Opinion ID: 1059475
Heading Depth: 1
Heading Rank: 2

Heading: CSC's Suit

Text: 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.
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] 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 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. 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 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).
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, 105 S.Ct. 3513, 87 L.Ed.2d 643 (1985). While evidence of net worth is relevant, the 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. Palas v. Zaharopoulos, 219 Va. 751, 755, 250 S.E.2d 357, 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 i 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 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 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.
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 §§ 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 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 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. 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. 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 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.