Arif Suhail v. Syed M. Agha (2010)

MEMORANDUM OF DECISION

On or about September 18, 2009, the plaintiff, Arif Suhail, filed this lawsuit against the defendant, Syed M. Agha, seeking, inter alia, a judicial dissolution of the limited liability company Professional Movers, LLC, pursuant to Connecticut General Statutes § 34-207.   The defendant filed an answer, special defenses and counterclaim on November 23, 2009, to which the plaintiff filed a reply on December 10, 2009.   The plaintiff filed a certificate of closed pleadings dated December 10, 2009.   On February 1, 2010, the defendant filed a motion to dismiss counts two through seven of the plaintiff's complaint which included allegations of breach of fiduciary duty, tortious interference, and unjust enrichment.   The defendant's motion, based on subject matter jurisdiction, was granted by the court on February 11, 2010.   The matter was tried to the court on seven days, or parts thereof, spanning a six-week period of time commencing on February 4, 2010.   Based on the evidence produced, the court makes the following findings of fact.

FINDINGS OF FACT

On November 9, 2007, the parties executed an operating agreement to form a limited liability company entitled “Professional Movers, LLC.” (Plaintiff's Exhibit l.) ¹ The LLC was formed to purchase a business known as “Jim Fahey Moving and Storage.”   In December 2006, the plaintiff had begun negotiations with Jim Fahey, the owner of the business, and was able to reduce the cash needed for the purchase from $135,000 to $100,000, $20,000 of which was to be a note.   In order to complete the transaction the plaintiff required an outside party to contribute $40,000 in cash.   When the plaintiff and the defendant began discussing buying the Fahey business, part of the conversation was that the defendant would contribute $40,000 towards the purchase.   The plaintiff and the defendant knew each other because the plaintiff was formerly married to the sister of Nosheen Agha, the defendant's wife.   The plaintiff and the defendant's wife had a bitter relationship.   During the discussions leading up to the formation of the LLC to purchase the business, the defendant explained to the plaintiff that the $40,000 representing his contribution would be taken from his wife's Bank of America credit card.

The plaintiff personally handled the applications for and negotiations with the Department of Transportation and bank financing of the additional funds needed for the purchase of the business.   The plaintiff expended considerable time in the form of start-up services which he valued at $40,000, in addition to his cash contribution of $8,000.

In terms of their backgrounds, the plaintiff is better educated than the defendant having received a Bachelor's Degree whereas the defendant has the equivalent of an 8th grade education.   Each was educated in Pakistan.   From 2003 to August of 2008, the plaintiff worked for and managed Three Amigos, a moving, hauling and cleaning company owned by Nosheen Ahga's brother, Shaheen Butt. The defendant was interested in forming an LLC with the plaintiff because the defendant had lost his job or was about to lose his job, and if he was unable to find another way to earn a living, he would be forced to return to Detroit, Michigan.

The plaintiff agreed to accept the defendant as a full and equal partner in the business he planned to purchase subject to the following conditions:  (1) that the defendant contribute $40,000;  and (2) that the defendant's wife refrain from any involvement in the business.   The defendant borrowed the $40,000 from his wife which she obtained as a credit card advance.   The operating agreement of Professional Movers, LLC which the parties entered on November 7, 2007 (PX 1), provided that each party would be a member and a manager and share in profits, losses and distributions on a 50-50 basis.   Section 7.1 of the agreement provided that “Each member shall contribute such cash, property, or services as is set forth in Exhibit B hereto as its share of the Initial Capital Contribution.”   Section 7.2 of the agreement provides that no member shall be required to make any capital contribution except as set forth in Section 7.1.   The agreement defines capital contribution as any agreed contribution to the capital of the company in cash, property or services by a member, whenever made.  “Initial Capital Contribution” is defined as the initial contribution to the capital of the company pursuant to this operating agreement as set forth on Exhibit B attached hereto.   The attachment states that the defendant and the plaintiff each contributed $1,000 to the LLC. Section 6.4 of the operating agreement provides that “Except as may be expressly provided in Article VIII, no Member shall have priority over any other Member or Economic Interest owner either as to the return of Capital Contributions or as to Net Profits, Net Losses or Distributions;  provided that this Section shall not apply to repayment of loans (as distinguished from Capital Contributions) which a Member has made to the Company.”

Section 5.2 of the operating agreement provided that the company would have initially two managers:  the plaintiff and the defendant.   Section 5.1 of the agreement concerning management of the Company provides as follows:

The business and affairs of the Company shall be managed by its Managers.   The Managers shall direct, manage and control the business of the Company to the best of their ability.   Except for situations in which the approval of the Members is expressly required by this Operating Agreement or by non-waiverable provisions of applicable law, the Managers shall have full and complete authority, power and discretion to manage and control the business, affairs and properties of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company's business.   At any time where there is more than one Manager, any one Manager may exercise all of the powers delegated to the Managers herein and may take any action permitted by the Manager, unless the approval of more than one of the Managers is expressly required pursuant to this Operating Agreement.

Section 5.4 of the agreement provides that “The Manager shall not be required to manage the Company as its sole and exclusive function and he may have other business interests and may engage in other activities in addition to those relating to the Company.”

Section 5.5. of the agreement provides that “The Manager may from time to time open bank accounts in the name of the Company, and the Manager shall be the sole signatory thereon, unless the Manager determines otherwise.”

Finally, Section 8.5 of the agreement provides that “Nothing in this Operating Agreement shall prevent any Member from making secured or unsecured loans to the Company by agreement with the Company.”

The LLC began operations on April 8, 2008 with $88,500 in funds of which the plaintiff contributed $8,000, the defendant contributed $40,000 and $40,500 came from loans from the Newtown Savings Bank. The defendant's wife previously had borrowed $49,000 from her Bank of America credit card account to prepare for the purchase.   The amount of money borrowed on the credit card included an amount sufficient to make the required monthly payments prior to the closing.

On April 8, 2008, the parties purchased the business known as Jim Fahey Moving and Storage through their newly formed company, utilizing $80,000 of the funds deposited in Newtown Savings Bank. Although the company was able to attract business, the two principals soon began having difficulties concerning the finances of the LLC. The plaintiff kept monthly records in which he recorded the revenues and expenses of the company, profit and loss, and the amounts paid to the Members.   One of the major problems which developed between the parties was the treatment of the initial $40,000 from the defendant to the company for start up.   The plaintiff believed that any distributions to the defendant from company funds in excess of the defendant's share of earnings was either a return of capital or a loan from capital to be repaid.   The defendant apparently believed that the distributions were simply a repayment by the company of his wife's personal credit card and neither a return of capital nor a loan.   According to the plaintiff's summary of bank statements (PX 5), for the period April 2008 through August 2008, the defendant Agha drew some $30,600 while the plaintiff drew $6,076.   This was done with the plaintiff's knowledge and permission.

On August 7, 2008, the plaintiff and the defendant submitted an application to the Newtown Savings Bank on behalf of the LLC to obtain a $20,000 loan in order to open an office in Westport, Connecticut.   The parties represented in the application (PX 10) that the funds would be used to establish an office, purchase furniture, a computer and supplies.   The bank granted the loan on the condition that $5,000 of the proceeds would be used to pay down a portion of the prior loan and that the remaining proceeds of $15,000 would be available for the company's new office.   When the loan proceeds were made available by the bank, the defendant signed a check for $15,000 made out to himself and removed said funds from the company's control in order to transfer said funds to his wife's use.   This was the first time funds were drawn for the defendant's use without the plaintiff's signature on the check.   The defendant's total draws from the company totaled $48,600 as of September 11, 2008.   The plaintiff's draw for the same period was $6,294.   The defendant during this time was paying down his wife's credit card balance.   Under Section 5.5 of the Operating Agreement each manager was entitled to open bank accounts in the name of the company and could be the sole signatory on such accounts.

The parties continued to work together in the business until April 2009 when the plaintiff was no longer able to monitor the flow of business and the relevant correlations to income because the defendant, or his wife, redirected all calls to their home phone in Fairfield.   Although the plaintiff was able to continue to monitor deposits to the Newtown Savings company account, that contact ended in September 2009 when the defendant opened a new company account at Peoples Bank in Fairfield without informing the plaintiff.   As a consequence thereof, the deposits to the Newtown Savings Bank were discontinued and all funds earned by the company were deposited by the defendant into the Peoples bank account.

No effort to relocate the location of the company's operations from the defendant's residence in Fairfield to a commercial location in Westport occurred because the defendant had used the funds designated to open the Westport office to pay down his wife's credit card balance.   According to the Connecticut Department of Transportation, the parties purchased a business that was licensed to operate only in Westport and any change to any other location would require that another application be filed, legal notices be published, and a hearing occur if any objections were received.   No application to change the application from Westport to any other location was ever filed.   The defendant's wife did change the mailing address of the business from Danbury to the defendant's home in Fairfield.   There was no evidence that the defendant replaced the $15,000 company funds which had been borrowed from Newtown Savings Bank to establish a Westport office but instead used by the defendant to pay his wife's credit card balance.

Under Section 5.4 of the Operating Agreement, the parties were free to conduct other business and owed no exclusive duty to the company.   In this regard, the defendant when questioned about the source of a deposit in February of 2009 to his personal account maintained in Webster Bank stated that the money ($3,000) was for work performed for Three Amigos, rather than Professional Movers, LLC. The defendant stated that Three Amigos is a hauling and moving company owned by his brother-in-law and that the defendant operates that business from his residence in Fairfield.

On January 10, 2010 the defendant made a payment to himself from company funds in the amount of $15,300.   On the same date the defendant made a payment to himself in the amount of $6,078.54 and paid off the Bank of America credit card loan in full.   The total amount paid by the company to the defendant to make payments on the credit card loan was $44,019.52.

Due to the complexities of this matter, including language difficulties by the parties and the fact that both the plaintiff and the defendant conducted business using cash with some frequency, exact figures are difficult to ascertain.   Each party prepared and kept some form of “business records.”   Based upon bank deposits from April 2008 through January 2010 the defendant drew $106,744 from the company's accounts, while the plaintiff drew $41,516.   (PX 5.)

From early 2009, the parties through their attorneys exchanged correspondence, but no reconciliation or mediation was possible.

CONCLUSIONS OF LAW

Based upon all of the evidence presented, this court concludes that count one of the complaint seeking a dissolution of the LLC is the only viable option.   Connecticut General Statutes § 34-207 provides:

On application by or for a member, the superior court for the Judicial District where the principal office of the limited liability company is located may order dissolution of a limited liability company whenever it is not reasonable practical to carry on the business in conformity with the articles of organization or operating agreement.

Connecticut General Statutes § 34-208 provides:

(a) Except as otherwise provided in writing in the operating agreement, the business and affairs of the limited liability company may be wound up (1) by the members or managers who have authority pursuant to Section 34-40 to manage the limited company prior to dissolution or (2) on application of any member or legal representative or assignee, thereof, by the superior court for the judicial district where the principal office of the limited company is located, if one or more of the members or managers of the limited liability company have engaged in wrongful conduct or under other cause shown.

(b) The persons winding up the business affairs of the limited liability company may, in the name of, and on behalf of, the limited liability company:  (1) Prosecute and defend suits;  2) settle and close the business of the limited liability company;  (3) dispose of and transfer the property of the limited liability company;  (4) discharge the liabilities of the limited liability company;  and (5) distribute to the members of any remaining assets of the limited liability company.

The plaintiff conclusively has demonstrated by the testimony and exhibits admitted into evidence that it is not reasonably practical to carry on the business in conformity with the operating agreement.   The testimony of the defendant and the defendant's exhibits and testimonial evidence including that of the defendant's wife, support this conclusion.   The undisputed facts of this case evidence the unavoidable conclusion that the parties equally own a company that is deadlocked and cannot operate as intended.   The plaintiff seeks a judicial dissolution and the defendant testified that he will never work with the plaintiff again.   The parties are deadlocked.  Sanders v. Firtel, 293 Conn. 515 (2009).

There is finger pointing between the parties as to the others' conduct.   Each party, with some justification, points to the other's use of cash in transacting business.   Each accuses the other of playing hard and fast with the rules and with filing misleading documents, including some with the Department of Transportation.   Most troublesome to the court is the defendant's conduct in using the proceeds from the $20,000 loan from Newtown Savings Bank in September 2008, granted to open an office in Westport, to pay off his wife's credit card debt.   That credit card loan now has been paid in full.

The defendant asks the court for a less drastic remedy than dissolution of the company.   The defendant requests that the court fashion a less harsh equitable remedy, suggesting a buyout of the interest of the plaintiff, who seeks dissolution, by the defendant.   The court declines to attempt to fashion such a remedy in light of the overwhelming evidence supporting dissolution.   While neither party is free from fault and each contributed to the conditions warranting dissolution, the plaintiff is entitled to consideration given the weight of the evidence.   There was a lack of agreement as to the running of the company from the outset.   Likewise, there was a lack of agreement as to the exact nature of the $40,000 advanced to the LLC by the defendant.   The operating agreement gave equal powers to the plaintiff and defendant, the two managers, including check writing and business decisions without consultation with the other.   While clearly the plaintiff did not want the defendant's wife involved in the business given their antagonistic relationship, the defendant's wife was involved from the very beginning, including borrowing the $40,000 used for the startup expenses for the business, on her credit card.

The plaintiff, however, brought years of prior experience to the business.   It was the plaintiff's idea to buy the existing business and he alone did all of the ground work and negotiations with the owner.   The plaintiff also completed the necessary paperwork with the Department of Transportation and Newtown Savings Bank for the initial loan.

Based on all of the evidence presented during the trial, the court will find in favor of the plaintiff.   Judgment on count one of the complaint will enter.

There was no evidence presented to the court by either party as to the current value of the assets of the LLC. The assets which were the subject of testimony were the three trucks.   The three trucks, a 1999 GMC, a 2001 Chevrolet, and a 1987 International, were used as collateral for the startup loan of $40,500 from Newtown Savings Bank on April 7, 2008.   Likewise, no evidence was presented concerning the amount of the outstanding liability on the note to Jim Fahey.

Given the differences in the withdrawal of funds from the LLC by the parties during the operation of the LLC together, the court orders the transfer of the three trucks presently owned by the company to the plaintiff.   Additionally, the plaintiff must assume responsibility for any balance on the note to Jim Fahey which remains outstanding.   Finally, any outstanding balance of the loan from Newtown Savings Bank in September 2008, which was not used for the Westport office startup purposes, is to be assumed by the defendant.

So ordered.

HARTMERE, J.

FOOTNOTES

FN1. Hereinafter plaintiff's exhibits will be referred to as “PX-.”.  FN1. Hereinafter plaintiff's exhibits will be referred to as “PX-.”

Hartmere, Michael, J.