Sunday, May 18, 2003

Humpty Dumpty On a Roll

Humpty Dumpty articulated a principle that remains the lodestone of contract interpretation: "When I use a word . . .it means just what I choose it to mean-neither more nor less." The problem that gives rise to most contract litigation is HD’s admonition that: "The question is . . . which is to be master-that's all." (For the complete quote, go here.) A recent LLC case out of Connecticut, brought to my attention by Professor Gary Rosin, illustrates the hazards of not exercising the power of the master.

In Radding v. Freedom Choice Mortgage, LLC, Radding was an at-will employee of Freedom Choice, a mortgage broker. In late 1995, Freedom Mortgage instituted an incentive profit sharing plan for certain of its employees wherein the employees became members of the LLC. The LLC's operating agreement had a provision that no member of the company would be eligible to receive income from the production bonus or profit sharing programs until he or she had been a member for one full calendar year.

The admission of Radding and several other employees as members to the company was memorialized in an amendment to Freedom Choice's operating agreement that was dated December 12, 1995. That amendment stated that Radding and the other employees had become members of the LLC as of that date.

While Radding did not sign the operating agreement until December 28, 1995, he did execute a waiver of workers' compensation benefits on December 22, 1995, asserting that the company did not have to provide workers' compensation insurance coverage on him because he was a member of the LLC.

Radding and the principal owner of the company got into a dispute in late 1996. As a result, Radding was discharged as an employee on December 13,1996.

As a threshold matter, the company argued that Radding was not entitled to any benefits for the 1996 year since he had not been a member of the LLC for a full year. However, the court reviewed the terms of the operating agreement which provided that the date a person becomes a member "shall be stated on Schedule A [to the operating agreement]." The minutes to the meeting of the owners of the LLC, held on December 12, 1995, adopting the revised Schedule, stated that Schedule A was "hereby" amended to include Radding and the others as members. The court's conclusion was fortified by the fact that Radding was holding himself out as a member of the LLC at least by December 22, prior to the December 28, 1995, date that he executed the operating agreement.

What no doubt came as even a greater surprise to the principal owners of the company was the conclusion that Radding was still a member of the company even after he was discharged as an employee. The reason was that while the majority owners of the LLC could remove an individual as a member, they hadn’t bothered to formally do so. Thus, the court concluded that Radding remained a member of the LLC through at least 1998.

The lesson of Humpty Dumpty is not merely that one who drafts a contract can be the master of its terms. Humpty Dumpty also teaches that, because one is the master of the terms of a written document, one is bound by the common sense meaning of the words unless a "special meaning" (that is, a meaning defined by the master) is intended.

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