Ohio Practical Business Lawyer & Attorney : Teri Rasmussen : Lane Alton & Horst Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

Pinch me - the Chicago Cubs REALLY are in the post-season and .... let's all hold our breath....  might even manage to make it to the World Series for the first time since 1945 and after precisely 100 years, could, just maybe, break the billy goat/black cat curse and win the World Series! . 

Of course, most or all of these games will be played at night.  And it was twenty years ago today,,, well almost (August 8, 1988 to be precise)... that lights came to Wrigley Field.  So I thought it might be a good time to revsit the part of the story about events along the way to Wrigley Field FINALLY getting lights, years after every other Major League baseball team.  Especially since the part I want to explore involves an unsuccessful effort to get night baseball at Wrigley and illustrates one way to apply the "business judgment rule" I've just been teaching to my Capital University students.  And the irony of talking about getting electric lights just after power has finally been restored to me after doing without for five days due to the incredible windstorm from Ike's remnants which whipped through Central Ohio last Sunday also seems oddly appropriate. 

Young Lawyer Takes on Mr. Wrigley.  I am of course talking about the celebrated case of Shlensky v. Wrigley et al., 95 Ill. App. 2d 173, 237 N.E.2d 776 (1968).  In this case, William Shlensky was a minority shareholder of Chicago National League Baseball Cub (inc.) ("Cubs Corporation"), the corporation which owned the Chicago Cubs and operated Wrigley Field.  After several years of disappointing  financial results, Shlensky became convinced that this trend would continue unless the Cubs "got with the program" and installed lights to play night baseball - just like every single other Major League team had been doing for years.  For the short version of the essence of the case, check out this limerick from ContractsProf Blog:  

As Wrigley explained to the court,

Pro-ball is a daytime sport,

Night ball you can see

Down at Comiskey

Where the teams out for profit cavort.

So Shlensky, being a red-blooded American sued majority controlling shareholder Phillip K. Wrigley (who held 80% of the shares and was also President) in his capacity as a director of the  Cubs Corporation,as well as other directors and the Cubs Corporation itself.  The suit was a shareholder derivative action against the directors for negligence and mismanagement. and sought an order requiring the installation of lights at Wrigley Field.  Shlensky argued:

• While the weekend attendance of the White Sox and the Cubs was about the same, weekday attendance at night games played by the White Sox was much higher than that of the Cubs.
• Installation of lights is readily able to get financing and will quickly pay for itself through anticipated greater attendance.
• Wrigley was refusing to install lights not because of any concern for the welfare of the Cubs Corporation, but rather because he believed that baseball is inherently a "daytime sport."
• The other directors allowed Wrigley to dominate the board and acquiesed in the refusal to install lights even though they knew he wasn't acting in a good faith concern for the best interests of Cubs Corporation, but rather out of an entrenched personal opinion.

Business Judgment Rule in Action.  Shlensky contended that these facts demonstrated arbitrary and capricious acts on the part of the directors constituting negligence on their part in failing to exercise reasonable care and prudence in the mangement of corporate affairs of Cubs Corporation.  The trial court was not impressed and dismissed the amended Complaint apparently rather summarily without permitting any testiimony.

On appeal, the Illinois Court of Appeals affirmed, concluding that it had no business second-guessing the Cubs Corporation's board of directors.  After discussing the essence of the "business judgment rule", including another well known "business judgment rule" case involving Henry Ford and his fight with the Dodge brothers (Dodge v. Ford Motor Co., 214 Mich. 459, 170 N.W. 608 (1909), the Court concluded that in the absence of fraud, illegality, or a conflict of interest, a decision by a board of directors should not be disturbed as long as it had some ratinal basis, evenif in hindsight, the decision was wrong.  

In applying the rule to the facts, the Court said:

we are not satisfied that the motives assigned to Phillip K. Wrigley, and through him to the other directors, are contrary to the best interests of the corporation and the stockholders.  For eample, it appears to us that the effect on the neighborhood might well be considered by a director who was considering the patrons who would or would not attend the games if the park were in a poor neighorhood.  Furthermore, the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deterioprating.  By these thoughts we do not mean to say that the decision of the directors was a correct one.  That is beyond our jurisdiction and ability.  We are merely saying that the decision is one properly before directors and the motives alleged in the amended complaint showed no fraud, illegality or conflict of interest in their making of that decision. 

Then the Court proceeded to dissect Shlensky's other arguments, finding fault with his failure to demonstrate a causal link between night ganes and increased profits or to consider the additional expenses installation of lights and playing of night games might involve. 

The Just One Bad Century website "dedicated to the long suffering fans of Chicago's favorite baseball team" (which may become one of my favorite websites) argues that the relative greater success of the Cubs making the post season since lights were installed shows that the Cubs real problem has been so many day games.  If so, then perhaps the real curse on the Cubs was the deference given to the baseball purists on the Cubs Corporation who refused to allow lights at Wrigley Field forty years ago. 

What If?  Of course now less deference is given to directors so the case might come out differently today.  But suppose Shlensky had commissioned an authoritative consulatant's report demonstrating quantitatively the substantially greater profitability of night baseball.  And that the directors simply ignored this.  Would the Court have given Shlensky more of a hearing and been less of an apologist for the directors?  In some parallel universe, the Cubs have already won the World Series repeatedly.      

The Rest of the Story.... And for those who want to know the rest of the story, check out this timeline of the road to lights at Wrigley Field  which has such gems as....

• Shlensky was a 27 year old lawyer (somehow that figures) who had owned two shares of Cubs Corporation since he was 14.
• In 1941,P.K. Wrigley actually bought lights to be installed at Wrigley Field for 6 PM twilight starts.  However, Pearl Harbor intervened and the steel for the light poles was donated to the war effort.
• In1982, the public was told the choice was lights or the Cubs would move.  A Wrigleyville citizens group named Citizens United for Baseball in the Sunshine (CUBS) was formed to oppose installation of lights.
• The first Wrigley Field game under the lights began on August 8, 1988 against the Phillies, but it was rained out after 3 1/2 innings.
• Restrictions on the number of night games played still exist.

And finally...

Got my power back on Thursday night and while I realize that's nothing compared to what folks in Texas are dealing with, I will tell you that reading by flashlight does not work nearly as well now as when I was a kid.  Also that I apparently spend an awfully lot of time on my laptop in the evenings and need to buy a new battery since the one I have only gives me an houor of juice.  On the plus side, I definitely caught up on my sleep and found out how great it can feel not to be sleep- deprived.  So I suppose the whole experience was useful.

I will be going to Oregon in a few days for a golf trip with friends so I may or may not get a chance to post before i leave.   

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Suppose your fellow LLC member starts a new business which competes with the LLC's business.  Can he or she do that?  Well the answer depends upon what state your LLC is organized in and what your Operating Agreement says.  It may also depend on how sophisticated the members are.

In Ohio, the default presumption is that fiduciary duty among members of an LLC, especially in what might be called a "closely held" LLC with few owners, exists and would prevent this sort of behavior.  However, Ohio courts have shown a willingness to allow parties to restrict or modify this obligation with the provisions of the operating Agreement itself. 

McConnell v. Hunt Sports Enterprises.  In Ohio, the key case is McConnell v. Hunt Sports Enterprises, 132 Ohio App.3d 657, 725 N.E.2d 1193 (10th App. Dist. 1999).  The case involved Lamar Hunt and Columbus' "Mr. Mac" who eventually became the majority owner of the Columbus Blue Jackets NHL hockey team.  It arose in the context of Columbus' efforts to attract a professional sports team.  McConnell and Hunt were both members of an LLC called Columbus Hockey League, LLC ("CHL") which was formed according to its Operating Agreement to "invest and operate a franchise in the National Hockey League". 

At some point along the way, Mr. Mac and some of the Columbus members of CHL, individually and not on behalf of CHL, went ahead and signed a lease and ownership agreement for an NHL team.  This group then filed a declaratory judgment against Lamar Hunt's entity to the effect that they had not violated CHL's Operating Agreement.  The Hunt group then counterclaimed alleging breach of fiduciary duty and seeking an injunction preventing the NHL from granting the franchise to Mr. Mac's group.  

Both the trial court and the Ohio Court of Appeals found that the Operating Agreement itself allowed competition and held that consequently no breach of fiduciary duty occurred.  Indeed section 3.3 of the Operating Agreement provided:

Members May Compete.  Members shall not in any way be prohibited from or restricted in engaging or owning an interest in any other business venture of any nature, including any venture which might be competitive with the business of the Company...  

The Court further explained:

In the case at bar, a limited liability company is involved which, like a partnership, involves a fiduciary relationship.  Normally, the presence of such a relationship would preclude direct competition between members of the company.  However, here we have an operating agreement which by its very terms allows members to compete with the business of the company.  Hence, the question we are presented with is whether an operating agreement of a limited liability company may, in essence, limit or define the scope of the fiduciary duties imposed upon its members.  We answer in the affirmative.

In reaching this conclusion, the Court considered existing caselaw which established a fiduciary duty in the close corporation context.  It harmonized these cases with its holding as collectively standing for the proposition that both close corporation agreements and operating agreements could permissibly limit the scope of fiduciary duties that would otherwise apply.  It also made it clear that "[i]n general terms, members of limited liability companiesowe one another the duty of utmost trust and loyalty." 

Recent Ohio Caselaw.  More recently, in All Star Land Title Agency v. Surewin Investment, Inc., 2006 Ohio 5729, (8th App. Dist.), the Cuyahoga County Court of Appeals held:

In the present case, a limited liability company is involved which involves a fiduciary relationship.  Normally, the presence of such a relationship would prevent direct competition between the members of the company.  However, here we have an operating agreement which, by its very terms, allows members to compete with the business of the company.

Delaware.  Delaware is even more accepting of a contractual waiver of fiduciary duty.  Section 18-1101 of the Delaware limited Liability Company Act specifically authorizes the restriction or even elmination of any fiduciary duty:

(c) To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing....

(e) A limited liability company agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a member, manager or other person to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement; provided, that a limited liability company agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.

As explained by Francis Pileggi in his Delaware Corporate and Commercial Litigation blog post entitled "Chancery Gives Victory to 'Freedom of Contract'and Refuses to 'Find' Fiduciary Duties in LLC Agreement When Not Clearly Stated", the recent Delaware case of Fisk Ventures, LLC v. Segal underscores this willingness to accept the parties' contractual agreement that no fiduciary duty applies.  Francis believe this case will gather much attention in an ongoing discussion regarding whether fiducairy duties should differ between LLCs and corporations.

Virginia.  A recent post "Members of Virginia LLCs May Not Owe Fiduciary Duties to Each Other" on the Womble Carlyle Unfair Business Practices blog by Mike Holm explores two Virginia cases which found the absence of statutory provisions regarding fiducary duty in the Virgina LLC Act, as compared with their presence in the Virginia Partnership Act to be dispositive in determining that LLC members have no fiduciary duties towards one another.     

Florida.  In Florida, Fla Stat. Section 608.4225 sets forth a number of fiduciary duties for members of limited liability companies.  In addition, pursuant to Fla Stat. Section 608.423 prohibits elimination fo the duties found in Fla. Stat. 608,4225, but does allow the operating agreement to

      1. Identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; and

      2. Specify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty;    (c) Unreasonably reduce the duty of care under s. 608.4225;    (d) Eliminate the obligation of good faith and fair dealing under s. 608.4225, but the operating agreement may determine the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;

 California.  In California,  in a manger-managed LLC, a manager owes members the same duties as a partner does to a partnershiop and to the other partners under Cal Corp. section 17153.  According to Cal Corp Code section 17005, "[t]he fiduciary duties of a manager to the limited liability company and to the members of the limited liability company may only be modified in a written operating agreement with the informed consent of the members."  No similar specific provision appears to exist with respect to the obligations between members.

Other States and Resources.  For discussions of the law in other states, visit:

• Illinois - "The Illinois Limited Liability Company Act After a Dozen Years - What Guidance have the Courts Gven Us About LLS in Illinois" by William Knee.
• Tennessee - "Getting Your fair Share: What Are the Fiduciary Duties When one member Takes a Piece of the LLC Pie?" by Richard Spare.  See also a more recent post on "Delaware LLCs for Tennessee Lawyers?" by the same author for an exhastive comaprison of the differences in philosophies between Delawar and Tennessee with respect to LLCs.
• Wisconsin - "The First LLC Case" by Joseph Boucher and George Kamperschroer

And for those really wanting to get into detail on a slightly different related topic, check out Miller, "What Fiduciary Duties Should Apply to the LLC Manager After More Than a Decade of Expermimentation?", 32 Iowa J. Corp. L. 565 (2007).

Analysis.  I like the Ohio approach of very strong presumption of a fiduciary duty among LLC members, especially in "closely held" LLCs.  When only a few owners are involved and are engaged in the day-to-day running of the company, there seems to be little rationale for varying the standard of care owed one's fellow owners by virtue of the form of business entity chosen. 

For more sophisticated LLCs,  I suppose a case can be made for allowing members to decide among themselves what level of loyalty and care they want.  However, what about publicly traded LLCs or privately held LLCs in which some members are individual investors who responded to a private placement memorandum?  In this case, it seems hard to me to explain why the form of entity chosen will determine the level of loyalty and care owed these perhaps less sophisticated members.  

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