In a dispute between business partners, one partner accepted the other's offer to sell his interest in the partnership. The district court rejected the claim on the ground that it was an attempt to use the duty of good faith to create a new contract term.
Lansing and Carroll were partners. They had a buy-sell agreement under which either could make a demand to be bought out by the other.
Lansing offered to sell his interest in the LLC The key fact is that the defendant, Carroll, accepted Lansing's offer to sell his interest in a partnership, but never completed the purchase. As such, Lansing argued that Carroll had forfeited his shares and that he had the right to purchase Carroll's interest in the LLC.
The district court sets forth the facts as follows:
"On November 1, 2010, Lansing sent a letter to Carroll pursuant to § 6.7(2)(a) of the Operating Agreement in which he offered to either buy Carroll's interests in the Westminster Funds, or to sell to Carroll his own interests, for $14,045,000, less Carroll's unmet or future capital obligations. On November 26, 2010, Carroll responded with a letter in which he accepted Lansing's offer to sell. He also deposited 5% of the sales price into escrow, and set the closing for March 29, 2011. However, Carroll never showed up to the closing and never consummated the purchase. After the sale fell through, Lansing twice demanded that Carroll release the $702,250 in escrowed funds to him, but Carroll has not done so."
Illinois law concerning the duty of good faith is as follows:
Under Illinois law, a duty of good faith and fair dealing is implied in every contract. See Reserve at Woodstock, LLC v. City of Woodstock, 958 N.E.2d 1100, 1112-13 (Ill. App. Ct. 2011). "Its purpose is to ensure that parties do not take advantage of each other in a way that could not have been contemplated at the time the contract was drafted or do anything that will destroy the other party's right to receive the benefit of the contract." Gore v. Indiana Ins. Co., 876 N.E.2d 156, 161 (Ill. App. Ct. 2007). The duty requires "a party vested with contractual discretion to exercise it reasonably, and not arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties."Seip v. Rogers Raw Materials Fund, L.P., 948 N.E.2d 628, 637 (Ill. App. Ct. 2011). However, the duty is "not an independent source of duties for the parties to a contract, and is `used as a construction aid in determining the intent of the parties where an instrument is susceptible of two conflicting constructions.'" Id. (quoting Fox v. Heimann, 872 N.E.2d 126, 134 (Ill. App. Ct. 2007)).
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As discussed above, the duty of good faith and fair dealing is not an independent source of duties for parties. See Fox, 872 N.E.2d at 134. Therefore, it cannot be used to create additional contractual terms. See LaSalle Bank Nat'l Ass'n v. Moran Foods, Inc., 477 F. Supp. 2d 932, 938-39 (N.D. Ill. 2007). Yet Lansing attempts to do just that by interpreting the Operating Agreement to give him the right to purchase Carroll's shares in the event that Carroll accepted an offer to purchase Lansing's shares but failed to do so within the 120-day deadline. The explicit terms of the contract do not give him that right, and he may not use the duty of good faith and fair dealing to create such a right. Rather, as the Operating Agreement contemplates, any failure to complete an agreed-upon transaction within 120 days results in a breach of contract, and that is where Lansing must look to for any remedies he is owed.
Accordingly, based upon the terms of the Operating Agreement and the allegations of the First Amended Complaint, the duty of good faith and fair dealing is inapplicable to Carroll's acceptance of Lansing's offer to sell, and does not nullify Carroll's acceptance.
Comment: this opinion contains a thoughtful discussion of the duty of good faith and limits of that duty. It is a classic effort to use litigation to complete a business divorce. The duty of good faith is often mentioned in complaints, but it rarely proves decisive in litigation.
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