Back in 1996, the NHL approached the mayor of Columbus about starting an expansion franchise in that city. The subsequent dealings among the partners of the enterprise ignited a legal controversy that eventually led to the award of $920,000 in legal fees, and set a precedent for modifications to fiduciary duty in LLC operating agreements.
To found the new expansion NHL franchise in Columbus, several community leaders approached sports legend Lamar Hunt, the man credited with naming the Super Bowl and founding the AFL and MLS among many other game-changing sports management efforts. Right away, he took the lead on the matter and organized an LLC with three other members aside from his company, called Columbus Hockey Limited (“CHL”).
After a sales tax initiative put forth by the city to build a new stadium failed, Nationwide Insurance approached Hunt with a plan to build and lease the arena to the franchise group.
Hunt rejected Nationwide’s terms unilaterally, and continued to do so until the NHL’s deadline had nearly passed.
With fewer than five days remaining to the NHL deadline, Nationwide approached the second member of Hunt’s LLC, John H. McConnell, to discuss the lease. McConnell assured Nationwide that if Hunt didn’t lease the arena, McConnell would with his own team.
When Hunt again refused to negotiate a lease, McConnell delivered. The same day McConnell’s company was awarded the NHL franchise, McConnell filed a complaint seeking a declaratory judgment stating that McConnell was allowed to compete with CHL, among other things.
In a counterclaim, Hunt claimed that McConnell breached his common-law duty of loyalty by competing with CHL and usurping its business opportunity, the NHL franchise.
Discussion of Law
CHL’s operating agreement stated the following:
“3.3 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.”
According to Ohio law, members of an LLC have a fiduciary duty to the LLC. Part of this fiduciary duty is called the duty of loyalty, which among other things, prohibits the member from competing against the LLC or appropriating any business opportunity.
The court found that Section 3.3 of the operating agreement contractually excused McConnell from any common law duty not to compete with CHL. The court refused to hear any other evidence that McConnell breached a fiduciary duty not to compete because the operating agreement expressly allowed it.
This case was the law of the land until 2012 when the legislature added some sections to the LLC law, namely O.R.C. 1705.081, prohibiting the operating agreement from extinguishing the common law duty of loyalty.
The comments to the amendment, as published by the Ohio Bar Association, suggests that McConnell v. Hunt Sports Ent. is still the law of the land:
These provisions are consistent with the result in McConnell v. Hunt Sports Enterprises, 132 Ohio App.3d 657 (1999) in which the court recognized that a contract can limit the scope of fiduciary duties and held that the provision of an operating agreement permitting members’ participation in ventures competitive with the company allowed the members to take actions that would otherwise have been a breach of fiduciary duty.