Michael Stavnicky and the SMDK Litigation Team Win Eighth District Court of Appeals Case

In Leight, et al. v. Osteosymbionics, LLC, et al., 2016-Ohio-110, Singerman, Mills, Desberg & Kauntz Co., L.P.A. represented two minority members in a dispute over fundamental changes to a closely-held company’s operating agreement by the largest member. The Defendants attempted to unilaterally change the company’s operating agreement to, among other things, create a provision to arbitrate all disputes between the members. When the three owners entered into the original operating agreement in 2006, there was no true arbitration provision at all; only if the Board of Managers was deadlocked on a vote after three consecutive Board meetings was that dispute subject to arbitration to break the deadlock.

When SMDK’s clients found out about the new operating agreement, they hired SMDK to bring suit seeking to enforce their rights under the original operating agreement. In response to the minority members’ lawsuit alleging breach of fiduciary duty, fraud, civil conspiracy and freezing-out of corporate interests, the Defendants filed a Motion to Compel Arbitration and Stay All Proceedings Pending Arbitration. The Defendants argued that all of the claims were required to be sent to arbitration because the company was now operating under the new operating agreement, which was amended without the consent of the other members. The trial court denied the Motion to Stay and the Defendants appealed to the Eighth District Court of Appeals.

On appeal, the Defendants argued that they had authority to unilaterally amend the company’s operating agreement for any reason without the other members’ consent.  Michael R. Stavnicky, on behalf of the Plaintiffs, argued that a majority owner cannot unilaterally amend an operating agreement and then seek to enforce the very terms of the disputed amendment against those that opposed it. It would be fundamentally improper and in conflict with Ohio law to allow a party to unilaterally change an operating agreement and then seek to enforce those same disputed terms that were just created. 

In a unanimous decision, the Eighth District Court of Appeals summarily rejected the Defendants’ arguments and found the arbitration provisions to be ineffective as there was no “meeting of the minds.”  The Court of Appeals refused to enforce the amendment and held that the underlying claims were not required to be resolved by arbitration. The Court of Appeals adopted Plaintiff’s arguments – finding that a party cannot enforce an arbitration provision when the creation of that very provision is the subject of the lawsuit. 

In finding for Plaintiffs, the Court sided entirely with SMDK on the merits finding that the Plaintiff could not be forced to arbitrate disputes without an express agreement to do so.  Mr. Stavnicky’s argument’s addressed a unique issue that has been subject to debate in numerous jurisdictions and may have ramifications outside of Ohio. This decision has been the subject of a legal article outside of Ohio.

http://kentuckybusinessentitylaw.blogspot.com/2016_01_01_archive.html;

http://kentuckybusinessentitylaw.blogspot.com/2016/01/an-amendment-too-far-arbitration.html

For a full copy of the Court’s decision, see: http://www.supremecourt.ohio.gov/rod/docs/pdf/8/2016/2016-Ohio-110.pdf