A contract...to save the friendship?

We’ve all been there. Someone in our circle comes up with a great idea to head to South Beach and start a night club. Everyone is on board because, well, we all saw the movie Studio 54. So we all throw in some money to buy the space and operate the club. Since we are all friends, who needs a contract? Well, a case out of the Third District Court of Appeal in Miami, Florida, gives us a good reason why you better get it all written down and be detailed about it.

In Demir v.Schollmeier, two personal friends (as you probably guessed, Demir and Schollmeier) decided to form Avrupa, LLC (a limited liability company) for the purpose of managing and operating a night club on Miami Beach called “Club Sin.” Demir’s brother also joined the company, and the three partners wrote up the “Avrupa, LLC Contribution Agreement” which outlined how much each person would contribute to the company and for what percentage. The agreement further laid out how Schollmeier could withdraw from the company and stated that the agreement is a Limited Liability Agreement under the Limited Liability Company Act of Florida.

If you didn’t know, there are different laws that lay out the formation and operation of corporations, limited liability companies, and non-profit corporations. Within those laws are prescribed the rights, responsibilities, and the protections and possible penalties for complying or failing to comply with the provisions.

Needless to say, like all great Miami Beach night club stories go, the partnership ended. Schollmeier wanted his $400,000 back, and Demir refused, so a lawsuit ensued. But Schollmeier sued Demir personally for, among other things, breaching the agreement and demanded the $400,000 in return.

Ultimately, the trial court agreed with Schollmeier at summary judgment (a proceeding when there are no facts in dispute and the judge rules for one side based on the law applied to those undisputed facts) and ordered that Demir was personally liable for the contribution made by Schollmeier.

On the appeal, the Third District disagreed and ruled that Demir wasn’t personally liable to Schollmeier for the money. While on its face the agreement didn’t specifically say it was a Limited Liability Company Operating Agreement and it wasn’t entered into at the time Avrupa was created, it was clear that the agreement was an operating agreement because it dictated the nature of the parties’ relationship and the obligations each owed to the others with regards to the company. And since an operating agreement governs the relations among the members, the managers, and the company itself, the agreement could also state whether the individual members owed any duty to the other members.

With that in mind, the Third District looked at the provisions of the agreement to determine whether or not it dictated that the members of Avrupa are directly liable to each other for breaches of the terms of the agreement. The Third District found that the agreement did not contain any language or provision indicating that any member of Avrupa would be personally liable to any other member for the company’s obligations, and that if they intended that to be so the agreement would need to be explicit as to that point.

As a result, the Third District held that Demir was not personally liable to Schollmeier for his contribution to the company. A big relief for Demir, for sure. Without this written agreement, Demir would be personally liable for almost $400,000 to Schollmeier. Or, in the alternative, even if it was their spoken intention that the parties be personally liable to each other for any breaches of the agreement, because it wasn’t included in the agreement Schollmeier is out of luck.

This case underlines the importance for having a detailed, written agreement in place in any business transaction, even if between friends. Whether in the formation and operation of a limited liability company or corporation, or a contract for the sale goods, anything can happen. Besides friendship, $400,000 could hang in the balance.

George Palaidis is a criminal defense and civil business attorney practicing in Miami, Fort Lauderdale and the South Florida region.