Article 9 to "continue the

LLC" and does not include the election procedures in that

Article regarding the right of the remaining members to

purchase the departed member's shares. We disagree with the

Flippos.

In construing contracts, we apply familiar principles.

"The primary goal in the construction of written contracts is

to determine the intent of the contracting parties, and intent

is to be determined from the language employed, surrounding

circumstances, the occasion, and apparent object of the

parties." Christian v. Bullock, 215 Va. 98, 102, 205 S.E.2d

635, 638 (1974).

It is the duty of the court to construe the
contract made between the parties, not to make a
contract for them, and "The polestar for the
construction of a contract is the intention of the
contracting parties as expressed by them in the
words they have used." Ames v. American Nat'l
Bank, 163 Va. 1, 38, 176 S.E. 204, 216. The facts
and circumstances surrounding the parties when they
made the contract, and the purposes for which it
was made, may be taken into consideration as an aid
to the interpretation of the words used, but not to
put a construction on the words the parties have
used which they do not properly bear. "It is the
court's duty to declare what the instrument itself
says it says." 163 Va. at 38, 176 S.E. at 216.

Seaboard Air Line R.R. Co. v. Richmond-Petersburg Turnpike

Auth., 202 Va. 1029, 1033, 121 S.E.2d 499, 503 (1961).

21
 In applying these principles, we first turn to the

language of the Operating Agreement and then to the

circumstances surrounding its execution. Article 9 refers to

two types of elections, either of which, if followed,

continues the LLC. The language of Article 13 refers to

procedures "resulting in an election to continue the LLC."

Without further limiting language, Article 13 does not

eliminate the purchase election of Article 9. Furthermore, an

interpretation that eliminates the election to purchase a

departed member's share from Article 13 renders the provisions

of that Article in conflict with Article 9. Both Articles

refer to termination of the LLC on a member's death, and

Article 9 unequivocally includes the election to purchase

under such a circumstance.

The facts and circumstances surrounding the execution of

the Operating Agreement and the "apparent object of the

parties" support the above construction. There is no dispute

that FLTC's Operating Agreement was to "mirror" the prior

unexecuted restated partnership agreement. The trial court

concluded that the resignation and in kind distribution rights

sought by the Flippos were not contained in the restated

partnership agreement. Because that agreement served as a

basis for the current Operating Agreement, the absence of

these rights in the Operating Agreement was consistent with

22
CSC's expectations. Thus, CSC's suggestion that a reference

to the procedures of Article 9 be included in Article 13 was

consistent with its position that resignation forcing

distribution in kind was not a part of the restated

partnership agreement. Article 13 already contained a

provision allowing the members to elect to continue the LLC

without purchasing the resigning member's share. Therefore,

there was no need to add the Article 9 reference other than to

bring Article 13 into compliance with CSC's understanding.

Finally, CSC specifically asked the Flippos and MWBB to

review the suggested changes, including those made to Article

13, and inform CSC if any "are not acceptable." Neither the

Flippos nor MWBB raised any question about the changes or

indicated that they were not acceptable in any way.

Under the trial court's construction of Article 13, on

the resignation of a member, FLTC would be dissolved unless

the remaining members elected to continue it by purchasing the

resigning member's shares or electing to continue it without

such purchase by a vote of the remaining members. Whether the

Operating Agreement is considered ambiguous or unambiguous,

under the terms of the agreement and the record regarding the

purpose of the parties and the circumstances surrounding its

execution, the trial court's construction of Article 13 is

23
reasonable and we will affirm that portion of the trial

court's judgment.

IV. Sanctions

CSC filed a motion for sanctions based on the allegations

of mutual mistake and fraud in Counts Two and Three of the

Flippos' amended bill of complaint. The trial court awarded

sanctions pursuant to Code § 8.01-271.1 in the amount of

$9,166.75. The Flippos challenge the award of sanctions,

asserting that the findings of the trial court were

insufficient to support the sanctions and that the Flippos'

theories of recovery were well grounded in fact and in law.

In reviewing a trial court's award of sanctions under

Code § 8.01-271.1, we apply an abuse of discretion standard.

In applying that standard, we use an objective standard of

reasonableness in determining whether a litigant and his

attorney, after reasonable inquiry, could have formed a

reasonable belief that the pleading was well grounded in fact,

warranted by existing law or a good faith argument for the

extension, modification, or reversal of existing law, and not

interposed for an improper purpose. Gilmore v. Finn, 259 Va.

448, 466, 527 S.E.2d 426, 435-36 (2000).

The Flippos based their fraud count, Count Three, on a

July 12, 1996 letter from CSC to MWBB and the Flippos. In

that letter, CSC proposed changes to a draft of FLTC's

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Operating Agreement, which it characterized as "housekeeping"

items that had no material effect on the Operating Agreement.

This characterization was a misrepresentation, the Flippos

assert, because the additions were material and not merely

"housekeeping." The trial court granted CSC's motion for

sanctions, concluding that the fraud count was "an unjustified

count," and rejecting the "idea that" CSC could defraud "these

businessmen" who "had the assistance of an extremely

experienced attorney, who was preparing the documents for

their benefit."

An allegation of fraud requires a showing by clear and

convincing evidence of an intentional and knowing

misrepresentation of a material fact, made with the intent to

mislead, and relied upon by another to his or her detriment.

Elliott v. Shore Stop, Inc., 238 Va. 237, 244, 384 S.E.2d 752,

756 (1989). Here, the July 12, 1996 letter sent to MWBB and

the Flippos containing CSC's alleged misrepresentations of

fact stated in pertinent part:

We have had our attorney review the document
and some "oversights" and housekeeping items have
been added (as shown in red). I would hope these
are just housekeeping items and have no material
affect [sic] on the agreement. Please let me know
if any of these are not acceptable.

Applying the objectively reasonable standard recited

above, we conclude that the language of this letter could not

25
support a reasonable belief that a pleading alleging fraud was

well grounded in fact or law, regardless of whether the

changes suggested resulted in a material change in the

Operating Agreement. First, the language of the letter, as

CSC argues, states an opinion — the opinion of the writer that

he "hope[s]" the changes are "just housekeeping items" and

"hope[s]" the changes have no material effect. Fraud cannot

be predicated upon the mere expression of an opinion. Tate v.

Colony House Builders, Inc., 257 Va. 78, 82, 508 S.E.2d 597,

599 (1999).

Second, the letter invites MWBB and the Flippos to review

the changes and to raise any objections regarding the changes.

This invitation to consider the impact of the suggested

changes is in direct conflict with the proposition that the

changes were made with an intent to mislead, a prerequisite

for a finding of fraud. As stated by the trial court in

ruling on the merits of Count Three, "[e]verything done by CSC

. . . was above board, highlighted in red, done in writing.

And to try to say that . . . [CSC] could mislead a

sophisticated law firm or sophisticated attorneys who

specialize in this type of work, and that [it] succeeded in

doing that, is ridiculous." Accordingly, we conclude that the

trial court did not err in awarding sanctions pursuant to Code

26
§ 8.01-271.1 against the Flippos based on Count Three of their

amended bill of complaint.

We note that the final order recited that sanctions were

imposed for both Counts Two and Three and that $9,166.75 was

incurred "in defending against the fraud and mutual mistake

claims." A review of the record shows, however, that the

amount awarded was designated by CSC's counsel and accepted by

the trial court as the amount of attorneys' fees incurred in

defending only Count Three, the fraud count. Because the

attorneys' fees incurred in defending Count Two were not

identified or separately claimed and the award made did not

include any amounts claimed to have been incurred for defense

of Count Two, we do not address the propriety of sanctions

pursuant to the mutual mistake claim. Oxenham v. Johnson, 241

Va. 281, 290, 402 S.E.2d 1, 6 (1991).

For the above reasons, we will affirm the judgment of the

trial court.

Affirmed.

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