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Allison v. Eriksson

Supreme Judicial Court of Massachusetts, Suffolk

May 30, 2018


          Heard: February 5, 2018. [1]

         Civil action commenced in the Superior Court Department on May 22, 2013.

         The case was heard by Mitchell H. Kaplan, J. The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.

          Dana Alan Curhan for the plaintiff. Sean T. Carnathan for the defendants.

          Ben Robbins & Martin J. Newhouse, for New England Legal Foundation, amicus curiae, submitted a brief.

          Present: Gants, C.J., Gaziano, Budd, Cypher, & Kafker, JJ.

          KAFKER, J.

         At issue in the instant case is the remedy available for limited liability company (LLC) mergers undertaken in violation of fiduciary duties. The defendant, Elof Eriksson, contends that the exclusive remedy for dissenting members to such mergers is the distribution of their interest in the LLC, pursuant to G. L. c. 156C, § 60 (b). The plaintiff, W. Robert Allison, contends that other equitable relief is available but that the judge erred in declining to rescind the merger. We conclude that G. L. c. 156C, § 60 (b), provides the exclusive remedy for dissenting members of a limited liability company that has voted to merge, so long as the merger is undertaken in accordance with G. L. c. 156C, §§ 59-63. Of relevance here is G. L. c. 156C, § 63 (b), which provides that members of a limited liability company owe each other fiduciary duties, but that such duties may be enhanced or restricted according to the terms in the operating agreement. Where, as here, a member of an LLC conducts a merger in breach of his fiduciary and contractual duties, the merger has not been conducted in compliance with § 63, and the remedy provided by G. L. c. 156C, § 60 (b), is not exclusive. Thus, the trial judge did not abuse his discretion in fashioning an equitable remedy. We also affirm most of the equitable relief awarded, but remand that portion of the trial judge's decision which increases Allison's interest in the merged LLC to five per cent, as we cannot discern any basis in the record for that figure.[2]

         1. Background.

         We recite the trial judge's relevant findings of fact, supplemented with undisputed evidence from the record.

         a. Formation and operation of Applied Tissue Technologies.

         Allison is an experienced corporate attorney who left the legal field in 1997. Eriksson is the former chief of the division of plastic surgery at a hospital in Boston. In 1999, Eriksson was looking to start a business based on technology he had developed at the hospital. He reached out to Allison, and the two eventually agreed to form Applied Tissue Technologies (ATT-MA), a Massachusetts LLC. Allison contributed $15, 000 to the company, and Eriksson contributed $45, 000. Allison received a twenty-five per cent membership interest in ATT-MA; Eriksson received a seventy-five per cent interest. Allison became the president and chief executive officer (CEO) of the company.

         Allison drafted the initial operating agreement for ATT-MA.[3]It provided that Allison and Eriksson were the only members of ATT-MA and that ATT-MA was to be managed by the members, who would vote based on their respective membership interests. Any additional capital contributions required the unanimous consent of all members. The judge found that this requirement "is not uncommon in a joint venture involving two participants who agree that they must both consent to certain, fundamental business changes, even though they do not have equal interests in the profit and loss of the enterprise."

         In 2003, Allison and Eriksson each decided to transfer a portion of their respective interests in ATT-MA into trusts for the benefit of their families. To that end, Allison and Eriksson also executed a new operating agreement that was lengthier and more sophisticated than the original. It contained several important changes: (1) it created a manager position, to be elected by voting members; (2) it defined the term, "Original Members, " as Allison and Eriksson; (3) both original members had to agree to the addition of any new members; (4) any change to the operating agreement required consent from both original members; (5) any change to the operating agreement that had the effect of reducing a member's interest in ATT-MA or interest in distribution from a sale of assets or cash flow required consent from the affected member; (6) a vote of at least sixty per cent of the membership was required to make significant business decisions. The agreement further provided that members were entitled to examine ATT-MA's books and records at any and all reasonable times, and that members had a duty to conduct company affairs in good faith. The new operating agreement also maintained a provision from the original agreement that required both Allison and Eriksson to consent to any further capital contributions. Subsequent to the enactment of the new operating agreement, Allison was elected as manager.

         At some point, ATT-MA hired Christian Baker to work as a full-time employee. In 2004, Baker received a two per cent interest in ATT-MA, transferred from Allison and Eriksson according to their twenty-five per cent/seventy-five per cent split. By 2007, ATT-MA could not afford to pay Baker, and his employment was terminated. A dispute arose between Allison and Eriksson about the terms of Baker's termination, which was ultimately resolved by Allison transferring two per cent of his interest in ATT-MA to Eriksson. After this transfer, the membership interests in ATT-MA were as follows: Eriksson owned 55.5 per cent; Eriksson's family trust owned twenty per cent; Allison owned 14.66 per cent; Allison's family trust owned 7.84 per cent; and Baker owned two per cent.

         From 2006 to 2008, Eriksson lent ATT-MA $200, 000 to cover operating expenses. This sum was later repaid to him with fifteen per cent interest. In March, 2010, Allison stepped down as CEO, and Karl Proppe, Eriksson's close friend, became the new CEO. In November, 2011, Allison resigned as president and manager.

         By January, 2012, ATT-MA was almost out of cash. Eriksson was unwilling to lend the company any more money, but indicated he would be willing to invest money in exchange for additional equity. However, Allison was unwilling to have his interest diluted unless the investment came from an outside investor, even though the members generally agreed that ATT-MA was at least one year away from being able to attract outside investors. In response to Allison's stance, Eriksson indicated that the operating agreement should be amended.[4]

         Eriksson eventually offered to invest $600, 000 if Allison invested $200, 000, but Allison rejected the proposal. Allison also refused to use personal assets to secure a bank loan for ATT-MA. Eriksson was frustrated by Allison's position and suggested that ATT-MA should be dissolved.

         b. The merger.

         In February, 2012, Eriksson's daughter arranged for him to meet with a senior attorney at her firm, Gary Schall, to discuss his concerns about the company. They ultimately decided that an appraisal of the company was necessary. Eriksson and Proppe retained Schall and his firm to represent ATT-MA. The judge found that Eriksson, Proppe, and Schall all specifically decided not to let Allison know of Schall's engagement.

         ATT-MA hired a firm to conduct the appraisal. Eriksson informed Allison of the appraisal, but not Schall's involvement or the purpose of the appraisal. The appraisal firm concluded that one hundred per cent of ATT-MA's equity had a value of $239, 000, but only if $620, 000 of additional funding was invested; without the additional $620, 000, ATT-MA was worth $0.[5]

         In May, 2012, Eriksson and Schall planned how they would deal with Allison. First, Eriksson would offer to purchase Allison's individual and trust membership interests based on the appraisal value. If Allison rejected the offer, Eriksson would form a new LLC under Delaware law (ATT-DE), and create a new operating agreement "that would accomplish Eriksson's goals." ATT-MA would then be merged into ATT-DE.

         On May 6, 2012, Eriksson offered to purchase Allison's collective membership interests, totaling 22.5 per cent, for $53, 775, i.e., 22.5 per cent of the $239, 000 valuation. Allison rejected the offer.

         Later the same month, ATT-DE was created. Proppe, now the manager and CEO of both ATT-MA and ATT-DE, executed the agreement and plan of merger on May 29, 2012. That evening, Eriksson and Proppe informed Allison of the merger. Up to this point, Allison ...

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