ELH Group LLC et al vs IGF Partners LLC et al
Case No: 17CV04771
Hearing Date: Fri Mar 23, 2018 9:30

Nature of Proceedings: OSC Preliminary Injunction

TENTATIVE RULING:

For the reasons set forth herein, the application of plaintiffs ELH Group, LLC, Andrew Wirth, and ACT Property Acquisition Partners IV, LLC, for issuance of a preliminary injunction is granted. The terms of the temporary restraining order are the terms of the preliminary injunction. The court fixes the amount of the undertaking required by Code of Civil Procedure section 529 at $10,000.

Background:

On October 23, 2017, plaintiffs ELH Group, LLC (ELH Group), Andrew Wirth, and ACT Property Acquisition Partners IV, LLC (ACT), filed their complaint in this action asserting five causes of action against defendants IGF Partners, LLC (IGF Partners), IGF Partners Realty, LLC (IGF Realty), Christian Heyer, Eugene McKnight, Thomas Caesar, and Damien Kriteman: (1) derivative action for breach of fiduciary duty (IGF Realty); (2) derivative action for breach of fiduciary duty (IGF Partners); (3) injunctive relief—usurpation of management; (4) appointment of a receiver; and, (5) unjustified refusal and failure to provide LLC records. The third cause of action is most relevant to the instant order to show cause. In the third cause of action, plaintiff allege:

On March 27, 2014, IGF Realty Advisors, LLC, was formed as a California limited liability company. (Complaint, ¶ 86.) On October 13, 2014, IGF Realty Advisors, LLC, changed its name to IGF Partners Realty, LLC, a defendant in this action. (Ibid.) The members at the time were Larry Crandell, Sr., TA Worldwide (a partnership owned by William Levy and predecessor in interest to plaintiff ELH Group), Luci Andrino, Caesar, Allessandro Castellarin, Wirth, Ralf Wasmundt, Santiago Tintore, Dan Calabro, and IGF Partners. (Ibid.) The articles of organization filed in 2014 states that IGF Realty was to be managed by all limited liability company members. (Complaint, ¶¶ 5, 86.)

In March 2017, Levy, on behalf of ELH Group, began to question the management authority of certain members of IGF Realty and IGF Partners. At the time, Levy was told that Heyer, Caesar, McKnight, and Nagler were appointed managers of IGF Partners, and that IGF Partners, managed by these individuals, was the manager of IGF Realty. (Complaint, ¶ 88)

On April 21, 2017, counsel for IGF Realty and IGF Partners responded to an objection by Levy stating that the appointment of managers was done in accordance with the written operating agreements of IGF Partners and IGF Realty, but counsel did not provide copies of any signed operating agreements confirming this. (Complaint, ¶¶ 88-89.)

Plaintiffs’ third cause of action alleges that defendants are improperly acting as managers of IGF Partners and IGF Realty to the exclusion of plaintiffs in violation of the organizational documents of these companies. (Complaint, ¶¶ 94, 98.) Plaintiffs seek an injunction to enforce the management of these companies in accordance with the organizational documents and California law. (Complaint, ¶¶ 98-100.)

Plaintiffs’ complaint also alleges breach of fiduciary duties in connection with the management of the companies.

On February 7, 2018, plaintiffs filed their ex parte application for a temporary restraining order (TRO) and order to show cause re preliminary injunction. The ex parte application was opposed by defendants. On February 8, the court issued a TRO enjoining defendants from managing IGF Realty as a manager-managed limited liability company to the exclusion of the other members pending disposition of the order to show cause for issuance of a preliminary injunction.

The order to show cause for issuance of the preliminary injunction is now before the court. Both sides have filed weighty evidence and argument in support of and in opposition to their respective positions.

Analysis:

Notwithstanding the issuance of the TRO, the burden is on plaintiffs, as the parties seeking injunctive relief, to show all elements necessary to support issuance of a preliminary injunction. (O’Connell v. Superior Court (2006) 141 Cal.App.4th 1452, 1481.) A preliminary injunction is available “[w]hen it appears by the complaint that the plaintiff is entitled to the relief demanded, and the relief, or any part thereof, consists in restraining the commission or continuance of the act complained of, either for a limited period or perpetually” or “[w]hen it appears by the complaint or affidavits that the commission or continuance of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action.” (Code Civ. Proc., § 526, subd. (a)(1), (2).)

“The trial courts consider two interrelated questions in deciding whether to issue a preliminary injunction: 1) are the plaintiffs likely to suffer greater injury from a denial of the injunction than the defendants are likely to suffer from its grant; and 2) is there a reasonable probability that the plaintiffs will prevail on the merits. [Citations.] ‘[By] balancing the respective equities of the parties, [the court] concludes that, pending a trial on the merits, the defendant should or that he should not be restrained from exercising the right claimed by him.’ [Citations.]” (Robbins v. Superior Court (1985) 38 Cal.3d 199, 206 (Robbins).)

(1) Probability of Prevailing on the Merits

Plaintiffs’ third cause of action is the cause of action applicable to the specific preliminary injunction remedy sought here by seeking to enjoin management by managers in favor of management by members of IGF Realty.

The articles of organization of IGF Realty, filed March 27, 2014, with the California Secretary of State provides: “The LLC will be managed by: … [x] All Limited Liability Company Member(s).” (Levy decl., ¶ 36 & exhibit 15.) The name was changed to IGF Partners Realty, LLC, by an amendment to the articles of organization, filed October 13, 2014, with the California Secretary of State. (Levy decl., ¶ 38 & exhibit 16.) The amendment did not change the election that the LLC will be managed by its members. (Ibid.)

The operating agreement of IGF Realty dated April 3, 2014, provides:

“Subject to the terms of this Agreement and the California Revised Uniform Limited Liability Company Act, the business and affairs of the Company will be managed by the Members.” (Levy decl., ¶ 11 & exhibit 2, § 4.1(A) [Original Operating Agreement].)

“Unless greater or other authorization is required pursuant to this Agreement or under the California Revised Uniform Limited Liability Company Act for the Company to engage in an activity or transaction, all activities or transactions must be approved by the Members, to constitute the act of the Company or serve to bind the Company.” (Original Operating Agreement, § 4.1(B).)

“Notwithstanding Clause B above, the following matters require unanimous approval of the Members in a consent in writing to constitute an act of the Company:

“(i) A material change in the purposes or the nature of the Company’s business;

“(ii) With the exception of a transfer of interest governed by Article 7 of this Agreement, the admission of a new Member or a Change in any Member’s Membership Interest, Ownership Interest, Percentage Interest, or Voting Interest in any manner other than in accordance with this Agreement;

“(iii) The merger of the Company with any other entity or the sale of all or substantially all of the Company’s assets; and

“(iv) The amendment of this Agreement.” (Original Operating Agreement, § 4.1(c).)

“The Members are authorized to appoint one or more officers from time to time. The officers will have the titles, the authority, exercise the powers, and perform the duties that the Members determine from time to time. Each officer will continue to perform and hold office until such time as (a) the officer’s successor is chosen and appointed by the Members; or (b) the officer is dismissed or terminated by the Members, which termination will be subject to applicable law and, if an effective employment agreement exists between the officer and the Company, the employment agreement. Subject to applicable law and the employment agreement (if any), each officer will serve at the direction of Members, and may be terminated, at any time and for any reason, by the Members.” (Original Operating Agreement, § 4.2.)

“The Members have the right and power to vote on all matters with respect to which the Articles of Organization, this Agreement, or the California Revised Uniform Limited Liability Company Act requires or permits. Unless otherwise stated in this Agreement (for example, in Section 4.1(c)) or required under the California Revised Uniform Limited Liability Company Act, the vote of the Members holding at least a majority of the Voting Interest of the Company is required to approve or carry out an action.” (Original Operating Agreement, § 6.1.)

“This Agreement along with the Articles of Organization (together, the ‘Organizational Documents’), constitute the entire agreement among the Members and replace and supersede all prior written and oral understandings and agreements with respect to the subject matter of this Agreement, except as otherwise required by the California Revised Uniform Limited Liability Company Act. There are no representations, agreements, arrangements, or undertakings, oral or written, between or among the Members relating to the subject matter of this Agreement that are not fully expressed in the Organizational Documents. This Agreement may not be modified or amended in any respect, except in a writing signed by all of the Members, except as otherwise required or permitted by the California Revised Uniform Limited Liability Company Act.” (Original Operating Agreement, § 10.2.)

The Original Operating Agreement is executed by or on behalf of JJA Holdings, LLC (60 percent interest), Larry Crandell, Sr. (10 percent interest), Larry Crandell, Jr. (10 percent interest), and Eugene H. McKnight (20 percent interest). (Levy decl., exhibit 2, pp. 13-14.)

There is no dispute among the parties as to the terms of the Original Operating Agreement or as to its effectiveness when executed. According to defendants, IGF Realty adopted an amended and restated operating agreement dated April 24, 2015. (McKnight decl., ¶ 6 & exhibit 4 [Amended Operating Agreement].) The Amended Operating Agreement provides:

“The powers of the Company shall be exercised by and under the authority of, and the business and affairs of the Company shall be managed under the direction of the Manager. Subject to the limitations provided in this Agreement and except as specifically provided herein, the Manager shall have exclusive and complete authority and discretion to manage the operations and affairs of the Company and to make all decisions regarding the business of the Company and shall have the power to act for or bind the Company (including, without limitation, with respect to the matters listed in Sections 17704.07(c)(4)(A)-(C) of the Act). Any action taken by the Manager shall constitute the act of and serve to bind the Company. In dealing with the Manager acting on behalf of the Company, no Person shall be required to inquire into the authority of the Manager to bind the Company. Persons dealing with the Company are entitled to rely conclusively on the power and authority of the Manager as set forth in this Agreement.” (Amended Operating Agreement, § 8.1(a).)

“The manager of the Company (‘Manager’) shall be IGF Partners, LLC” (Amended Operating Agreement, § 8.1(c).)

“With respect to the matters listed in Sections 17704.07(c)(4)(A)-(C) of the Act, the Members’ rights to consent on such matters are hereby superseded by the provisions of this Section 8.1. In furtherance of the foregoing, the Members, by executing this Agreement, hereby consent to the Manager causing the Company to engage in any of the matters listed in Sections 17704.07(c)(4)(A)-(C) of the Act.” (Amended Operating Agreement, § 8.1(d).)

“This Agreement may contain more than one counterpart of the signature page and this Agreement may be executed by the affixing of the signatures of each of the Members to one of such counterpart signature pages. All of such counterpart signatures pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page.” (Amended Operating Agreement, § 13.7.)

The Amended Operating Agreement is signed only by IGF Partners as manager, by defendant Heyer as “Managing Principal.” (McKnight decl., exhibit 4, p. 32.)

According to defendant McKnight, IGF Realty solicited new members, including plaintiffs Wirth and ACT. (McKnight decl., ¶¶ 7-10.) To admit new members into IGF Realty, it was the company’s practice to require each new member to execute a subscription agreement and to execute a copy of the Amended Operating Agreement. (McKnight decl., ¶ 7.) Wirth and ACT both executed copies of the Amended Operating Agreement. (McKnight decl., ¶¶ 8, 10 & exhibits 6, 8.)

There is no evidence presented to the court of any document executed by or on behalf of ELH or its predecessors in interest, including JJA Holdings, LLC, expressly agreeing to the Amended Operating Agreement.

According to McKnight, Levy worked as a special advisor in the IGF Realty offices, participating in selecting the office space and signing a guaranty for the lease. (McKnight decl., ¶ 11.) Levy was fully informed that IGF Partners managed IGF Realty and that Heyer, Caesar, and McKnight managed IGF Partners from October 2014 until now, and Levy never objected to the change to a manager-managed company. (Ibid.)

According to Caesar, in September and October 2014, Caesar was involved with meetings and telephone conversations with Levy and others about the formation of IGF Partners to manage IGF Realty. (Caesar decl., ¶ 4.) Levy expressed his agreement with the discussions to change the structure of IGF Realty in order to facilitate additional capital investments. (Ibid.) IGF Partners was formed on October 13, 2014. (Caesar decl., ¶ 5.) The IGF Partners operating agreement, signed by Levy as manager for TA Worldwide, stated that the purpose of IGF Partners was to act as the manager for IGF Realty. (Caesar decl., ¶¶ 5-6 & exhibit 1, § 1.3(i).) (Note: Levy denies signing the IGF Partners operating agreement and asserts that this signature is a forgery. (Levy supp. decl., ¶¶ 35-38.)) The initial managers of IGF Partners were McKnight, Heyer, Caesar, and Nagler. (Caesar decl., ¶ 6 & exhibit 1, § 8.1(c)(iii).) The Amended Operating Agreement for IGF Realty, dated April 23, 2015, was intended to implement this management structure and to create new classes of membership units. (Caesar decl., ¶ 10.)

According to Kriteman, Kriteman maintained copies of the membership records of IGF Realty prior to the issuance of the TRO and on more than one occasion in 2016 inquired of Levy about the missing signature pages for TA Worldwide. (Kriteman decl., ¶ 6.) Levy responded at the time that all records should be there—with IGF Realty—and Kriteman should look harder for the signature page. (Ibid.) In 2016, Levy was involved in offering Class A investments, which included a Class A fractional membership interest in IGF Realty. (Kriteman decl., ¶¶ 9-15 & exhibits 3-9.) The Class A membership interest exists only in the Amended Operating Agreement. (Kriteman decl., ¶ 9.)

Defendants also provide evidence from several investors in IGF Realty that if IGF Realty were member-managed rather than manager-managed, the investors would not have made their investment. (E.g., Wasmundt decl., ¶ 6.)

It is important to keep in mind that the only issue presented by this order to show cause for issuance of a preliminary injunction is whether there is a probability of success on the merits of determining that IGF Realty is member-managed rather than manager-managed. On this narrow issue, the evidence is undisputed that the original articles of organization expressly provide that IGF Realty is member-managed. It is also undisputed that when the articles were amended, there was no change to the member-managed provision of the articles.

“A limited liability company is a member-managed limited liability company unless the articles of organization contain the statement required by paragraph (5) of subdivision (b) of Section 17702.01.” (Corp. Code, § 17704.07, subd. (a).)

“The articles of organization shall state all of the following: [¶] … [¶] (5) If the limited liability company is to be manager-managed, the articles of organization shall contain a statement to that effect.” (Corp. Code, § 17702.01, subd. (b)(5).)

The Original Operating Agreement is consistent with the articles of organization in providing for member-management. The Amended Operating Agreement provides for manager-management. As noted above, the parties dispute whether the Amended Operating Agreement is effective. The Original Operating Agreement requires unanimous written consent for amendment. The preponderance of the evidence presented here is that there is no unanimous written consent for amendment of the Original Operating Agreement. There is evidence of written consent as to plaintiffs Wirth and ACT, but there is no evidence of written consent as to ELH, or any of its predecessors in interest. The evidence is ambiguous as to whether Levy, the principal of ELH and its predecessors in interest, impliedly consented to the Amended Operating Agreement by conduct. However, it is a different question as to whether the Amended Operating Agreement is effective generally than whether the specific provision of the Amended Operating Agreement providing for manager-management is effective.

“In addition to the matters specified in paragraphs (1) to (4), inclusive, of subdivision (d), an operating agreement shall not do any of the following: [¶] … [¶] (8) Except as provided therein, vary the requirements of Article 2 (commencing with Section 17702.01) or Article 7 (commencing with Section 17707.01).” (Corp. Code, § 17701.10, subd. (c)(8).)

Corporations Code sections 17704.07, subdivision (a), and 17702.01, subdivision (b)(5), provide that a company is member-managed unless the articles of incorporation provide otherwise, and section 17701.10, subdivision (c)(8), provides that the operating agreement may not vary the requirement that the articles provide for manager-management if the company is to be manager-managed. So, even if Levy’s conduct were sufficient to deem his consent to the Amended Operating Agreement generally, the manager-management provision of the Amended Operating Agreement is nonetheless ineffective. Because section 17701.10, subdivision (c)(8), does not permit the operating agreement to vary this requirement, the general principle that the operating agreement prevails over a conflicting provision in the articles of organization as among members (Corp. Code, § 17701.12, subd. (d)) does not apply.

It is interesting to note that section 407, subdivision (a) of the Uniform Limited Liability Company Act (West’s U. Laws Ann. (2006)), from which Corporations Code section 17704.07, subdivision (a) is derived provides that a company is member-managed unless the operating agreement otherwise provides. In enacting section 17704.07, the Legislature changed the language of the uniform act so that the document required to provide the terms for manager-management is the articles of organization rather than the operating agreement. This legislative change further emphasizes the need for this term to be amended in the articles and not in the operating agreement to be effective.

The court is mindful that “[u]nless displaced by particular provisions of this title, the principles of law and equity supplement this title.” (Corp. Code, § 17701.07, subd. (b).) In making this ruling, the court has fully considered the admissible evidence of Levy’s conduct as to its potential effect in deeming consent to the Amended Operating Agreement.

In weighing all of the evidence and arguments presented, the court finds that plaintiffs have established a probability of prevailing on the merits for purposes of this application for issuance of a preliminary injunction.

(2) Relative Hardships

The first of the two interrelated questions to be considered under the Robbins test is whether the plaintiffs are likely to suffer greater injury from a denial of the injunction than the defendants are likely to suffer from its grant. There is a great deal of argument as to the parties’ respective conduct as to operation of the business. The court is not, however, being asked to enjoin types of business operation or conduct asserted to violate fiduciary duties. The court is being asked to enjoin member exclusion from participation in management. As a result, the hardship analysis is a comparison of member-management during the pendency of the litigation when the possible result of the litigation is to affirm manager-management with manager-management during the pendency of the litigation when the possible result of the litigation is to affirm member-management.

Member-management means that all those with an economic interest in IGF Realty have the right to participate in management decisions. Member-management does not determine what management decisions are made, and only determines that management decisions depend upon a decision of a majority of membership interests. There is conflicting evidence as to whether plaintiffs constitute a present majority membership interest owing to the conflicting declarations of Alessandro Castellarin. (See Castellarin decl., dated Nov. 29, 2017, ¶¶ 2-4; Castellarin decl., dated Feb. 5, 2018, ¶¶ 2-10; Castellarin decl., dated Feb. 15, 2018, ¶¶ 2-13; Levy decl., ¶ 15 & exhibit 5.) Under member-management in the Original Operating Agreement, the members may elect officers of the company and may authorize transactions broadly. (Original Operating Agreement, §§ 4.1(B), 4.2.) The only necessary difference between member-management and manager-management is the approval of the members and the delay and expense that exists as a result of obtaining approval of the members. There is some evidence of general uneasiness with member-management. There is little evidence that this uneasiness itself translates into any actual difficulty in operating IGF Realty. As pointed out in opposition, the more comprehensive impediment to operating IGF Realty is the existence of this entire dispute and its potential alternate outcomes. The preliminary injunction sought does not, and cannot, alleviate the uncertainty that exists by virtue of the claims made in this lawsuit.

In opposition defendants also argue that there is no irreparable harm asserted because the breach of fiduciary duty claims, regardless of their merit, are for past acts that are unaffected by the issuance of the injunction. “ ‘Irreparable harm’ does not mean ‘injury beyond the possibility of repair or beyond possible compensation in damages.’ [Citation.] ‘ “[T]he word ‘irreparable’ is a very unhappily chosen one, used in expressing the rule that an injunction may issue to prevent wrongs of a repeated and continuing character, or which occasion damages estimable only by conjecture and not by any accurate standard….” ’ [Citation.]” (Donahue Schriber Realty Group, Inc. v. Nu Creation Outreach (2014) 232 Cal.App.4th 1171, 1184.) The harm to be provisionally remedied by the requested injunction is the right of members to participate in the management of IGF Realty on a prospective basis. The interference with that right, based upon the claims of plaintiffs, would continue absent issuance of an injunction. There is no clear way in which wrongful interference with that right, if proven, would be fully compensated by damages. Plaintiffs have made a sufficient showing of irreparable injury.

In the context of the Robbins analysis, the court finds that the greater harm is to the plaintiffs by the denial of the injunction than to the defendants by its grant. By granting the injunction, the court enforces the management structure of the Original Operating Agreement and the right of members to participate directly in that management. By denying the injunction, the court would prevent members from direct participation in management decisions. The court finds that the potential harm to members by their wrongful denial of participation is, on the record presented, a greater harm than the loss of efficiency in management that is occasioned by preventing management solely by managers.

(3) Balance of Equities

The final element of the Robbins analysis is a balance of the equities. As discussed above, the court finds that plaintiffs have met their burden of showing a probability of prevailing on the merits of the claim relating to member-management and that the plaintiffs would suffer a greater harm by the denial of the injunction than the defendants would suffer by the grant of the injunction. After considering the totality of the admissible evidence presented and the arguments of the parties, the court finds that the equities balance in favor of granting the preliminary injunction in accordance with the terms of the temporary restraining order.

(4) Undertaking

In their moving papers, plaintiffs assert that no undertaking should be required because no damage is likely to occur by the grant of the injunction. Defendants argue that an undertaking is required upon issuance of a preliminary injunction.

“On granting an injunction, the court or judge must require an undertaking on the part of the applicant to the effect that the applicant will pay to the party enjoined any damages, not exceeding an amount to be specified, the party may sustain by reason of the injunction, if the court finally decides that the applicant was not entitled to the injunction.” (Code Civ. Proc., § 529, subd. (a).)

The court agrees that an undertaking in an appropriate amount is required. Defendants do not provide any argument or evidence as to the appropriate amount of the undertaking. In reply, plaintiffs suggest a nominal bond of $1,500 to cover the administrative expense of removing or replacing defendants’ personal property from the IGF office.

“Nothing in the statute conditions the trial court’s obligation to require such an undertaking upon a request from the parties. To the contrary, an injunction does not become effective until an undertaking is required and furnished [citation], and must be dissolved if an undertaking is not filed within the time allowed by statute [citation]. Since an undertaking is an indispensable prerequisite to the issuance of a preliminary injunction, regardless of whether the party to be restrained has reminded the court to require the applicant to post one, the restrained party does not waive its right to that statutorily-mandated protection by failing to affirmatively request it. Therefore, the defendants’ initial silence did not waive their right to an undertaking.” (ABBA Rubber Co. v. Seaquist (1991) 235 Cal.App.3d 1, 10.)

As discussed above in the context of the relative hardships, the principal harm to be suffered by defendants is in the inefficiencies of including the entire membership in the management process. Nothing by this injunction precludes the entire membership from engaging in all of the same transactions that would have occurred under manager-management; those transactions simply must be approved by a majority of the membership. As noted, there is conflicting evidence as to what a majority of the membership may ultimately do. There is no meaningful basis to include in the calculation of the injunction bond the speculative effects of alternative business decisions by the members. However, the inefficiencies of member-management involve more than merely moving out personal property. The inefficiencies include the added costs of membership participation (i.e., the expense of notifying and obtaining membership decisions). In the absence of more definitive evidence or argument on this point, the court estimates these expenses during the pendency of the litigation at $10,000, which will be the amount of the bond required to be posted.