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Penebre v. Kurland

Superior Court of Massachusetts, Suffolk, Business Litigation Session

September 15, 2016

Dylan Penebre et al.
v.
Daniel Kurland et al No. 135213

          MEMORANDUM AND ORDER ON PRELIMINARY INJUNCTION

          Edward P. Leibensperger, Justice

         Plaintiff, Dylan Penebre, holds a 20% member interest in a Florida LLC called Shakensoft, LLC. Defendants, Daniel Kurland and Scott Kurland, hold member interests of 57% and 20%, respectively.[1] This case concerns the power and authority of defendants, as majority owners of the LLC, to effect the termination of the business, or at least a major part of the business, that constitutes the source of plaintiffs' economic interest. Whether defendants possess the power and authority to terminate the business must be analyzed under the Operating Agreement (" Agreement") of the LLC, as well as under principles of common-law fiduciary duties. Penebre moves for a preliminary injunction to preserve the status quo ante of the business on the date before defendants took steps to terminate the business.

         BACKGROUND

         Shakensoft sells a point-of-sale software product designed for bars and restaurants. The product, PointOS, allows customers to process multiple orders from waiters at multiple terminals, as well as to perform other services and reports for the customer. Shakensoft has a Boston office from which nine (9) salespersons operate to sell PointOS. Penebre is the Executive Vice President of the LLC. His duties, as described in the Agreement, are " [o]versees operations, sales, marketing, company strategy and personnel." Penebre's compensation is based entirely upon commissions earned. He receives a percentage of " Net Sales" (a defined term) accomplished by him and his sales force in Boston. The other salespersons are also compensated only on a commission basis.

         On September 1, 2016, following unsuccessful attempts to resolve disputes between Penebre and defendants, defendants caused a vote of the members of the LLC to be taken. Defendants exercised their combined 77% ownership interest to vote to shut down immediately the Boston office of the LLC. All nine salespersons, including Penebre, were terminated from employment. Defendants proceeded immediately to dismantle telephones, office equipment and computers. They eliminated access by Penebre and the other former salespersons to Shakensoft's email server and a database, called CRM, necessary to service customers and potential customers. According to Penebre, more than $1 million of potential sales to customers were in the pipeline on that date. Penebre protested the vote as not being in accordance with the Agreement and objected to the immediate termination of the Boston office. Penebre asserts that he and the other salespersons are unable to complete sales and service customers as a result of the termination of their employment and the denial of access, all to the detriment of the goodwill of Shakensoft.

         On September 6, 2016, Penebre commenced this action by verified complaint and moved for a preliminary injunction. Service on defendants was accomplished on September 8, 2016. The motion for preliminary injunction was heard on September 13, 2016. Defendants, through counsel, appeared at the hearing. Defendants presented argument against the issuance of a preliminary injunction but filed no affidavits or memorandum.

         ANALYSIS

          The familiar standards for a preliminary injunction are that the moving party must show (1) a likelihood of success on the merits; (2) that irreparable harm will result from denial of the injunction; and (3) that, in light of the plaintiff's likelihood of success on the merits, the risk of irreparable harm to the plaintiff outweighs the potential harm to the defendant in granting the injunction. Tri-Nel Management, Inc. v. Board of Health of Barnstable, 433 Mass. 217, 219, 741 N.E.2d 37 (2001), citing Packaging Industries Group, Inc. v. Cheney, 380 Mass. 609, 617, 405 N.E.2d 106 (1980). In applying these standards the court applies a balancing test: " What matters as to each party is not the raw amount of irreparable harm the party might conceivably suffer, but rather the risk of such harm in light of the party's chance of success on the merits. Only when the balance between these risks cuts in favor of the moving party may a preliminary injunction properly issue." Id. In an appropriate case, " the risk of harm to the public interest also may be considered." Brookline v. Goldstein, 388 Mass. 443, 447, 447 N.E.2d 641 (1983).

         Likelihood of Success

         Penebre contends that the vote to terminate the Boston office was in violation of the Agreement. Thus, the vote is a nullity and the Boston office should be restored.

         The Agreement provides that certain actions affecting the LLC are deemed " Major Decisions" and such actions require unanimous written consent of the members or a vote of a " Super-Majority-In-Interest" of the members. Agreement, § 4.12. Among the actions described as a " Major Decision" is a decision to " amend, enforce or terminate any agreement with a Member . . . or grant approvals or waivers under any such agreement (including setting the salary or changing or [sic] compensation and benefits of any Member or related parties who are employees) . . ." Agreement, § 4.12(g). While all the other described " Major Decisions" in subparagraphs (a) through (m) of § 4.12 of the Agreement require a Super-Majority-In-Interest vote of 75% of member interests, § 4.12(g) is the exception. In order to effect a decision covered by subparagraph (g), the vote of member interests must be 85%.

         The reasonable inference from the difference in percentage vote required for effecting a Major Decision directly affecting a member, like Penebre, as opposed to all other Major Decisions is that the higher percentage vote was intended to give a type of veto power to a minority member. From the outset of the LLC, the respective interests in the LLC were held as described above. Daniel Kurland, who is the manager of the LLC and the holder of a 57% interest, has broad authority to conduct the business of the LLC. See § 4.1 of the Agreement. But when it comes to Major Decisions, he needs the alignment of at least one of the 20% holders to reach the 75% vote requirement. The 85% vote requirement for a Major Decision under § 4.12(g) protects a minority member when, for example, the Kurlands align against another minority member such as Penebre. Thus, from the beginning, the Agreement expresses and guarantees a valuable protection against tyranny by the majority.

         The vote by defendants on September 1, 2016, to close the Boston office and terminate the employment of Penebre and the other salespersons was a Major Decision under § 4.12(g) of the Agreement. There is no question that the decision terminated an agreement with a member (Penebre and Macomber) that provided his compensation. Moreover, the decision affected the compensation of " related parties who are employees." § 4.12(g). Penebre's compensation was directly tied to sales made by all of the salespersons who were terminated. Because the vote to terminate the Boston office and fire employees failed to obtain an 85% vote of the members the vote was a nullity. Accordingly, Penebre and Macomber have demonstrated a reasonable likelihood of success on their claims of breach of the Agreement.

         In addition, Penebre and Macomber demonstrate a likelihood of success on their claim of breach of fiduciary duty. What the majority members did by their unauthorized, self-help conduct was to deny plaintiffs the fruits of their employment and member interests. This is a classic example of a corporate " freeze out" of a minority shareholder. This is particularly so where the Agreement provides another, express remedy for resolution of a dispute among members regarding the future of the business. Section 6.7 of the Agreement states that if a Super-Majority-In-Interest fails to reach agreement regarding a Major Decision " then an impasse (" Impasse") shall be deemed to exist." Upon such Impasse, a member may initiate a buy-sell process that will result in the acquisition of the minority member's interest or the majority members' interest by the minority. Defendants violated this section of the Agreement by implementing the disputed Major Decision to close the ...


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