F I L E D

United States Court of Appeals

Tenth Circuit

AUG 21 1998

PATRICK FISHER

Clerk

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

___________________________________

 

DAREN LLOYD,

Plaintiff-Appellant,

v. No. 97-3074

(D.C. No. 95-CV-2549)

HORN INC., RIMA, INC. and (D. Kansas)

SDI OF FORT SCOTT, L.L.C.,

Defendants-Appellees.

________________________

ORDER AND JUDGMENT* 

________________________

Before ANDERSON and KELLY, Circuit Judges, and BRETT,** District Judge.

______________________

Plaintiff-Appellant, Daren Lloyd (“Lloyd”) appeals the Order of the United States

District Court for the District of Kansas rescinding the SDI of Fort Scott, L.L.C. Operating

Agreement (“Operating Agreement”) entered into by Lloyd and Defendants-Appellees, 

___________________

* This order and judgment is not binding precedent, except under the doctrines of law

of the case, res judicata, and collateral estoppel. The court generally disfavors the citation

of orders and judgments; nevertheless, an order and judgment may be cited under the terms

and conditions of 10th Cir.R. 36.3.

** Honorable Thomas R. Brett, District Judge, United States District Court for the

Northern District of Oklahoma, sitting by designation. 
1

 Rickerson was the sole stockholder of RIMA, Inc. [Tr. 15].

2

 In February 1990, Leneev, Inc. was no longer a partner.

3

 The pertinent provision reflecting the contributions of the partners, Section 2.01

Partners’ Contribution, states the following:

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Horn, Inc. and RIMA, Inc. The case below was bifurcated into issues of construction of the

Operating Agreement and damages. After a trial to the court on the equitable counterclaims

of defendants, the district court rescinded the Operating Agreement based on its findings of

defendants' unilateral mistake and Lloyd's constructive fraud. It is this ruling which Lloyd

appeals. Based on the parties’ stipulation as to damages, the district court entered judgment

in favor of Lloyd and against defendants in the amount of $17,354.40, the value of Lloyd’s

capital account. We exercise jurisdiction under 28 U.S.C. §1291 and affirm the trial court.

I. Background

In June 1989 Lloyd was hired as a manager trainee by the owners of an existing Sonic

Drive-In in Fort Scott, Kansas - Max Rickerson (“Rickerson”) of RIMA, Inc. (“RIMA”)1,

Marion Leneev of Leneev, Inc. and John Horn (“Horn”). [Tr. at 68-70, 100-101]. Pursuant

to an oral agreement between the owners and Lloyd, Lloyd replaced Horn as manager of the

drive-in restaurant on July 1, 1989, receiving $1,200.00 per month in wages and ten percent

of the profits. [Tr. at 70-72, 111]. 

On February 21, 1990, Lloyd entered into a Partnership Agreement with Horn and

RIMA2 whereby Lloyd became Managing Partner and acquired 25% interest in the new

partnership, paying $12,500 to Horn and $12,500 to RIMA for his interest.3 [Tr. at 19, 71;
On or before the commencement date of the Partnership, the Partners shall

contribute in cash as follows:

Darren [sic] T. Lloyd $25,000.00 new acquisition

John Horn $20,000.00 original contribution

Rima, Inc. $10,000.00 original contribution

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Plt’s Ex. 1, Partnership Agreement, Section 2.01]. The partnership was formed for the

purpose of owning, operating and continuing to do business as Sonic Drive-In of Fort Scott

(“Sonic Drive-In”). [Plt’s Ex. 1, Partnership Agreement, Article 1]. As Managing Partner,

Lloyd received a salary of $1,200.00 per month and $25.00 per week car allowance, plus

25% of the net profits. [Plt’s Ex. 1, Partnership Agreement, Section 5.03 and Article 3]. 

Pursuant to the Partnership Agreement, the profits from the operation of the Sonic

Drive-In were distributed among the partners according to their respective interests: Lloyd

with 25%, RIMA with 37 1/2% and Horn with 37 1⁄2%. [Plt’s Ex. 1, Partnership Agreement,

Section 5.03 and Article 3]. However, the Partnership Agreement expressly limited the

amount Lloyd, as Managing Partner, could realize from his partnership interest should he

withdraw or be fired from the partnership. Under the terms of the agreement, if Lloyd

withdrew or was fired as Managing Partner, his partnership interest would be valued as the

amount of his capital account plus all undistributed earnings through the effective date of

withdrawal or termination. [Plt’s Ex. 1, Partnership Agreement, Sections 6.01, 7.01, 7.02].

The Partnership Agreement was amended twice, on November 1, 1990 and on

February 26, 1992. [Plt’s Ex. 2, Amended Partnership Agreement; Plt’s Ex. 3, Second

Amended Partnership Agreement]. The Amended Partnership Agreement and Second
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Amended Partnership Agreement did not substantively alter the terms of the Partnership

Agreement other than to substitute Horn, Inc. for John Horn as one of the three partners. 

The partnership continued under the Second Amended Partnership Agreement until the

parties entered into the Operating Agreement on June 30, 1995, by which the partnership

was converted into a limited liability corporation, SDI of Fort Scott, Kansas, L.L.C (“SDI”).

The conversion of the partnership to a limited liability corporation was recommended

to Rickerson by Tim Larson (“Larson”). Larson was an attorney for Rickerson and his

corporation, RIMA, and also advised Rickerson concerning legal matters pertaining to the

Sonic partnership. [Tr. at 26, 55-56]. Rickerson testified that Larson recommended the

conversion of the partnership to a limited liability corporation to limit the owners’ liabilities.

[Tr. at 26]. Rickerson also testified that he directed Larson to prepare the Articles of

Organization and Operating Agreement for the formation of SDI and none of the terms was

subject to discussion or negotiation with Lloyd. [Tr. at 26-29; Plt’s Ex. 4, Articles of

Organization; Plt’s Ex. 5, Operating Agreement]. After Rickerson, Horn and Lloyd

separately reviewed and signed the documents, the Articles of Organization and Operating

Agreement were filed with the Secretary of State of Kansas on August 9, 1995. [Tr. at 29,

74-75, 106; Plt’s Ex. 4]. 

Most of the provisions of the Operating Agreement mirrored corresponding provisions

of the prior partnership agreements. However, the Operating Agreement reflected the

following changes in the form of management of the new limited liability corporation: 
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5.01 Management of the Company. Management of the Company shall be

vested in the Members. The Members of the Company initially shall be towit:

Daren T. Lloyd Horn, Inc.

1700 S. National 120 S. National

Ft. Scott, KS 66701 Ft. Scott, KS 66701

RIMA, Inc.

c/o Max K. Rickerson

P.O. Box 431

Chanute, KS 66720

5.04 Designated Managing Member.

(a) There may be a designated Managing Member of the Company who shall

have the responsibility to act on behalf of the Company and to carry out the

decisions of all the Members by handling the general daily affairs and

operations of the Company. The Managing Member shall inform the Members

of any problems of unusual nature with the operations that are not resolved in

the regular course of business operations, and the Members shall determine by

vote of the majority in interest the action to be taken.

5.06 Additional, Removal, and Replacement of Managing Member or

Supervising Member. The Managing Member or Supervising Member, as the

case may be, may be added, removed, and/or replaced by written agreement

signed by the Members upon a vote of the majority in interest. 

[Plt’s Ex. 5, Operating Agreement, Sections 5.01, 5.04 and 5.06]. Although the “Managing

Partner” was now designated as the “Managing Member,” the Operating Agreement

incorporated the prior partnership agreements’ restriction on the value of the Manager’s

interest in the event he were fired to the amount of his capital account plus his pro rata share

of all undistributed earnings up to the effective date of termination. [ Plt’s Ex. 5, Operating

Agreement, Sections 7.01 and 7.02].

On August 16, 1995, Lloyd wrote the following letter to Rickerson and Horn:
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Today in the mail, I received copies of Articles of Organization and an

Operating Agreement for the above referenced company [SDI].

I want to make clear that I do not desire to be appointed nor will I

accept the designation as managing member of SDI of Fort Scott, Kansas,

L.L.C. I have no idea to whom you intend to seek or designate as managing

member, however, I will be happy to assist in this decision at such time as we

may meet for organizational purposes.

I intend to remain as a member of SDI of Fort Scott, Kansas, L.L.C. and

continue to receive pro-rata draws. To that end, I will be happy to assist in

consultation or supervision as we as members shall decide.

Also, please accept this as my official designation in writing pursuant

to paragraph 11.01 that notices and other correspondence should be directed

to me at P.O.Box 1027, Fort Scott, Kansas 66701-1027, from and after the date

of this letter.

Please contact me at your earliest opportunity so that we may further

discuss.

[Plt’s Ex. 6]. Following receipt of the letter, Rickerson and Horn met with Lloyd and asked

if he planned to continue to manage the Sonic Drive-In. Lloyd answered no, and the meeting

ended. [Tr. at 35-36]. 

By letter dated September 5, 1995, Larson, on behalf of RIMA and Horn, Inc.,

informed Lloyd that Rickerson and Horn considered Lloyd’s August 16, 1995 letter a

“withdrawal and resignation” of his position as Managing Member. Alternatively, Larson

notified Lloyd that he was expelled as a member of SDI based on his failure to disclose his

intent not to manage the Sonic Drive-In once the limited liability corporation was formed.

[Plt’s Ex. 7]. 

On December 12, 1995, Lloyd brought suit for breach of the Operating Agreement,

seeking the fair market value of his membership interest in SDI and his share of any

distributions paid to the members since August 1, 1995, plus punitive damages, costs and
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attorney fees. Defendants Horn Inc., RIMA and SDI counterclaimed for equitable relief

seeking judgment that Lloyd was the Managing Member of SDI under the literal terms of

the Operating Agreement, and if not, based on the conduct and understanding of the parties

and other equitable principles, the Operating Agreement should be reformed to so designate

Lloyd as Managing Member, or be rescinded.

The trial court bifurcated the case and conducted a bench trial on the issue of

rescission or reformation on September 17, 1996. At the conclusion of the trial, the court

found that rescission of the Operating Agreement was warranted based on (1) defendants’

unilateral mistake regarding the effect of the Operating Agreement, if, as Lloyd contended,

the effect were to change Lloyd’s ownership interest to a full equity interest rather than a

limited management interest, relieve Lloyd of his management responsibilities, and entitle

him to more than the amount of his capital account in exchange for his interest, and (2)

Lloyd’s constructive fraud and inequitable conduct in remaining silent and concealing his

intent to resign as manager as soon as the transition to the limited liability corporation

became effective.

After this ruling Lloyd applied for an Order of Partition pursuant to the parties’

ownership interests under the Second Amended Partnership Agreement. [Appellee’s Ex. D].

Lloyd asked the trial court to effect a partition whereby Lloyd would purchase RIMA’s and

Horn, Inc.’s partnership interests in the amount of five times the 1995 net earnings of their

interests in the partnership, or $848,537.25, or in the alternative, the majority owners
-8-

purchase Lloyd’s interest for $282,845.75, plus his earned but undistributed profits of the

partnership since August 1995. Defendants moved for summary judgment on the question

of damages, asserting Lloyd was entitled to $17,354 plus interest, representing the amount

of his capital account due under the Second Amended Partnership Agreement.

In its Memorandum and Order of January 29, 1997, the trial court denied Lloyd’s

Application for an Order of Partition and granted Defendants’ Second Motion for Summary

Judgment in part and denied it in part. The court found the Second Partnership Agreement

governed Lloyd’s damages, but the record was insufficient to determine whether Lloyd

withdrew from the partnership under Section 7.01 or defendants terminated him under

Section 6.01 of that agreement. The court then set the matter for trial. The parties, however,

later stipulated that the amount of damages was $17,354.40 regardless of whether Lloyd

withdrew or was terminated, and the court entered judgment for Lloyd in that amount.

[Appellee’s Ex. G]. Lloyd now brings this appeal. 

II. Standard of Review

Lloyd appeals from the decision of the district court, sitting as a court of equity, to

rescind the Operating Agreement based on the its findings of unilateral mistake, constructive

fraud and inequitable conduct. Ordinarily, “[w]e review a district court’s choice of equitable

remedies for abuse of discretion.” Roberts v. Colorado State Bd. of Agric., 998 F.2d 824,

826 (10th Cir.), cert. denied, 510 U.S. 1004 (1993). However, if the “the availability of

equitable relief depends upon an interpretation of law,” the review is de novo. Downriver
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Community Fed. Credit Union v. Penn Square Bank, 879 F.2d 754, 758 (10th Cir. 1989),

cert. denied, 493 U.S. 1070 (1990). We review underlying factual determinations for clear

error. Rascon v. US West Communications, Inc., 143 F.3d 1324, 1329 (10th Cir. 1998);

Estate of Holl v. Commissioner, 54 F.3d 648, 650 (10th Cir. 1995). A finding of fact is

clearly erroneous if it is without factual support in the record or if, after reviewing all of the

evidence, the Court is left with the definite and firm conviction that a mistake has been made.

Raydon Exploration, Inc. v. Ladd, 902 F.2d 1496, 1499 (10th Cir. 1990). Mixed questions

of fact and law are reviewed de novo if they involve primarily a consideration of legal

principles and under a clearly erroneous standard if the question is primarily a factual inquiry.

Rascon, 143 F.3d at 1329. 

III. Analysis

The general rule of contract formation under Kansas law is there must be a “meeting

of the minds on all essential elements” of the contract to bind the parties to its terms. Albers

v. Nelson, 809 P.2d 1194, 1198 (Kan. 1991). A party to a contract may seek equitable

remedies of reformation and rescission when “there is ignorance or a mistake on one side and

fraud or inequitable conduct on the other, as where one party to an instrument has made a

mistake and the other knows it and fails to inform him of the mistake or conceals the truth

from him.” Andres v. Claassen, 714 P.2d 963, 969 (Kan. 1986). “Thus, unilateral mistake

may be the basis for relief when it is accompanied by the fraud of, or is known to, the other

party.” Id. 
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Lloyd argues the trial court erred in rescinding the Operating Agreement as the

evidence did not establish either unilateral mistake or constructive fraud. We disagree.

The district court found it was the parties’ sole intent in entering into the Operating

Agreement to convert the partnership to a limited liability corporation in order to limit their

respective liabilities. Horn, Inc. and RIMA, therefore, made a mistake as to the effect of the

Operating Agreement if its effect were to relieve Lloyd of his management responsibilities

and entitle him to receive more than the amount of his capital account in exchange for his

interest. The court also found Lloyd knew or should have known of their mistake at the

time of the agreement and concealed from his partners his intent to resign as manager of the

Sonic Drive-In until after the conversion was effected, and concluded Lloyd’s silence

constituted constructive fraud and inequitable conduct. We review these findings for clear

error because, although they involve mixed questions of fact and law, the inquiries are

predominantly factual. Rascon, 143 F.3d at 1329. 

 Lloyd does not dispute the parties’ intent in entering into the Operating Agreement

was to convert the partnership to a limited liability corporation in order to limit the parties’

liabilities. Nor does he dispute it was not the intent of RIMA or Horn, Inc. to relieve him of

his management responsibilities by the conversion. Indeed, when specifically asked at trial

whether Rickerson and Horn would have converted the partnership to a limited liability

corporation if they had known Lloyd did not intend to continue managing the business, Lloyd

testified, “I am sure that if they thought that I was not going to be a managing member, that
4

 The “sudden death penalty” provision refers to Section 7.01 of the Operating

Agreement which limited the value of the Managing Member’s interest in the limited

liability corporation upon termination to the amount of his capital account plus his pro

rata share of all undistributed earnings.

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they might not have gone through with this process.” [Tr. at 88]. 

Rather, Lloyd argues the doctrine of unilateral mistake does not apply here where

sophisticated business parties executed an unambiguous contract, the legal effect of which

was to create a new form of business that permitted operation without the designation of a

Managing Member and granted Lloyd a shared interest in the business that could not be

terminated by the other members. In other words, the only “mistake” made by Rickerson and

Horn was to assume that Lloyd did not intend to enforce the terms of the Operating

Agreement which expressly provided that the designation of a Managing Member is

permitted, not required: “There may be a designated Managing Member of the Company who

shall have the responsibility to act on behalf of the Company and to carry out the decisions

of all the Members by handling the general daily affairs and operations of the Company.”

[Plt’s Ex. 5, Operating Agreement, Section 5.04 (emphasis added)]. Further, nothing in the

Articles of Organization or the Operating Agreement designated Lloyd as the Managing

Member. Thus, under the terms of the agreement, Lloyd was entitled to remove himself from

the “sudden death penalty” provision4 of the Operating Agreement by declining to become

the Managing Member. 

The trial court’s decision to rescind the Operating Agreement, however, did not turn
5

 The district court did note “[t]he Articles of Organization and Operating

Agreement were at variance with the parties [sic] prior dealings and expressed

manifestations of intent which so far as the evidence discloses was only to convert the

partnership to an L.L.C. in order to limit the liabilities of the respective parties.” 

[Appellee’s Ex. C, Order dated September 17, 1996].

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on an interpretation of the contract. The issue before the court was one of contract

avoidance, not interpretation. For the purpose of its analysis, the court assumed Lloyd’s

interpretation of his management obligations, or lack thereof, under the Operating

Agreement.5 The district court determined Rickerson and Horn entered into the Operating

Agreement under the mistaken assumption Lloyd would continue to manage the Sonic DriveIn; this assumption was material to the agreement; and Lloyd knew or should have known

of their mistake at the time of formation. These findings are not only clearly supported by

the record, they are undisputed. 

The relevant inquiry on appeal, therefore, is not whether the trial court erred in finding

unilateral mistake but whether the court erred in concluding Lloyd’s silence constituted

constructive fraud or inequitable conduct to permit rescission of the Operating Agreement.

The general rule under Kansas law is a unilateral mistake will not excuse nonperformance

of a contract, absent fraud or inequitable conduct. Albers, 809 P.2d at 1198. Constructive

fraud is defined as “a breach of a legal or equitable duty which, irrespective of the moral

guilt, the law declares fraudulent because of its tendency to deceive others or violate a

confidence, and neither actual dishonesty of purpose or intent to deceive is necessary.”

Andres, 714 P.2d at 970. In finding constructive fraud, the trial court did not identify the
6

 It is unclear what the parameters of “inequitable conduct” are under Kansas law. 

However, as we affirm the trial court’s finding of constructive fraud, we need not reach

the issue.

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nature of the duty Lloyd owed and breached with his silence. However, the existence of a

duty was implicit in the court’s finding “defendants were necessarily deceived and that in

the circumstances, the plaintiff has to be charged with the natural consequences of his acts

which were to deceive the defendants.” [Tr. at 152]. The court also found Lloyd’s conduct

under these same circumstances constituted inequitable conduct.6

Constructive fraud or fraud by silence is premised on a party’s obligation or duty to

speak. Andres, 714 P.2d at 970; Ensminger v. Terminix Int’l Co., 102 F.3d. 1571, 1573

(10th Cir. 1996) (interpreting Kansas law). “A suppression or concealment of the truth is not

at all times such fraud or deceit as will be relieved against. It must be a suppression or

concealment of facts which the party is under a legal or equitable obligation to communicate

and in respect of which he could not be innocently silent.” DuShane v. Union Nat’l Bank,

576 P.2d 674, 678-79 (Kan. 1978). “The question of what gives rise to a legal or equitable

obligation to communicate is not always an easy question to resolve, but generally the duty

must arise from a relationship existing between the parties when the suppression or

concealment is alleged to have occurred.” Id. at 679. 

We agree with the trial court that under the circumstances of this case, Lloyd had an

obligation to inform his partners he did not intend to continue to manage the Sonic Drive-In

once the Operating Agreement was in place. Lloyd was a partner with Rickerson and Horn
-14-

or their related corporate entities for almost five years. As such, he was accountable as a

fiduciary to the partnership. Kan.Stat.Ann. §56-321; Denison State Bank v. Madeira, 640

P.2d 1235, 1241 (Kan. 1982) (finding two types of fiduciary relationships: those created by

contract and those “implied in law due to the factual situation surrounding the involved

transactions and the relationship of the parties to each other and to the questioned

transactions”). As Managing Partner, Lloyd had a particular duty to his partners to disclose

any intent to discontinue his management obligations as he was responsible for the day-today operation of the business and his management was pivotal to its financial success.

DuShane, 576 P.2d at 679 (finding duty to speak if the parties to a bargain are in a fiduciary

relationship to one another). However, at no time did he inform his partners that he did not

intend to continue managing the business once the conversion to a limited liability

corporation was effected. [Tr. at 82-83]. 

Lloyd claims Rickerson and Horn should have known of his intention not to continue

as manager because he expressed his wishes to them in May of 1989 “to get into Sonic and

become a partner and progress,” [Tr. at 69] and told Horn in June of 1995 that he wanted “to

get into some other drive-ins” and if anything else came along, he “was going to take it.” [Tr.

at 75-76]. These vague statements, however, are insufficient to have alerted Rickerson and

Horn that Lloyd did not intend to be Managing Member under the Operating Agreement,

particularly when Lloyd had acted as managing partner under the three prior partnership

agreements over the preceding five years.
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The findings of the trial court of unilateral mistake and constructive fraud are

supported by the evidence and warrant the court’s equitable rescission order. Accordingly,

we affirm for substantially the reasons stated by the district court in its Order of September

17, 1996. 

Entered for the Court

Thomas R. Brett

Senior United States District Judge