Doll v. Little Big Warm Ranch

417 Mont. 493

WILFRED L. DOLL and CHERI L. DOLL, Plaintiffs, Counter Defendants, Appellees, and Cross Appellants,

v.LITTLE BIG WARM RANCH, LLC, LARRY H. SMITH and MARK FRENCH, Defendants, Counter Plaintiffs, and Appellants.

LEVI DOLL and SHEILA DOLL, Intervenors.

No. DA 23-0291.

Submitted on Briefs May 1, 2024.

Decided August 20, 2024.

2024 MT 179.

417 Mont. 493.

_____P.3d____.

Appeal from the District Court of Phillips County.

Seventeenth Judicial District Court, Cause No. DV-2018-06.

Honorable Yvonne Laird, Judge.

Given limited liability company (LLC) members pleaded for a distribution of their interest in the LLC in the alternative to dissolution, the pleading was sufficient to constitute both a "voluntary act" and a "short plain statement" of the members’ "express will to withdraw," satisfying the terms of the operating agreement, the Montana Limited Liability Company Act, Mont. Code Ann. § 35-8-803(1), and the notice pleading requirements; the eight-statute of limitation for contract-based claims applies to the LLC’s counterclaims. The LLC’s breach of fiduciary duty and obligation of good faith and fair dealing claims would never have formed but for the existence of the operating agreement and the members’ membership; the LLC’s counterclaims were breach of contract claims. Thus it was improper to award it punitive damages under Mont. Code Ann. § 27-l-220(2)(ii).

Affirmed in part and remanded.

For Appellants: Hertha L. Lund, Lund Law, PLLC, Bozeman; Gregory G. Pinski, Conner, Marr & Pinski, PC, Great Falls.

For Appellees: L. Randall Bishop, L. Randall Bishop, AAL, Kalispell; Monica J. Tranel, Tranel Law Firm, P.C., Missoula.

CHIEF JUSTICE McGRATH delivered the Opinion of the Court.

¶1 Little Big Warm Ranch, LLC (LBWR), appeals a summary judgment order from the Seventeenth Judicial District Court, Phillips County, which ruled that Wilfred L. Doll and Cheri L. Doll (Dolls) dissociated from LBWR in 2018.¹

¶2 Dolls cross-appeal an adverse, contemporaneous summary judgment ruling from the same District Court that led to a verdict and judgment awarding LBWR compensatory and punitive damages.

¶3 We affirm in part and remand to the District Court to modify its judgment to exclude punitive damages.

¶4 We restate the issues on appeal as follows:

Issue One: Did the District Court err in ruling that Dolls dissociated from LBWR in 2018?

Issue Two: Did the District Court err by applying the eight-year statute of limitation for contracts to LBWR’s counterclaims?

FACTUAL AND PROCEDURAL BACKGROUND

¶5 LBWR and Dolls have been litigating various issues since late 2017. Generally, the issues have involved the formation and fallout of a business relationship that was designed to manage scarce water rights in Phillips County, which themselves have been the subject of litigation since the early 1990s.²

¶6 We have previously ruled on two appeals between LBWR and Dolls. In December 2018, we affirmed a Water Court order denying LBWR’s petition to reopen Dolls’ closed water rights claims, which had previously been adjudicated and settled. Little Big Warm Ranch, LLC v. Doll, 2018 MT 300, 393 Mont. 435, 431 P.3d 342 (Little Big Warm I). More recently, we affirmed a district court order enforcing LBWR’s and Dolls’ water rights in Big Warm Creek and denying Dolls fees and costs. Little Big Warm Ranch, LLC v. Doll, 2024 MT 3, 415 Mont. 8, 541 P.3d 104 (Little Big Warm II).

¶7 The present litigation proceeded in parallel with the water rights dispute and culminated in a $2.5 million jury verdict for LBWR finding that Dolls were liable for breach of fiduciary duties and the obligation of good faith and fair dealing to LBWR. The District Court ordered Dolls to pay LBWR for their damages at an 11.25% interest rate per year until paid in full. Further, the District Court ordered LBWR to distribute Dolls’ shares in LBWR to them for the "fair value price of $434,000 at a 7.5% interest rate which began to accrue on February 2, 2018."

¶8 The parties appeal various rulings underpinning the District Court’s judgment. Because several prongs of litigation co-evolved, we recount the relevant details in chronological order for clarity.

¶9 Through the 1990s, Dolls were involved in two water rights disputes with Steve and Lori Knudsen (Knudsens) over rights to water in Big Warm Creek, Ester Reservoir, Little Warm Creek, and Little Warm Reservoir.³ The cases were certified to the Water Court, where they were adjudicated and published in draft water master’s reports.

¶10 Knudsens’ successors-in-interest, James Dudley and Leslie Greene (Greenes) objected to Dolls’ rights during the water right adjudication process. Before their objections were resolved, in 2013, Greenes sold the property to Carthel "Jack" Finch, W.G. Dement, and Jason Dement (Finch/Dements).

¶11 In November 2014, several families and neighbors with mutual interests in Phillips County formed LBWR "for the purpose of operation and management of farm and ranch real estate and any and all lawful related or incidental business activities."

¶12 On November 10, 2014, LBWR members, including Dolls, signed an operating agreement (Operating Agreement) which, among other provisions typical of a business operating agreement, provided a formula for valuing members’ shares, procedures for dissociating members, and procedures for dissolving and "winding up" the business. Dolls bought two of fifteen total member shares for $265,000 each.

¶13 Between November and December 2014, LBWR negotiated to purchase the Finch/Dement property. The buy-sell agreement included first priority appurtenant water rights.

¶14 While negotiations between LBWR and the Finch/Dements were underway, Dolls began separately negotiating a settlement agreement (Settlement Agreement) with the Finch/Dements regarding the Greenes’ previous objections to Dolls’ water rights. The Settlement Agreement provided Dolls with senior water rights and effectively devalued the Finch/Dement property. LBWR would have otherwise acquired the most senior rights.

¶15 It is not disputed that Dolls threatened to withhold a $300,000 deposit on the Finch/Dement property purchase pending LBWR members’ signatures on an acknowledgment of the Settlement Agreement. The parties dispute when the other LBWR members gained actual knowledge of the terms of the Settlement Agreement. There is no dispute, however, that Dolls failed to notify them that the water rights granted to Dolls under the Settlement Agreement conflicted with LBWR’s loan application for the Finch/Dement property, which provided as security "1st water rights. Source is Ester Lake and Little Big Warm Lake," and which Dolls signed.

¶16 LBWR members signed the acknowledgment, thereby consenting to Dolls’ consequent senior priority water rights on December 11, 2014, the same day that it closed on the Finch/Dement property. The Settlement Agreement was executed on December 23, 2014.

¶17 On November 29, 2017, LBWR petitioned the Water Court to reopen Dolls’ claims and substitute itself for Greenes as objectors. Although the claims were closed more than two years prior,⁴ LBWR alleged that its Due Process rights were violated when Dolls failed to provide sufficient notice of the Settlement Agreement. LBWR argued that it could not adequately protect the water rights appurtenant to the Finch/Dement property having learned about the Settlement Agreement and Dolls’ senior rights just before its members closed on the transaction.

¶18 On January 8, 2018, at an annual meeting, LBWR passed amendments to the Operating Agreement, which would impose assessments for litigation fees and costs and allow LBWR to terminate the membership of an adverse member. The members also voted to show support for LBWR’s proceeding before the Water Court. Dolls voted against the amendments.

¶19 On January 29, 2018, the Water Court rejected LBWR’s petition to reopen Dolls’ claim, concluding that LBWR failed to timely substitute itself for the Greenes in their objections to Dolls’ water rights. LBWR subsequently appealed that ruling to this Court.

¶20 On January 30, 2018, Dolls filed a District Court complaint in this proceeding seeking an injunction prohibiting action on the Operating Agreement amendments and alleging certain members violated their duty of loyalty, duty of care, and obligation of good faith and fair dealing in their business dealings with Dolls. Among their requests for relief, Dolls asked for "an order dissolving the ranch or alternatively for a distribution and/or purchase of the Dolls’ interest in [LBWR]."

¶21 On February 16, 2018, LBWR convened a board meeting that was scheduled, in part, to ratify minutes from the January 8,2018 meeting. When they learned that Dolls’ counsel was present at the meeting remotely, LBWR members voted to adjourn the meeting. All members, excluding Dolls, reconvened the meeting moments later and voted to "update and publish … [Amendments] passed at the Annual Meeting 1.8.18, to be included in the Operating Agreement and By-Laws of [LBWR]."

¶22 On December 11, 2018, this Court affirmed the Water Court order denying LBWR’s request for substitution and motion to reopen Dolls’ claims. Little Big Warm I, ¶ 15. In the appeal, LBWR again argued that it did not have notice of an opportunity to substitute itself for Greenes as objector to Dolls’ water rights. Little Big Warm I, ¶ 15. We affirmed the Water Court’s conclusion that LBWR had notice and even participated in the Dolls’ proceedings with the Greenes, which was reflected by LBWR’s consent to the Settlement Agreement resolving the Greenes’ objections. Little Big Warm I, ¶ 17.

¶23 On January 15, 2019, LBWR filed counterclaims in the District Court proceeding against Dolls related to the Settlement Agreement. LBWR alleged it was entitled to compensatory and punitive damages for fraud, deceit, tortious interference with contract, unjust enrichment, and breach of the duty of loyalty, the duty of care, and the obligation of good faith and fair...