Bad Contracts are Still Contracts

Copacia v Ginzinger, an unpublished Michigan Court of Appeals Case, highlights a fairly unpalatable axiom of the law that the fact a party made a bad deal does not relieve him of the consequences of his contract.

Copacia and Ginzinger formed a limited liability company to develop a condominium project.  They both initially made equal capital contributions; however, during the course of the development Copacia wound up contributing the lion’s share of the capital to finish the project.  The operating agreement for the LLC provided that the parties would share in the "net profits, net losses, and other items of income, gain, loss, deduction and credit of the condominium project based upon the ratios of the capital contributions between the parties.

When the parties each contribute equal funds to the project, they also share 50-50 in the expenses and the profits.  But when one member starts contributing more than the other member, the ratios change, and the person contributing more also starts bearing more of the expenses (as well as receiving more of the profits).  The opinion does not state whether the project was profitable, but one can assume if there was a lawsuit, it probably was not.

The heavily contributing partner tried to get around this bad deal by claiming there was an oral agreement to split the expenses 50-50 notwithstanding the operating agreement, but the operating agreement had an integration clause, and the Limited Liability Company Act has a statute of frauds, barring oral agreements.  The court also dismissed the fraud, unjust enrichment and quasi-contract claims, because there was an express contract (the operating agreement) between the parties.

In hindsight, the moneyed partner should have requested a change in the operating agreement before contributing more capital than the destitute partner.  However, his lack of business savvy (his lack of understanding of his contract), did not excuse him from its provisions.

UPDATE:  the Court of Appeals vacated its prior opinion and issued a new opinion; however, it does not change the analysis above.

© Steve Sowell 2017