Can LLC managers unilaterally defer their compensation? CWS v. Montgomery Explained

In CWS v. Montgomery, the Utah Court of Appeals addressed whether an LLC manager can unilaterally defer compensation without member approval, providing important guidance on contract interpretation and damages issues.

Background and Facts

Montgomery served as manager of CWS, LLC from 2007 to 2019. During this period, he periodically deferred his $150,000 annual salary and bonuses to improve CWS’s cash flow. In 2014, Montgomery formed Capitol Commercial Glazing, a competing business that manufactured storefront windows. After other members discovered Montgomery’s competing activities, they removed him as manager in 2019. CWS sued Montgomery for breach of contract, while Montgomery counterclaimed for approximately $1.8 million in deferred compensation.

Key Legal Issues

The case presented three primary issues: (1) whether the Operating Agreement permitted Montgomery to defer his compensation without majority member approval; (2) whether prejudgment interest was appropriately awarded on various damage categories; and (3) whether the trial court’s attorney fee award was supported by adequate findings.

Court’s Analysis and Holding

The court affirmed summary judgment in Montgomery’s favor on his compensation claim. The court applied correctness review to contract interpretation, finding that while the Operating Agreement required specific payment timing, other provisions granted Montgomery broad management discretion. The court noted that Montgomery’s deferral was within his discretionary authority and that concluding otherwise would result in forfeiture of earned compensation, producing an inequitable result.

Regarding prejudgment interest, the court partially reversed. While prejudgment interest was appropriate on Capitol-related damages because they were calculable and fixed, the court found it was calculated on incorrect figures. The court reversed prejudgment interest on line-item damages, noting that Montgomery had tendered payment but CWS refused, making the delay CWS’s responsibility rather than Montgomery’s.

The court reversed the attorney fee award, finding the trial court’s conclusory ruling insufficient. The court emphasized that fee awards require detailed findings explaining the factors considered in determining the prevailing party.

Practice Implications

This decision demonstrates the importance of clear contract language regarding compensation modifications. When seeking attorney fees based on contractual provisions, practitioners must ensure trial courts make adequate findings considering relevant factors such as claim importance, amounts awarded, and the litigation’s overall context. The decision also reinforces that prejudgment interest serves to compensate for delayed payment, not to punish parties who attempt to tender payment that is refused.