Case Title: Flippo v. CSC Associates

Citation: 

Docket Number: 002183

State: virginia

Court: Virginia Supreme Court

Date: 2001-06-08T00:00:00Z

Document:
Present:  All the Justices 
 
F. CARTER FLIPPO, ET AL. 
 
v.  Record No. 002183     OPINION BY JUSTICE ELIZABETH B. LACY 
 
 
 
June 8, 2001 
CSC ASSOCIATES III, L.L.C. 
 
FROM THE CIRCUIT COURT OF KING WILLIAM COUNTY 
Thomas B. Hoover, Judge 
 
In this appeal, two members of a limited liability 
company seek reversal of a trial court's judgment entered in 
consolidated cases holding one of the members liable for a 
breach of fiduciary duty to the limited liability company, 
barring both members from performing as managers of the 
company, awarding compensatory and punitive damages, and 
imposing sanctions pursuant to Code § 8.01-271.1.  Because we 
conclude that there was no abuse of discretion by the trial 
court and no reversible error in the judgment, we will affirm 
that judgment. 
I. Facts 
T. Frank Flippo owned timberlands in Hanover, Caroline, 
King and Queen, and King William Counties.  On his death in 
1974, these properties were devised to his three children, 
Arthur P. Flippo, F. Carter Flippo, and Lucy Flippo Wisely. 
Carter Flippo, as executor of the estate, managed the 
timberlands.  Lucy Flippo Wisely conveyed her interest in the 
timberlands to her three children, who held their interests in 
the name of CSC Associates, a general partnership.  In 1988, 
Carter Flippo, Arthur Flippo, and CSC Associates created the 
Flippo Land & Timber Company Partnership, to own and operate 
the business. 
In 1989, the Flippos and CSC Associates discussed 
amending the partnership agreement to address issues of 
partner withdrawal or death that were not covered in the 
existing partnership agreement.  A "restated partnership 
agreement" was drafted which contained specific provisions 
relating to the purchase of a member's shares by the remaining 
members upon the death or withdrawal of a member.  The 
restated partnership agreement eliminated a paragraph 
contained in the original partnership agreement allowing a 
partner to terminate the partnership unilaterally and receive 
an in kind distribution of the partnership's assets.  The 
restated partnership agreement, drafted by an attorney at the 
law firm of McGuire Woods Battle & Boothe L.L.P. (MWBB), was 
never executed. 
In 1995, the Flippos agreed to permit CSC Associates to 
hold its interest in the partnership as a limited liability 
company, CSC Associates III, L.L.C. (CSC).  Flippo Land & 
Timber Company Partnership also was converted to a limited 
liability company, Flippo Land & Timber Co., L.L.C (FLTC).  
 
2
CSC, Arthur Flippo, and Carter Flippo were the members of 
FLTC.  Carter Flippo was named manager of FLTC. 
In 1997, Carter and Arthur Flippo considered creating 
individual limited liability companies to hold their interests 
in FLTC for estate planning purposes.  CSC rejected requests 
by the Flippos to allow them to hold their interests in FLTC 
through limited liability companies.  Carter Flippo then 
consulted with MWBB regarding other means by which they could 
implement their estate planning goals.  MWBB advised that 
Carter Flippo could resign from FLTC, thereby forcing its 
dissolution, or a joint venture could be formed between FLTC 
and Flippo Lumber Corporation.  Under the second approach, 
Carter Flippo, as manager of FLTC, could then transfer its 
assets to the joint venture, resulting in the dissolution of 
FLTC under the terms of FLTC's Operating Agreement.  MWBB 
advised the Flippos that limited liability companies could 
hold their interests in the new venture and that none of these 
actions would require CSC's approval under the Operating 
Agreement of FLTC. 
The Flippos adopted the joint venture approach suggested 
by MWBB, and, in October 1998, Carter Flippo informed CSC by 
letter that, as manager of FLTC, he had accepted a proposal 
from Flippo Lumber Corporation for FLTC to enter a joint 
venture and had conveyed all of FLTC's property to the new 
 
3
venture, Timber Enterprises, L.L.C. (Timber Enterprises).  The 
letter also informed CSC that FLTC had "dissolved" under 
Article 13(a)(ii) of the Operating Agreement because FLTC had 
contributed all of its non-cash assets to Timber Enterprises.  
CSC was given the option of joining Timber Enterprises if it 
agreed to the terms of that venture's Operating Agreement. 
As a result of these events, CSC filed a bill of 
complaint, individually and derivatively on behalf of FLTC, 
against Carter Flippo, Arthur Flippo, FLTC, Flippo Lumber 
Corporation, and Timber Enterprises.  CSC sought to recover 
FLTC's assets, to remove Carter Flippo as manager of FLTC, to 
enjoin further efforts to dissolve FLTC or dispose of its 
assets, and to recover compensatory and punitive damages for 
breach of fiduciary duties by the Flippos.  Prior to trial, 
Timber Enterprises returned the assets it had received from 
FLTC and the company was dissolved, thereby making the claims 
against it moot. 
The Flippos filed a separate amended bill of complaint 
seeking the dissolution of FLTC and distribution of the assets 
in kind on three alternative bases:  (1) under Code § 13.1-
1047, because it was not reasonably practicable to carry on 
the business of FLTC; (2) reformation of Article 13 of the 
Operating Agreement based on mutual mistake; and (3) 
rescission of the Operating Agreement based on CSC's alleged 
 
4
fraud in the inducement.  The Flippos submitted "contingent 
resignations" which would be operative should the trial court 
grant them relief by determining that Article 13 allowed a 
member to resign under that Article and receive an in kind 
distribution of the member's share of the assets.  CSC filed a 
motion for sanctions on the basis that the allegations of 
mutual mistake of fact and fraud in Counts Two and Three of 
the Flippos' amended bill of complaint were not well grounded 
in fact or warranted by existing law or a good faith argument 
for the extension, modification, or reversal of the existing 
law. 
The two suits were consolidated by agreement and an ore 
tenus hearing was held.  In CSC's suit, the trial court held 
that Carter Flippo, assisted by Arthur Flippo, breached his 
fiduciary duties to and violated the Operating Agreement of 
FLTC in forming Timber Enterprises and in transferring FLTC's 
assets to that company.  The trial court awarded CSC its 
attorneys' fees of $178,349.02 for prosecuting the action on 
behalf of FLTC.  Compensatory and punitive damages of 
$12,860.64 and $350,000.00, respectively, were awarded against 
Carter Flippo.  The trial court also prohibited the Flippos 
from serving as managers of FLTC and installed CSC in that 
capacity. 
 
5
In ruling on the Flippos' amended bill of complaint, the 
trial court denied the request for dissolution of FLTC and for 
reformation or rescission of the Operating Agreement.  
Accordingly, the trial court also rejected the Flippos' 
"contingent resignations."  Finally, the trial court granted 
CSC's motion for sanctions, awarding an additional $9,166.75 
in attorneys' fees.  The Flippos assign error to the trial 
court's determinations in both suits. 
II.  CSC's Suit 
The Flippos assign error to the trial court's failure to 
afford Carter Flippo protection from liability for a breach of 
fiduciary duty pursuant to Code § 13.1-1024.1(B), to the award 
of punitive damages against Carter Flippo, to the removal of 
Carter and Arthur Flippo as managers, and to the designation 
of CSC as manager of FLTC. 
A.  Breach of Fiduciary Duty 
The Flippos assert in their first three assignments of 
error that the trial court erred in failing to afford Carter 
Flippo the defense from liability contained in subsection (B) 
of Code § 13.1-1024.1 for acts the trial court held breached 
Carter Flippo's fiduciary duty to FLTC.1  
                     
1 The Flippos do not challenge the trial court's 
determination that Carter Flippo's actions in forming Timber 
Enterprises and transferring FLTC's assets to that company 
constituted a breach of his fiduciary duty to FLTC. 
 
6
Subsection (B) of Code § 13.1-1024.1 provides in 
pertinent part: 
B. Unless a manager has knowledge or information 
concerning the matter in question that makes 
reliance unwarranted, a manager is entitled to 
rely on information, opinions, reports or 
statements, including financial statements and 
other financial data, if prepared or presented 
by: 
 
. . . . 
 
 
2. Legal counsel, public accountants, or 
other persons as to matters the manager believes, 
in good faith, are within the person's 
professional or expert competence; . . . . 
 
The Flippos assert that Carter Flippo relied on the legal 
advice he received from MWBB when he accepted Flippo Lumber 
Corporation's offer for a joint venture, created Timber 
Enterprises, and transferred FLTC's assets to the joint 
venture.  Thus, the Flippos conclude that the trial court 
erred in imposing liability on Carter Flippo for a breach of 
fiduciary duties for acts taken in reliance on legal advice.  
The Flippos apply this Code section out of context. 
A manager, like a corporate director, is required to 
discharge his duties in accordance with his "good faith 
business judgment of the best interests of the limited 
liability company."  Code § 13.1-1024.1(A); see Code § 13.1-
690(A).  By virtually identical language, Code §§ 13.1-
1024.1(B) and 13.1-690(B) afford managers and corporate 
 
7
directors, respectively, protection from liability in the 
exercise of that good faith judgment under certain 
circumstances.  We have held that a corporate director is 
entitled to such protection from liability under Code § 13.1-
690(B) only for acts related to the exercise of business 
judgment on behalf of the corporation of which he or she was 
the director.  Simmons v. Miller, 261 Va. 561, 544 S.E.2d 666 
(2001).  There is no basis to apply a different rule to 
managers seeking protection from liability under Code § 13.1-
1024.1(B).  In this case, therefore, to come within the 
protection of subsection (B) of Code § 13.1-1024.1, the legal 
advice which Carter Flippo received and acted upon must have 
been advice sought in good faith for the benefit of the 
company. 
The trial court found that the legal advice sought by 
Carter Flippo was not related to the business interests of 
FLTC.  MWBB was not representing FLTC when it advised Carter 
Flippo to transfer the assets of FLTC to Timber Enterprises.  
According to the trial court, MWBB was "representing their 
long-time clients, Carter Flippo and Arthur Flippo."  Not only 
was the advice sought, delivered, and implemented for the 
personal benefit of the Flippos, Carter Flippo testified at 
trial that he thought the advice was not "very good" for FLTC. 
 
8
The Flippos' argument that the advice upon which it acted 
involved acts which could "legally" be taken by a manager is 
irrelevant to the prerequisite for protection under Code 
§ 13.1-1024(B) — whether an act was taken with the intent of 
benefiting the company.  Furthermore, an act which is 
otherwise legal may, nevertheless, breach one's fiduciary 
duty.  The advice relied and acted upon in this case was given 
solely for the purpose of implementing the Flippos' personal 
estate planning goals.  Even if legal, the action was neither 
sought nor taken with the intent of benefiting FLTC and, in 
fact, had an adverse impact on the company.  Following such 
advice cannot be the basis for a defense under subsection (B) 
of Code § 13.1-1024.1 to a violation of subsection (A) of that 
section. 
The Flippos also complain that the trial court erred in 
imposing liability on Carter Flippo because MWBB was acting 
under a conflict of interest as defined by the Code of 
Professional Responsibility applicable to attorneys at the 
time.  See Former DR 5-105(C).  We disagree.  Although the 
trial court suggested that MWBB had a conflict of interest 
because it represented both the Flippos and FLTC, such 
conflict did not affect the Flippos' motivation for seeking 
the advice, the advice given, and the decision to follow that 
advice.  Carter Flippo's actions to further his estate 
 
9
planning goals based on advice directed toward that end alone 
violated his fiduciary duty.  Any conflict of interest under 
which MWBB operated was immaterial to Carter Flippo's conduct. 
Accordingly, we conclude that the trial court did not err 
in denying Carter Flippo the protection from liability 
afforded by Code § 13.1-1024.1(B). 
B.  Punitive Damages 
The Flippos next assert that the trial court erred in 
awarding $350,000 in punitive damages against Carter Flippo 
because (1) there was no evidence of Carter Flippo's net 
worth, (2) reliance on advice of counsel should be a defense 
to punitive damages, and (3) the evidence was insufficient to 
show that Carter Flippo acted with malice or wantonness. 
First, we reject the Flippos' contention that imposition 
of punitive damages was improper because there was no evidence 
of Carter Flippo's net worth.  The purpose of punitive damages 
is to punish the wrongdoer and warn others.  Smith v. Litten, 
256 Va. 573, 578, 507 S.E.2d 77, 80 (1998).  Evidence of a 
party's net worth is admissible because it is material to this 
purpose and is relevant to a determination of the size of the 
award and whether it is so large as to be destructive.  Id.; 
The Gazette, Inc. v. Harris, 229 Va. 1, 50-51, 325 S.E.2d 713, 
746-47, cert. denied sub nom. Fleming v. Moore, 472 U.S. 1032 
(1985).  While evidence of net worth is relevant, the 
 
10
appropriate amount of a punitive damage award can be 
established by other evidence, and the lack of evidence of the 
wrongdoer's net worth does not of itself defeat the punitive 
damage award.  In this case, the record showed that the 
estimated value of the assets of FLTC exceeded nine million 
dollars.  Carter Flippo's one-third interest in FLTC alone was 
sufficient to establish that the punitive damage award of 
$350,000 was not destructive. 
Next, while some jurisdictions have allowed good faith 
reliance on advice of counsel to defeat the imposition of 
punitive damages, such reliance generally has been treated 
only as an appropriate factor to consider in determining 
whether the requisite malice or wantonness needed to impose 
punitive damages has been shown.2  We agree that good faith 
reliance on the advice of counsel is relevant, but it is not 
an absolute defense to the imposition of punitive damages.  
Cf. Pallas v. Zaharopoulos, 219 Va. 751, 755, 250 S.E.2d 357, 
                     
2 See, e.g., Stanton v. Astra Pharm. Prods., Inc., 718 
F.2d 553, 580 (3d Cir. 1983)("[P]unitive damages may be 
awarded 'only after consideration of the act itself, together 
with all the circumstances, including the motive of the wrong-
doer, and the relations between the parties.'"); Hamilton 
County Bank v. Hinkle Creek Friends Church, 478 N.E.2d 689, 
691 (Ind. Ct. App. 1985)("Several other jurisdictions have 
held that good faith reliance on the advice of counsel may 
prevent imposition of punitive damgages.  We agree . . . . 
However, such is not an absolute defense." (citations 
omitted)). 
 
11
359 (1979) (good faith reliance on legal advice is absolute 
defense to charge of malicious prosecution). 
Finally, the Flippos argue that the trial court based its 
award of compensatory damages on "the implementation of the 
Timber Enterprises 'scam'" and, therefore, the punitive damage 
award can stand only if Carter Flippo "made the Timber 
Enterprises 'scam' a reality 'with malice or wantonness.' "  
No such evidence is in the record, the Flippos contend, 
because MWBB, not Carter Flippo, conceived the Timber 
Enterprises "scam" and Carter Flippo simply followed the legal 
advice given by MWBB.  Citing Simbeck, Inc. v. Dodd Sisk 
Whitlock Corp., 257 Va. 53, 508 S.E.2d 601 (1999), the Flippos 
assert that their actions in this case were not shown to be 
malicious or wanton, but were a legitimate "hard ball" 
response to CSC's refusal to allow the Flippos to transfer 
their interests in FLTC to limited liability companies and 
realize their estate planning goals. 
However, the trial court found that the Flippos "weren't 
going [to MWBB] asking for advice as to what is in the best 
interest of the LLC, they were asking what was the best way to 
break this LLC after the younger members of the organization, 
CSC, had not done what they wanted them to do."  This action, 
as characterized by the trial court, was "secretive, 
concealed, dishonest" and "an attempt to steal property worth 
 
12
millions of dollars."  Punitive damages were assessed "because 
of that clearly dishonest conduct." 
 
In reviewing this decision, we make an independent review 
of the record to determine whether it supports a finding of 
actual malice or wantonness by clear and convincing evidence.  
Williams v. Garraghty, 249 Va. 224, 236-37, 455 S.E.2d 209, 
217 (1995).  The record in this case is clear that the actions 
taken by Carter Flippo were in response to CSC's refusal to 
agree that the Flippos' interests in FLTC could be held by 
limited liability companies.  The record is also clear that in 
order to realize their estate planning goals, the Flippos did 
not want to withdraw their interests from FLTC under Article 
10 of the Operating Agreement, but wanted to maintain control 
of the timberlands which comprised the assets of FLTC.  To 
accomplish this objective, the Flippos sought and acted on 
advice that resulted in divesting FLTC of the timberlands as 
an asset.  The Flippos purposely concealed these actions from 
CSC; and the new venture, including ownership of the 
timberlands by Timber Enterprises, was presented to CSC as a 
completed transaction. 
 
The Flippos argue that they did nothing illegal, but 
illegality is not the test for punitive damages.  Punitive 
damages may be awarded if a defendant acted with actual malice 
or such willful or wanton recklessness as to evince a 
 
13
conscious disregard for the rights of others.  Booth v. 
Robertson, 236 Va. 269, 273, 374 S.E.2d 1, 3 (1988).  Here, 
the Flippos acted in conscious disregard of the interests of 
FLTC and CSC.  Furthermore, the fact that the scheme was 
devised by MWBB does not alter the underlying reason why the 
scheme was devised in the first place – the Flippos' desire to 
implement their estate planning goals regardless of the 
interests of FLTC and CSC and any duties they owed to those 
entities. 
Accordingly, we conclude that the trial court did not err 
in awarding FLTC punitive damages against Carter Flippo. 
C.  Appointment of CSC as Manager of FLTC 
In their sixth and seventh assignments of error, the 
Flippos assert that in removing Carter Flippo as manager of 
FLTC, disqualifying Arthur Flippo from serving as manager, and 
installing CSC as manager, the trial court exceeded its 
statutory authority and violated FLTC's Operating Agreement.  
CSC asserts that this issue has not been preserved for appeal, 
citing Rule 5:25. 
The Flippos offer two grounds which they maintain place 
this issue properly before us.  First, they contend that they 
raised the issue of the trial court's lack of authority to 
take this action in their demurrer to Count Three of the bill 
of complaint.  In the demurrer, they asserted that Code 
 
14
§§ 13.1-1024 and -1024.1 do not provide a cause of action for 
the disqualification or removal of a member from serving as 
the manager of a limited liability company.  The trial court 
did not rule on the demurrer, but the Flippos assert that they 
properly preserved the issue for appeal because they objected 
to the final order which "granted the relief the demurrer 
challenged as inappropriate."  The problem with this 
contention, however, is not only that the Flippos never sought 
a ruling on their demurrer, but also that the arguments 
presented to the trial court on this issue after the filing of 
the demurrer indicated that the Flippos abandoned any reliance 
on the grounds stated in the demurrer to defeat imposition of 
the relief sought by CSC in Count Three. 
At trial, counsel for the Flippos did not argue that the 
trial court could not remove Carter and Arthur Flippo as 
managers.  Rather counsel argued that he did not think "a case 
has been made" for requiring Carter Flippo to step down as 
manager or for dissociation of the Flippos.  Counsel suggested 
that further restrictions would be appropriate only if the 
court were concerned about Carter Flippo's future actions as 
manager and advised that restrictions contained in the consent 
order entered by the trial court for the duration of the trial 
would be appropriate. 
 
15
The Flippos' assertion that the evidence is insufficient 
to support CSC's claim admitted the court's authority to grant 
the relief sought and challenged only the proof burden of the 
party seeking the relief.  At no point in oral arguments to 
the court, in post trial memoranda, or in objections to the 
final order did the Flippos refer to their previously filed 
demurrer or raise any objection to the relief sought by CSC in 
Count Three based on the trial court's lack of authority to 
remove or disqualify the Flippos as managers and to appoint 
CSC as manager of FLTC.  Thus, we conclude that the mere 
filing of a demurrer and objecting to the final order under 
the circumstances of this case did not comply with the 
requirements of Rule 5:25 that objections must be "stated with 
reasonable certainty at the time of the ruling." 
The Flippos also argue that these assignments of error 
are properly before us because they involve a challenge to the 
subject matter jurisdiction of the trial court and, therefore, 
can be raised at any time.  Again we disagree.  In this case, 
the trial court concluded that the Flippos had breached their 
fiduciary duties to FLTC and violated the Operating Agreement 
in doing so.  Code § 13.1-1023(C)(1) authorizes a court of 
equity to enforce an operating agreement by relief "that the 
court in its discretion determines to be fair and 
appropriate."  The Operating Agreement identified Carter and 
 
16
Arthur Flippo as successive managers and also stated that 
"[a]ll Members shall participate in the management of the LLC, 
but they shall appoint one Member as a Manager."  The trial 
court was charged with construing the Operating Agreement and 
enforcing it in a "fair and appropriate manner."  Whether the 
enforcement of the Operating Agreement as construed by the 
trial court was "fair and appropriate" is a matter reviewable 
on appeal for its correctness, but the initial decision was 
fully within the subject matter jurisdiction of the trial 
court to consider in the first instance. 
Accordingly, for these reasons we conclude that the 
issues raised in assignments of error six and seven were not 
properly preserved in the trial court, and therefore we do not 
consider them here.  Rule 5:25. 
III.  The Flippos' Suit 
 
In their amended bill of complaint, the Flippos' sought 
the dissolution of FLTC and in kind distribution of its 
assets.  In Count One, the Flippos asked that FLTC be 
dissolved pursuant to Code § 13.1-1047 because "it is not 
reasonably practicable to carry on the business" of FLTC under 
the Operating Agreement.  In Count Three, the Flippos sought 
rescission of the Operating Agreement, alleging that CSC 
fraudulently induced the Flippos to agree to the Operating 
Agreement by representing that CSC's proposed changes to 
 
17
Article 13 did not materially change the Operating Agreement.  
The Flippos allege such changes deprived them of a right to 
resign and receive a distribution in kind of their one-third 
interest in the assets.  The trial court denied the Flippos' 
requested relief for dissolution and rescission, finding, 
respectively, that there was no evidence that the Operating 
Agreement adversely impacted the operation of FLTC's business 
and that CSC did not make any misrepresentations regarding the 
changes it proposed to Article 13 of the Operating Agreement.  
The Flippos have not assigned error to either of these 
holdings. 
 
In Count Two of their amended bill of complaint, the 
Flippos asserted that "the parties were mutually mistaken as 
to the effect of the changes proposed by CSC to Article 13 and 
there was no meeting of the minds regarding that provision."  
In developing this position at trial, the Flippos presented 
evidence which, in their view, showed that provisions in the 
previous partnership agreements as well as in Article 13 of 
the current Operating Agreement were intended to, and did, 
allow a partner or member to resign, force the dissolution of 
the entity, and receive the distribution of the entity's 
assets in kind.  To secure the relief requested under Count 
Two, dissolution and distribution in kind, the Flippos 
tendered their resignations from FLTC "contingent" on the 
 
18
trial court concluding that dissolution and distribution in 
kind were authorized by the Operating Agreement.  In response, 
CSC maintained that although such rights were included in the 
original partnership agreement, neither the restated 
partnership agreement nor the subsequent FLTC Operating 
Agreement ever contained a right to resign, force dissolution 
of the partnership, and receive distribution of partnership 
assets in kind. 
 
The trial court found that Article 9 of the original 
partnership agreement for the Flippo Land & Timber Company 
Partnership specifically allowed a partner to terminate the 
partnership and receive a distribution in kind, but the court 
rejected the Flippos' contention that similar provisions were 
included in the unexecuted restated partnership agreement.  
The trial court found that CSC had no expectation that such 
rights were included or were supposed to be included in the 
restated partnership agreement or in the current Operating 
Agreement.  Furthermore, the trial court found that the 
Flippos had no such expectation either.  According to the 
trial court, the Flippos instead expected CSC to leave FLTC 
and be bound by the provisions of the Operating Agreement, 
which would have given the Flippos the right to purchase CSC's 
membership share at 85% of its appraised value.  Thus, the 
trial court found that the only mistake harbored by the 
 
19
Flippos was in the "prediction of things that are going to 
happen in the future."  
 
Accordingly, the trial court held that "[t]here was no 
mutual mistake of fact or law among the Flippos and CSC 
regarding the FLTC Operating Agreement."  The Flippos do not 
assign error to this holding.  Rather, they assert that the 
trial court erred in its interpretation of FLTC's Operating 
Agreement, specifically that Article 13's reference to Article 
9 entitles the remaining members to an opportunity to purchase 
the shares of a resigning member. 
 
Article 13 has been characterized as unambiguous by the 
Flippos, CSC, and the trial court, although the construction 
of the provision varies with the reader.  Article 13 states in 
relevant part that dissolution of FLTC occurs on "the death, 
resignation, bankruptcy, or dissolution of a Member, . . . 
unless, within 90 days of such event, the procedures of 
Article 9 are followed resulting in an election to continue 
the LLC . . . ." 
 
Article 9 provides that on the death of a member, the 
remaining members may "elect to purchase" the interest of the 
deceased member, or, if such interest is not purchased, a 
majority of the remaining members "may elect to continue the 
LLC."  If the remaining members "do not make either of these 
elections," the LLC will be dissolved. 
 
20
 
The Flippos maintain that the word "election" in Article 
13 refers only to the election in Article 9 to "continue the 
LLC" and does not include the election procedures in that 
Article regarding the right of the remaining members to 
purchase the departed member's shares.  We disagree with the 
Flippos. 
 
In construing contracts, we apply familiar principles.  
"The primary goal in the construction of written contracts is 
to determine the intent of the contracting parties, and intent 
is to be determined from the language employed, surrounding 
circumstances, the occasion, and apparent object of the 
parties."  Christian v. Bullock,  215 Va. 98, 102, 205 S.E.2d 
635, 638 (1974). 
It is the duty of the court to construe the 
contract made between the parties, not to make a 
contract for them, and "The polestar for the 
construction of a contract is the intention of the 
contracting parties as expressed by them in the 
words they have used."  Ames v. American Nat'l 
Bank, 163 Va. 1, 38, 176 S.E. 204, 216.  The facts 
and circumstances surrounding the parties when they 
made the contract, and the purposes for which it 
was made, may be taken into consideration as an aid 
to the interpretation of the words used, but not to 
put a construction on the words the parties have 
used which they do not properly bear. "It is the 
court's duty to declare what the instrument itself 
says it says."  163 Va. at 38, 176 S.E. at 216. 
 
Seaboard Air Line R.R. Co. v. Richmond-Petersburg Turnpike 
Auth., 202 Va. 1029, 1033, 121 S.E.2d 499, 503 (1961). 
 
21
 
In applying these principles, we first turn to the 
language of the Operating Agreement and then to the 
circumstances surrounding its execution.  Article 9 refers to 
two types of elections, either of which, if followed, 
continues the LLC.  The language of Article 13 refers to 
procedures "resulting in an election to continue the LLC."  
Without further limiting language, Article 13 does not 
eliminate the purchase election of Article 9.  Furthermore, an 
interpretation that eliminates the election to purchase a 
departed member's share from Article 13 renders the provisions 
of that Article in conflict with Article 9.  Both Articles 
refer to termination of the LLC on a member's death, and 
Article 9 unequivocally includes the election to purchase 
under such a circumstance. 
 
The facts and circumstances surrounding the execution of 
the Operating Agreement and the "apparent object of the 
parties" support the above construction.  There is no dispute 
that FLTC's Operating Agreement was to "mirror" the prior 
unexecuted restated partnership agreement.  The trial court 
concluded that the resignation and in kind distribution rights 
sought by the Flippos were not contained in the restated 
partnership agreement.  Because that agreement served as a 
basis for the current Operating Agreement, the absence of 
these rights in the Operating Agreement was consistent with 
 
22
CSC's expectations.  Thus, CSC's suggestion that a reference 
to the procedures of Article 9 be included in Article 13 was 
consistent with its position that resignation forcing 
distribution in kind was not a part of the restated 
partnership agreement.  Article 13 already contained a 
provision allowing the members to elect to continue the LLC 
without purchasing the resigning member's share.  Therefore, 
there was no need to add the Article 9 reference other than to 
bring Article 13 into compliance with CSC's understanding. 
 
Finally, CSC specifically asked the Flippos and MWBB to 
review the suggested changes, including those made to Article 
13, and inform CSC if any "are not acceptable."  Neither the 
Flippos nor MWBB raised any question about the changes or 
indicated that they were not acceptable in any way. 
 
Under the trial court's construction of Article 13, on 
the resignation of a member, FLTC would be dissolved unless 
the remaining members elected to continue it by purchasing the 
resigning member's shares or electing to continue it without 
such purchase by a vote of the remaining members.  Whether the 
Operating Agreement is considered ambiguous or unambiguous, 
under the terms of the agreement and the record regarding the 
purpose of the parties and the circumstances surrounding its 
execution, the trial court's construction of Article 13 is 
 
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reasonable and we will affirm that portion of the trial 
court's judgment. 
IV.  Sanctions 
 
CSC filed a motion for sanctions based on the allegations 
of mutual mistake and fraud in Counts Two and Three of the 
Flippos' amended bill of complaint.  The trial court awarded 
sanctions pursuant to Code § 8.01-271.1 in the amount of 
$9,166.75.  The Flippos challenge the award of sanctions, 
asserting that the findings of the trial court were 
insufficient to support the sanctions and that the Flippos' 
theories of recovery were well grounded in fact and in law. 
 
In reviewing a trial court's award of sanctions under 
Code § 8.01-271.1, we apply an abuse of discretion standard.  
In applying that standard, we use an objective standard of 
reasonableness in determining whether a litigant and his 
attorney, after reasonable inquiry, could have formed a 
reasonable belief that the pleading was well grounded in fact, 
warranted by existing law or a good faith argument for the 
extension, modification, or reversal of existing law, and not 
interposed for an improper purpose.  Gilmore v. Finn, 259 Va. 
448, 466, 527 S.E.2d 426, 435-36 (2000). 
 
The Flippos based their fraud count, Count Three, on a 
July 12, 1996 letter from CSC to MWBB and the Flippos.  In 
that letter, CSC proposed changes to a draft of FLTC's 
 
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Operating Agreement, which it characterized as "housekeeping" 
items that had no material effect on the Operating Agreement.  
This characterization was a misrepresentation, the Flippos 
assert, because the additions were material and not merely 
"housekeeping."  The trial court granted CSC's motion for 
sanctions, concluding that the fraud count was "an unjustified 
count," and rejecting the "idea that" CSC could defraud "these 
businessmen" who "had the assistance of an extremely 
experienced attorney, who was preparing the documents for 
their benefit." 
 
An allegation of fraud requires a showing by clear and 
convincing evidence of an intentional and knowing 
misrepresentation of a material fact, made with the intent to 
mislead, and relied upon by another to his or her detriment.  
Elliott v. Shore Stop, Inc., 238 Va. 237, 244, 384 S.E.2d 752, 
756 (1989).  Here, the July 12, 1996 letter sent to MWBB and 
the Flippos containing CSC's alleged misrepresentations of 
fact stated in pertinent part: 
 
We have had our attorney review the document 
and some "oversights" and housekeeping items have 
been added (as shown in red).  I would hope these 
are just housekeeping items and have no material 
affect [sic] on the agreement.  Please let me know 
if any of these are not acceptable. 
 
 
Applying the objectively reasonable standard recited 
above, we conclude that the language of this letter could not 
 
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support a reasonable belief that a pleading alleging fraud was 
well grounded in fact or law, regardless of whether the 
changes suggested resulted in a material change in the 
Operating Agreement.  First, the language of the letter, as 
CSC argues, states an opinion — the opinion of the writer that 
he "hope[s]" the changes are "just housekeeping items" and 
"hope[s]" the changes have no material effect.  Fraud cannot 
be predicated upon the mere expression of an opinion.  Tate v. 
Colony House Builders, Inc., 257 Va. 78, 82, 508 S.E.2d 597, 
599 (1999). 
 
Second, the letter invites MWBB and the Flippos to review 
the changes and to raise any objections regarding the changes.  
This invitation to consider the impact of the suggested 
changes is in direct conflict with the proposition that the 
changes were made with an intent to mislead, a prerequisite 
for a finding of fraud.  As stated by the trial court in 
ruling on the merits of Count Three, "[e]verything done by CSC 
. . . was above board, highlighted in red, done in writing.  
And to try to say that . . . [CSC] could mislead a 
sophisticated law firm or sophisticated attorneys who 
specialize in this type of work, and that [it] succeeded in 
doing that, is ridiculous."  Accordingly, we conclude that the 
trial court did not err in awarding sanctions pursuant to Code 
 
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§ 8.01-271.1 against the Flippos based on Count Three of their 
amended bill of complaint. 
We note that the final order recited that sanctions were 
imposed for both Counts Two and Three and that $9,166.75 was 
incurred "in defending against the fraud and mutual mistake 
claims."  A review of the record shows, however, that the 
amount awarded was designated by CSC's counsel and accepted by 
the trial court as the amount of attorneys' fees incurred in 
defending only Count Three, the fraud count.  Because the 
attorneys' fees incurred in defending Count Two were not 
identified or separately claimed and the award made did not 
include any amounts claimed to have been incurred for defense 
of Count Two, we do not address the propriety of sanctions 
pursuant to the mutual mistake claim.  Oxenham v. Johnson, 241 
Va. 281, 290, 402 S.E.2d 1, 6 (1991). 
For the above reasons, we will affirm the judgment of the 
trial court. 
Affirmed.
 
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