ATTORNEYS FOR APPELLANTS
Gene R. Leeuw
John M. Mead
ATTORNEYS FOR APPELLEES
Edward L. Murphy, Jr.
Diane C. Bauer
Fort Wayne, Indiana
SUPREME COURT OF INDIANA
APPLE GLEN CROSSING, LLC, )
APPLE GLEN INVESTORS, LP, )
BOBECK REAL ESTATE COMPANY, )
INC. AND H. DUANE BOBECK, )
Appellants (Plaintiffs Below), ) Indiana Supreme Court
) Cause No. 02S05-0207-CV-397
) Indiana Court of Appeals
TRADEMARK RETAIL, INC. ) Cause No.
APPLE GLEN CROSSING, LLC, and )
TERRY MONTESI, Individually )
Appellees (Defendants Below). )
APPEAL FROM THE ALLEN SUPERIOR COURT
The Honorable Nancy Eschoff Boyer, Judge
Cause No. 02D01-0101-CP-158
ON PETITION TO TRANSFER
March 7, 2003
Apple Glen Crossing is a shopping center developed by a limited liability company
whose minority member also served as manager of the LLC under the LLCs
Operating Agreement. The LLC and its majority member attempted to remove the
manager, claiming the manager breached the Operating Agreement by incurring obligations to contractors
without prior approval. The trial court in this case granted the managers
request for a preliminary injunction preventing its removal. The court, in part,
reasoned that once the LLC ordered the obligations paid, the alleged breach of
the Operating Agreement was cured and the LLC no longer had the power
to remove the manager. We granted transfer in this case to reaffirm
the longstanding rule that a principal who honors an obligation wrongfully incurred by
its agent may nevertheless enforce its remedies against the agent for the wrongful
action. However, for different reasons, we affirm the trial courts grant of
the preliminary injunction and remand this case for further proceedings.
Factual and Procedural Background
Apple Glen Investors, LP (AGI) is an Indiana limited partnership that, until 1998,
was the sole owner of a piece of undeveloped real estate in Fort
Wayne. In May of that year, AGI teamed up with a Texas
corporation, Trademark Retail, Inc., to form a limited liability company, Apple Glen Crossing,
LLC, organized under the Indiana Business Flexibility Act. The purpose of the
LLC was to develop the property into a shopping center now known as
Apple Glen Crossing. AGI became the majority (65%) member of the LLC,
and the parties entered into an Operating Agreement
See footnote that provided for Trademark to
become the sole manager. See footnote
Under the Operating Agreement, Trademark could make Major Decisions only with unanimous approval
of the Members. Among the actions defined by the agreement to be
a Major Decision was the [e]ntering into or amending any contract . .
. where the payments to be made . . . are reasonably anticipated
to exceed $10,000 in any one calendar year. The agreement also spelled
out the procedure for obtaining approval of Major Decisions: (1) Trademark was to
give AGI notice of its recommendation; (2) AGI then had five days after
receiving the notice to object to Trademarks recommended course of action; and (3)
if no timely objection was made, Trademarks recommendation was deemed approved. In
addition, a separate Development, Marketing and Management Agreement (Management Agreement) entered into between
Trademark and the LLC stated: [Trademark] shall assist [the LLC] and/or [the LLCs]
Architect in preparing change orders for the Project, but no change order exceeding
$5,000 could be made without [the LLCs] consent. The parties dispute the
meaning of change orders, an issue more fully discussed in Part III.
The term is not defined in the Management Agreement but also appears in
the contract between the LLC and Irmscher, Inc., the contractor hired to construct
Apple Glen Crossing.
In the ordinary course of construction at Apple Glen Crossing, Trademark only occasionally
provided AGI with copies of the change orders submitted by Irmscher for payment,
and AGI neither expressly approved nor objected to the change orders it received.
The result was that much of the construction went forward with only
Trademarks specific approval, but without any objection from AGI. That changed on
September 12, 2000, when counsel for AGI sent a letter to the Executive
Vice President of Trademark objecting to change orders it had received apparently on
September 6.See footnote That letter stated:
Trademarks request for Apple Glen Investors consent to Change Orders 39, 43, and
46-52 that was submitted by T.C. Beardslee on behalf of Trademark was received
on September 6, 2000, by Apple Glen Investors while Duane Bobeck [president of
AGIs general partner, Bobeck Real Estate] was out of the country as you
well know. Apple Glen Investors objects to and withholds its consent from
the proposed changes.
The documents you submitted indicate these change orders were already approved by Trademark.
Because Trademark was not authorized to undertake this action without the unanimous
agreement of the members of Apple Glen Crossing, Trademark has again breached the
Operating Agreement. Furthermore, Trademark has failed to provide sufficient information to Apple
Glen Investors in order for it to make a determination on the propriety
or necessity of these changes had the request been properly and timely submitted.
On the basis of these facts, Apple Glen Investors withholds it[s] consent and
objects to Change Orders 39, 43, and 46-52.See footnote
Although AGI objected to the change orders, it later directed Trademark to pay
I. Standard of Review
On September 15, 2000, AGIs counsel sent a second letter to Trademark stating
that [b]ased on the events of default detailed in my letter to you
of September 12, 2000, Trademark Retail, Inc. is hereby notified by Apple Glen
Investors, L.P. that as of today Trademark is removed as manager of Apple
Glen Crossing, LLC. AGI also purported to terminate both the LLC Operating
Agreement and the Management Agreement between the LLC and Trademark.
At a meeting of the LLC members on October 18, 2000, AGI voted
to acknowledge and approve the removal of Trademark as manager of the LLC
and appoint itself as manager. However, the records of the project remained
at Trademarks office in Texas and Trademark continued to hold itself out as
the manager of the LLC. On October 26, 2000, AGI filed a
complaint against Trademark in Allen Circuit Court essentially seeking to enforce its decision
to discharge Trademark as manager of the LLC. On November 7, 2000,
Trademark filed its own separate complaint in Allen Superior Court seeking, in part,
a preliminary injunction enjoining AGI from removing Trademark as manager.
Those cases were consolidated in Superior Court and on December 22, 2000, AGI
moved for a preliminary injunction against Trademarks continuing to act as manager of
the LLC. After a three-day hearing, the trial court concluded that AGIs
removal of Trademark [in the September 15, 2000, letter] was void because AGI
did not give Trademark the 15 days required under the Operating Agreement or
the 30 days under the Management Agreement to cure any default. The
trial court also held that [s]ince the change orders were paid at the
direction of AGI . . ., the Event of Default has been cured
and cannot form a legal basis for removing Trademark as manager of the
LLC, or of the shopping center.See footnote The Court of Appeals agreed with
Apple Glen Crossing, L.L.C. v. Trademark Retail, Inc., 760 N.E.2d
1109, 1117 (Ind. Ct. App. 2001).
The grant or denial of a
rests within the sound
of the trial court, and our review is limited to whether there was
a clear abuse of that
discretion. Ind. Family & Soc. Servs. Admin.
v. Walgreen Co. , 769 N.E.2d 158, 161 (Ind. 2002).
To obtain a
preliminary injunction, the moving party has the burden of showing by a preponderance
of the evidence that: (1) the movants remedies at law are inadequate, thus
causing irreparable harm pending resolution of the substantive action; (2) the movant has
at least a reasonable likelihood of success at trial by establishing a prima
facie case; (3) threatened injury to the movant outweighs the potential harm to
the nonmoving party resulting from the granting of an injunction; and (4) the
public interest would not be disserved. Id. If the movant fails
to prove any of these requirements, the trial courts grant of an injunction
is an abuse of discretion. Id.
II. An Agents Liability to its Principal
We agree with the Court of Appeals that the trial courts enjoining the
removal of Trademark as manager was within its discretion. However, as to
the issue of Trademarks reasonable likelihood of success at trial, we disagree with
the trial courts and the Court of Appeals reasoning. Specifically, we hold
that a principals paying an obligation improperly incurred on its behalf by its
agent does not constitute a waiver of the principals objection to the agents
action or bar the principals claims against the agent. Therefore, Trademark will
not succeed at trial by claiming it could not be fired as manager
after the LLC ordered the objectionable change orders paid. However, we agree
with Trademarks contention that its approving the change orders objected to by the
LLC did not constitute a Major Decision as that term is defined by
the Operating Agreement, and therefore gave the LLC no grounds to remove Trademark
An Indiana LLC is expressly authorized to outline in an operating agreement provisions
defining the authority of its manager. See Ind. Code § 23-18-4-1(b); id.
§ 23-18-4-4. The LLCs Operating Agreement named Trademark as the LLCs manager
and included provisions modifying the ordinary power of a principal to revoke an
agents authority at any time. 1 Indiana Law Encyclopedia, Agency § 7,
at 456 (2002). Under that agreement, Trademark could be terminated for an
Event of Default only if the default was not cured within 15 days
after notice from the LLC specifying the event.
See footnote The parties agree that
the September 12, 2000, letter constituted notice of a claimed Event of Default,
although they disagree as to whether Trademark actually was in default.
Trademark acted as manager of the LLC, and as such was an agent
of the LLC. The trial court held that any Event of Default
allegedly caused by Trademarks approving change orders 39, 43, and 46-52 was cured
by the LLCs subsequently ordering Trademark to pay them. This decision was
presumably grounded in the notion that a principal may be estopped from alleging
the illegality of an agents acts when the principal ratifies those acts.
Id. § 13, at 466.
As this Court stated in Koval v. Simon Telelect, Inc., 693 N.E.2d 1299,
1304 (Ind. 1998), a principal is bound by the acts of a general
agent if the agent acted within the usual and ordinary scope of the
business in which it was employed, even if the agent may have violated
the private instructions the principal may have given it.
See also 3
Am. Jur. 2d Agency § 73, at 487 (2002) (An
to do business on the
behalf in accordance with the
general custom, usage, and procedures in that business.). Whether or not Trademark
was in default of the Operating Agreement by unilaterally authorizing the change orders,
unless Irmscher was on notice of the limited authority,
See footnote the LLC was obligated
to pay Irmscher for the work already authorized by Trademark as the LLCs
agent. But to the extent the trial court concluded payment to Irmscher
effected a cure of any unauthorized payment, we disagree. It is well
established that an agent who wrongfully binds its principal may be subject to
termination and may also remain liable to the principal in accordance with the
terms of their agreement, despite the principals obligation to the third party.
Harold Gill Reuschlein and William A. Gregory,
Agency and Partnership § 81, at
133-34 (If . . . the principal was compelled to ratify . .
. to protect his own interests the agent is not relieved of liability.
. . . Even though the ratification . . . operates to relieve
the agent of liability for damages, the breach . . . by the
agent stands and the principal still retains his right to discharge the agent.);
Restatement (Second) of Agency § 101(b) (1958) (ratification of the unauthorized action does
not preclude a claim against the agent if the ratification is necessary to
protect . . . [the principals] interests.). We need not address the
issue of the agents liability for damages here. For our purposes today
the point is that the LLCs honoring its obligation to Irmscher cannot be
considered a cure of Trademarks alleged default that precludes Trademarks removal.
III. The Effect of Approving Change Orders
The trial court defined change orders as requests for construction work payments.
At oral argument, counsel for Trademark expanded on the trial courts definition by
stating that the change orders were essentially invoices of work actually completed by
Irmscher, and not the entering into or amending of a contract, i.e., not
a Major Decision. This seems essentially correct.
The term change orders was used in the construction contract with Irmscher in
a variety of ways. On some occasions, the term was used in
the traditional sense as the means by which the LLC, if it chose,
could order Irmscher to change the project itself, its lump sum cost, or
the contracts time schedule. When used in this manner, it is easy
to see how the change orders would constitute amendments to the construction contract
with Irmscher that would need LLC approval. In fact, the change order
forms submitted by Irmscher for payment stated: The said Contract as hereby amended
shall remain in full force and effect.
However, the construction contract also provided a different use for these documents entitled
change order. When it came to the cost of construction, the contract
estimated Lump Sum Amounts (termed allowances) the LLC could expect to pay for
various parts of the project. The costs actually incurred were represented by
a succession of change orders that Irmscher submitted to Trademark, as manager of
the LLC, for payment. For example, a change order would state the
original project costs as $0, state the amounts charged by the previous change
orders (e.g., $6,429,928.26), the amount charged under the current change order (e.g., $3,484.50),
and the total cost of the project to date ($6,433,412.76). The effect
of this is that what a change order termed a project cost adjustment
was merely a tally of the costs incurred since the previous change order
and a running total of all the costs to date, and not necessarily
a change in anything originally agreed to by the LLC or Irmscher.
This was the pricing mechanism contemplated by the construction contract, which stated: The
Lump Sum price for the Project is to be determined by change order
to this contract. Change orders could also account for a cost reduction,
as reflected in change order 51, which reflected a negotiated price reduction of
$1,569.50 from earlier project costs.
The change orders objected to by the LLC were in this latter category
and amounted to requests for progress payments. Their net effect was not
the entering into of a new construction contract or amending the original contract
with Irmscher. Rather, these documents appear to be in substance, as Trademarks
counsel put it, invoices to be paid pursuant to pricing already contemplated by
the contract for various stages of Irmschers work. As such, Trademarks approval
of these amounts did not constitute Major Decisions under the contract. Therefore,
we agree with the trial courts conclusions that (1) the LLCs letter of
September 12, 2000, stated no basis upon which it could properly terminate Trademark;
and (2) Trademark has demonstrated a reasonable likelihood of success at trial.
We affirm the trial courts grant of a preliminary injunction enjoining the removal
of Trademark as manager of the LLC, and remand this case for further
SHEPARD, C.J., and DICKSON, SULLIVAN, and RUCKER, JJ., concur.
Operating agreement of a limited liability company is defined by the Indiana
Code as any written or oral agreement of the members as to the
affairs of a limited liability company and the conduct of its business that
is binding upon all the members. Ind. Code § 23-18-1-16.
Footnote: The Act contemplates a manager if the Articles of Organization so provide.
Ind. Code § 23-18-1-14. In practical terms, AGIs approval was required
for all Major Decisions. This type of restraint on the actions of
an LLC manager is contemplated by Indiana Code section 23-18-4-1(b), which states: If
the articles of organization provide for a manager . . .,
the extent that the operating agreement reserves the authority to any members .
. ., the manager . . . [has] the authority to manage the
business or affairs of the limited liability company. (Emphasis added.) See
also I.C. § 23-18-4-5 (Members may enter into an operating agreement to regulate
or establish any aspect of the affairs of the limited liability company or
the relations of the members and managers, if any, including provisions establishing .
. . [t]he manner in which the business and affairs of the limited
liability company shall be managed . . . .).
According to the letter, AGI appears to have sent its objection six
days after receiving notice of Trademarks action, one day after the five days
required under the terms of the Operating Agreement. Trademark has not argued
in the trial court or on appeal that AGIs objection was too late,
instead focusing on whether AGI provided enough time to cure the alleged defect,
and the issue, if there is one, is therefore waived.
Footnote: Those change orders were for the following amounts: number 39 ($74,077.50); number
43 ($110,324.50), number 46 ($63,225.36), number 47 ($3,832.95); number 48 ($14,025); number 49
($22,110); number 50 ($19,338); number 51 (minus $1,726.45); and number 52 (minus $9,960.72).
Footnote: The trial court also addressed other events of default raised by AGI,
but found that (1) they were not the basis upon which Trademark was
purportedly removed by AGIs September 15 letter, and (2) AGIs other complaints were
raised well after the time for objection had passed. We agree with
Footnote: Event of Default is defined as [t]he failure to observe or comply
with any provision or covenant in this Agreement or the [Management] Agreement, and
such default is not cured within 15 days of the date Notice of
such default is given, which Notice shall specify with reasonable particularity the basis
for the default claimed.
Footnote: The principals obligation to the third party is also predicated on the
third partys ignorance that the agent was exceeding its authority.
N.E.2d at 1304.
Where a third party knows, or should know, that an agent is
exceeding his or her authority, the principal will not be bound. 1
Indiana Law Encyclopedia, Agency § 21, at 475 (2002) (citing Prairie Heights Educ.
v. Bd. of Sch. Trustees of Prairie Heights Cmty. Sch. Corp., 585 N.E.2d
289 (Ind. Ct. App. 1992)).