The operator disclosed the lawsuit on day 31 of a 30-day rep period and called it timely
A capital provider funded $340k into a six-unit acquisition on terms that gave the operator a standard 8% preferred return and a 70/30 waterfall. The operating agreement included representations and warranties from the operator, with a 30-day disclosure window for any material litigation affecting the entity or its principals. On day 31, the operator sent an email noting an ongoing breach-of-contract claim from a prior investor, characterized in the email as "resolved" and "immaterial." The lawsuit was neither. It named the operating entity directly, sought $180k in damages, and had been filed 11 days before the JV closed.
The capital provider's read was that the disclosure was late and the characterization was false, which taken together should trigger the indemnification clause in the operating agreement. The operator's read was that email disclosure, even on day 31, satisfied the spirit of the requirement, and that materiality was a judgment call the operator was entitled to make. That gap between two readings of the same paragraph is what actually happened here.
The indemnification clause mattered, but the definition of "material litigation" is what the whole dispute turned on. The agreement used a dollar threshold, $50k, which the claim cleared easily, but it also used the phrase "reasonably likely to result in a judgment," and the operator argued the claim would settle for nothing. An experienced reviewer would have pushed for a definition of material that did not give the operator interpretive room on likelihood, or would have required disclosure of any pending or threatened claim above a fixed amount, full stop, with no materiality filter at all.
The second thing worth studying is the remedy structure. The operating agreement gave the capital provider an indemnification right but no removal right tied to rep breaches. So the capital provider had a claim for damages and no ability to change who was running the asset while that claim was being sorted out. Those two rights usually travel together in a well-drafted agreement, and here they did not.
Did you build the removal trigger as a standalone right in your last operating agreement, or did you attach it to the indemnification section and assume they would function the same way?
