Joseph Cardello et al. v. Dane Risley et al. (2014)

MEMORANDUM OF DECISION ON DEFENDANTS' MOTION FOR TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION (MOTION # 129.00)

I. Background

On March 7, 2014, the court held an evidentiary hearing on the above referenced motion;  the evidence revealed the following.   In July 2011 five individuals formed Woovite, LLC, a limited liability company organized and existing under the laws of the State of Delaware (the company or Woovite).   Three of the individuals, Dane Risley, Steven Bushey and Joseph Schum as well as the company are defendants in this action.   The three individuals are sometimes collectively referred to as the “founders” or the “founding defendants.”   The original signatories to the operating agreement were the founding defendants, Joseph Cardello, one of the plaintiffs and a non-party, James Adrian.   The organizational documents of Woovite, LLC authorize one thousand units for sale or distribution, 61% of which were issued on the date of organization.   The issued units were distributed as follows:  Risley—183.4 shares;  Bushey—163.3 shares;  Schum—163.3 shares;  Cardello—50 shares;  Adrian—50 shares.   This resulted in the founding defendants collectively owning 51% of all authorized units and an 83.6% of the units issued up to that point.   Risley was named in the operating agreement as managing member.   Subsequently the company attracted other financial investors and issued additional units in consideration for financial investments made.   The total of these private investments was $750,000.00.   The plaintiffs are Cardello and ten other investors/unit owners in the company.   It is not disputed that prior to the fall of 2012 the founding defendants owned a majority-in-interest of the units issued by the company.   Prior to October 2012 the founding defendants owned collectively 71% of the issued units and the plaintiffs owned about 21% of the issued units.

While the amended complaint alleges conduct on the part of the individual defendants that is either tortious or in violation of certain statutory duties that alleged tortious conduct is not presently before the court and accordingly there was no evidence introduced at the hearing to support those allegations.   The defendants by way of counterclaim essentially allege that the plaintiffs have wrongfully usurped control of the company by holding a purported annual “meeting of members” without notice to the individual defendants and without their presence;  that at such purported meeting the plaintiffs held “sham elections” that were contrary to the provisions of the operating agreement;  that following the meeting the plaintiffs filed “fraudulent filings” with the commercial recording division of the Connecticut Secretary of State in which they named Cardello as the managing member of the company.   The plaintiffs then amended the company's commercial banking account with TD Bank to remove control of the account from Risley and place it with Cardello.   The defendants in this motion seek a “temporary restraining order and preliminary injunction in order to restore and preserve and the status quo ante with regard to Woovite's commercial filings and financial accounts, and to prevent the plaintiffs from attempting to bind Woovite contractually during the pendency of the above captioned litigation.”

II. The Motion for Temporary Restraining Order and Temporary Injunction

At the heart of the present dispute is the issue of who are the current rightful owners of the company.   The founding defendants take the position that they have always owned a majority in interest in the company and still own 71% of the outstanding units of company ownership.   The plaintiffs take the position that pursuant to the applicable documents and agreements the defendants by their conduct have forfeited their ownership interest in the company.   At the hearing the only witness to testify was the defendant Risley and the relevant and material corporate documents were introduced as exhibits.   The evidence indicates that at the outset the business plan for the company was to develop and implement an online event planning service which required the development and implementation of certain software.   The concept for the company and the business plan was essentially developed by the three founding defendants.   The Operating Agreement,¹ executed July 14, 2011, names Risley as the manager and provides that the manager shall oversee all the company's day to day business operations subject to oversight by the full board.   Section 3.3 of the Operating Agreement lists certain management decisions that require the consent of a “majority-in-interest.”   Those decisions include any amendment to the operating agreement, any merger or other business combination, and the sale of substantially all assets of the company.  “Majority-in-interest” is a defined term and “means Members whose aggregate Membership Percentage Interest of Authorized Units equals or exceeds fifty-one (51%) percentage points ․ a Member shall be entitled to participate in and vote on any matters the Board of Directors believes needs to be decided by a Membership vote irrespective of whether the Member has a personal interest in such matter or it affects the Member financially.”   The Operating Agreement states that “Any action required or permitted to be taken at a meeting of the Members may be taken without a meeting if a unanimous consent or consents in writing, setting forth the action so taken, shall be signed by a Majority–in–Interest.”

In the fall of 2011 and the winter of 2012 Risley, Bushey and Schum all signed employment agreements with the company.   Risley's salary was approximately $150,000 plus health insurance and certain other benefits.   Schum and Bushey had somewhat lower salary and benefit packages.   The employment agreements also contained provisions prohibiting the employees from working for a company that competes with Woovite for 12 months following termination of the employee's employment with Woovite and prohibiting the employees from disclosing certain confidential information.   The present dispute between the parties centers around paragraph 8.3 of the various employment agreements which state:

8.3 Cause–Without Good Reason.   Notwithstanding any other provision of this Agreement, during the Employment Period, if the Company shall terminate the Employee's employment for Cause, or if the Employee terminates his employment with the Company within 36 months from the Effective Date of this Agreement without Good Reason, any Units held by the Employee as of the Date of Termination will be forfeited for no consideration, and the Company shall have no further obligations to the Employee under this Agreement other than his pro rated Salary and the Fringe Benefit Package then in effect through the Date of Termination.  (Emphasis added.)

The employment agreement defines termination by employee for good reason.

For purposes of this Agreement “Good Reason” for the Employee to terminate employment hereunder shall mean the occurrence of any of the following events undertaken by the Company without Cause and without Employee's consent:  the Employee having incurred a material reduction in his status, authority or responsibility as [his position], a reduction in his base salary from the Company.  (Emphasis added.)

If Employee elects to terminate his employment for apparent Good Reason, Employee will provide Company three weeks written notice of termination which shall include the specific basis/reason for termination.   The Company may elect to waive the notice requirements ․

A similar forfeiture clause is contained in a document entitled Woovite Unit Holder Forfeiture and Non–Dilution Agreement.²  There is no evidence that the salary and compensation package of the individual defendants was unknown to the plaintiff investors or in any way unreasonable in its terms.   Notwithstanding the investment of the plaintiffs by the summer of 2012 the company was running out of cash and was unable to pay the salaries of the founding defendants and was also falling behind on its other financial obligations.   The founding defendants continued their employment but at some point did not receive pay.   Given the status of the development and implementation of the company's event planning system it was not likely that there would be an infusion of revenue into the company either by business operations or investors in time to allow the company to continue its operations.

Risley found a prospective purchaser for the company's assets and began negotiations with the prospective purchaser, etouches, Inc., a Delaware Corporation (etouches).   Etouches' business also involved internet event management and its business was similar though not identical to that of Woovite.   Risley believed that the sale of Woovite's assets to etouches represented the best chance for Woovite to be able to pay its creditors and for the investors to receive some or all of their investment back.   The etouches transaction was also in the interest of Risley, Bushey and Schum because etouches was willing to employ the founding defendants in one capacity or another, at least short term, and it also represented a possibility of the founding defendants receiving back some of the compensation that they had deferred while working at Woovite during the period when Woovite couldn't pay them.   Risley tried to get the plaintiffs to consent to the etouches transaction but the plaintiffs did not consent to the transaction.   On or about October 24, 2012 the company, acting through Risley, signed three employee termination and release agreements which terminated the employment of each of the founding defendants and released the employee from the provisions of his non-competition covenants contained in the employment agreement.   Each of the founding defendants also signed the agreement that related to him.   On or about October 25 all three of the founding defendants signed a document entitled “Consent of Members of Woovite LLC” which indicated that they signed in their capacity as being a majority-in-interest of the members of Woovite.   The document approved the transaction between the company and etouches;  approved the termination of the employees and the release of the employees from their non-competition agreements;  and authorized Risley as managing member of the company “to negotiate, settle, execute and deliver the Sale Agreement to etouches and the Termination Agreements to the aforementioned employees together with any other instruments or documents necessary or desirable to consummate the transactions contemplated therein.”   Risley as managing member signed an additional document entitled “CONSENT OF the Managing Member as authorized by the Majority–In–Interest OF WOOVITE, LLC” indicating that the transaction with etouches constituted good reason as defined in the forfeiture and non-dilution agreement, that the notice requirement of the Employee Agreements was waived, and that the forfeiture and non-dilution agreement with reference to Bushey, Risley and Schum were void.

III. Discussion

The employment agreements and the nonforfeiture and nondilution agreements call for forfeiture of the employee's interest in the company if they terminated their employment within 36 months without good reason.   Good reason is defined in the agreements as the employee having incurred a material reduction in his status, authority or responsibility or a reduction in his base salary without the employee's consent.   The individual defendants were not being paid.   While the plaintiffs argue, in part, that the salary of the founding defendants were deferred, as opposed to reduced, it is hard to imagine that the failure to receive pay, with the opportunity to be paid if resources are available in the future, is not a reduction in some sense of the word.   A similar question might arise with regard to the phrase material reduction in status, authority or responsibility when the company was no longer able to operate.   The more difficult questions raised by the evidence include:  Whether or not this occurred without the employee's consent?   Were such reductions whether it is to status or salary with the employee's consent if the company had no ability to pay salary or avoid reduction in status, authority or responsibility?   If in fact the termination was by the employee without good reason which would otherwise result in the forfeiture of the employee's interest in the company, did the individual defendants acting as unit members representing a “majority-in-interest” have the power to waive these provisions?   If they had the power, did they do so effectively?   And did they do so in a timely manner?   Could the majority-in-interest on behalf of the company determine that good cause existed?   Is the majority-in-interest's power to waive or amend provisions the same with regard to the Forfeiture and Non–Dilution Agreement as it is with regard to the Employment Agreements?   While the plaintiffs argue that the self-dealing of the individual defendants is apparent on its face and should not be countenanced, the governing documents expressly allow for members to take action and vote on matters notwithstanding the fact that the action or vote affects their individual and personal financial interest.   The operating agreement also provides that a majority-in-interest can act without a meeting and a vote if they sign a document consenting to the action.   If they generally can participate in such matters are there limits based upon common-law or statutory duties?

These are all issues, among others, that the court will have to determine after a full trial on the merits in order to determine who are the existing owners of the company.

However, the defendants are now seeking a temporary injunction.  “The purpose of a temporary injunction is to ‘[maintain] status quo while the rights of the parties are being determined.’  “ Massachusetts Mutual Life Insurance Company v. Blumenthal, 281 Conn. 805, 811 (2007);  quoting Ulichny v. Bridgeport, 230 Conn. 140, 147 (1994).   See also Town of Bozrah v. Chmurynski, 303 Conn. 676 (2012).   The defendants seek more than a maintenance of the status quo.   The defendants seek an order of the court affirmatively requiring the plaintiffs to make filings with the Secretary of State to restore the defendants to their prior positions.   The defendants seek this notwithstanding the fact that Risley has prevailed upon the bank in which the company's account is being held to freeze Woovite's commercial banking account during the pendency of this lawsuit.   There is no evidence before the court of any pending transactions involving the interests of Woovite that would cause the defendants irreparable harm.

Both sides in their prayers for relief seek a declaratory judgment as to who the rightful owners of Woovite, LLC are and that is best determined after a full trial on the merits.   At the present there is no evidence the plaintiffs are about to engage in any transaction that will prejudice the interest of the defendants.   Indeed it appears that the only significant asset of Woovite at the present time are amounts that it is owed by etouches which amounts presumably will be deposited into the company's bank account where they will remain until such time as this litigation is concluded.

“The standard for granting a temporary injunction is well settled.  ‘In general, a court may, in its discretion, exercise its equitable power to order a temporary injunction pending a final determination of the order, upon a proper showing by the movant that if the injunction is not granted he or she will suffer irreparable harm for which there is no adequate remedy at law.’   Moore v. Ganim, 233 Conn. 557, 569 n.25, 660 A.2d 742 (1995).   A party seeking injunctive relief must demonstrate that:  (1) it has no adequate remedy at law;  (2) it will suffer irreparable harm without an injunction;  (3) it will likely prevail on the merits;  and (4) the balance of equities tips in its favor.  Waterbury Teachers Assn. v. Freedom of Information Commission, 230 Conn. 441, 446, 645 A.2d 978 (1994).  ‘The [party] seeking injunctive relief bears the burden of proving facts which will establish irreparable harm as a result of the violation.’  Karls v. Alexandra Realty Corp., 179 Conn. 390, 401, 426 A.2d 784 (1980).   Moreover ‘[t]he extraordinary nature of injunctive relief requires that the harm complained of is occurring or will occur if the injunction is not granted.   Although an absolute certainty is not required, it must appear that there is a substantial probability that but for the issuance of the injunction, the party seeking it will suffer irreparable harm.’  Id.” 402.  Aqleh v. Cadle Rock Joint Venture II, L.P., 299 Conn. 84, 97–98 (2010).

The defendants have failed to prove that they will suffer irreparable harm without an injunction or that they lack an adequate remedy at law.   Accordingly, the motion for a temporary injunction is denied without prejudice.   Should the defendants have evidence that assets of Woovite are being diverted or withdrawn from the company's bank account or the plaintiffs are otherwise diverting company assets or binding the company in a manner that would cause the defendants irreparable harm they may renew their motion.

BY THE COURT

GENUARIO, J.

FOOTNOTES

FN1. The exhibit introduced as the operating agreement was unsigned but counsel for all parties stipulated that the operating agreement was in fact signed by all of the founding defendants, Cardello and Adrian..  FN1. The exhibit introduced as the operating agreement was unsigned but counsel for all parties stipulated that the operating agreement was in fact signed by all of the founding defendants, Cardello and Adrian.

FN2. The exhibit introduced as the Woovite Unit Holder Forfeiture and Non–Dilution Agreement was unsigned but counsel for all the parties stipulated that the document (or documents) were signed.   It is not clear to the court however, when they were signed, by whom they were signed, and the circumstances under which they were signed..  FN2. The exhibit introduced as the Woovite Unit Holder Forfeiture and Non–Dilution Agreement was unsigned but counsel for all the parties stipulated that the document (or documents) were signed.   It is not clear to the court however, when they were signed, by whom they were signed, and the circumstances under which they were signed.

Genuario, Robert L., J.