Question

Clarissa Hendricks, a hedge fund operator, sued her investing partners, Bruno Moretti and Brandon Washington, for breach of contract, claiming that they had agreed to change the compensation provisions in their limited liability company (LLC) operating agreements. The agreements provided that if a founder left, he or she would receive only his/her capital account and earned income for that year. Over a year-and-a-half period, Hendricks’ lawyers prepared and circulated nine drafts of a new operating agreement that would have given each founder a declining percentage of his/her interest for six years upon retirement or death. None of the three founders ever signed the new operating agreement. Although Hendricks was paid more than $100 million after she left the LLC in 2014 (which represented her 2014 earned compensation and capital accounts), she claimed that Moretti and Washington had agreed to pay her the six-year declining interest contemplated by the draft operating agreement. Is Hendricks entitled to receive more than her 2014 earned compensation and capital account? Explain.

Answer 1

No. She is not entitled to receive more than the compensation that she received.

To understand this issue let’s review the facts

• Clarisaa Hendricks has two other partners – Bruno Moretti and Brandon Washington.
• The initial agreement provided that if a founder left, he or she would receive only his/her capital account and earned income for that year.
• Hendriks’ (through her lawyers) had proposed changing of this operating agreement and sent nine drafts.
• None of the founders signed the agreement
• When Hendricks left, she was compensated using the old operating agreement

Issue

• Hendricks claims that there had been a verbal agreement between her and the other founders on receiving compensation using the new operating agreement.

Now if we review the facts, it becomes clear that it is possible that there was a verbal agreement between Hendricks and the other two founders. However the difference between an agreement and contract is that a contract is legally binding and enforceable in the court of law. An agreement on the other hand is a simple acknowledgement to an arrangement.

From the provided facts we can safely assume that there has been no formal (written contract) between Hendricks and the other two founders. Now let’s assume that there has been a verbal contract. For a contract to be valid, there has to be several components. Namely, offer, acceptance, consideration and legal relationship. Even in this scenario, we can understand that there was an offer from Hendricks but there has been no sign of acceptance, consideration and legal relationship. Thus, the new operating agreement (proposed by Hendricks) is not legally binding. Hence she is not entitled to receive more than her 2014 earned compensation and capital account.