Ferk Family, Lp v. Frank

Citation: 240 So. 3d 826Docket: 16-0448

Court: District Court of Appeal of Florida; February 27, 2018; Florida; State Appellate Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Ferk Family, LP appeals two final summary judgment orders favoring Gail Frank and others in a case concerning the operation of Med-Rite Laboratories, LLC, formed in April 2010 to manufacture a medical device for hemorrhoids. Initial disagreements among members arose regarding financing, manufacturing location, and personnel terminations. An amended Operating Agreement executed on January 16, 2012, outlined management structure and removal procedures for managers, defining "Cause" for removal as serious misconduct. A "Majority in Interest" is necessary for decisions regarding manager removal and capital loans. Member interests after Ted Morgan's resignation were: Ferk Family, LP (26.49%), Larry Ferk and Gail Frank (28.99%), COJO Holdings (24.90%), Joe Mitchell, Mas-Rite, LLC (16.21%), and other members with lesser stakes. The court affirmed some aspects of the lower court's decision while reversing others.

On June 26, 2012, Larry Ferk emailed Gail Frank, refusing to continue working with Swastic Srihari. Subsequently, on June 28, 2012, Walter Frank informed Larry Ferk of his termination for cause from the board of management under section 5.1(e) of the Operating Agreement. On July 17, 2012, Mas-Rite, LLC transferred Alex Melendez's majority interest to Ferk Family, which effectively transferred voting interest in Med-Rite to Ferk Family. On August 1, 2012, Ferk Family initiated a member derivative action against Gail and Walter Frank and Joe Mitchell for breach of fiduciary duty and sought to inspect records. An independent investigation by Herbert Stettin concluded that proceeding with the derivative action was not in the company's best interest, leading to its dismissal.

During discovery, it was revealed that Ferk Family's acquisition of Mas-Rite's majority interest provided them voting rights in Med-Rite, but the Operating Agreement required member consent for such transfers and compliance with a right-of-first-offer clause. Consequently, Gail Frank, COJO Holdings, and Swastic Srihari sued Ferk Family, Mas-Rite, and Alex Melendez for declaratory relief and damages for breach of contract, later amending the complaint to include claims for breach of the implied covenant of good faith and fair dealing. 

Ferk Family counterclaimed and asserted third-party claims against Joe Mitchell and Walter Frank, alleging wrongful removal of Larry Ferk as manager, which harmed minority members' interests. They also claimed Gail and Walter Frank exceeded permissible loan amounts under the Operating Agreement. The counterclaims included allegations of breach of fiduciary duty and multiple counts of breach of contract and implied covenant of good faith. 

Summary judgment motions from both sides were denied, leading to the withdrawal of certain claims from the Second Amended Complaint. The court conducted a bench trial on remaining counterclaims and third-party claims, resulting in a judgment favoring Gail Frank, COJO Holdings, Joe Mitchell, Swastic Srihari, and the Estate of Walter Frank. On January 28, 2016, the trial court issued orders granting final summary judgment in favor of Gail Frank and others on the claims against them and on Ferk Family's counterclaims.

The appeal by Ferk Family challenges the trial court's summary judgment on several grounds, stating that the court: 1. Erroneously ruled that Melendez's transfer of his interest in Mas-Rite was void due to a violation of the Right of First Offer Provision of the Operating Agreement; 2. Misinterpreted the Operating Agreement, leading to incorrect findings regarding the improper removal of Larry Ferk as manager; 3. Incorrectly categorized Ferk Family's claims as derivative, overlooking exceptions for claims based on special contractual or statutory duties; 4. Inappropriately applied the business judgment rule to protect Med-Rite's officers and managers, despite the Operating Agreement excluding its application; 5. Erroneously determined that Ferk Family failed to present a viable damage model.

The operative Second Amended Complaint included claims for breach of contract, breach of implied covenant of good faith and fair dealing, and specific performance, all related to Melendez's transfer of his majority interest in Mas-Rite to Ferk Family. The breach of contract claim alleged that Ferk Family breached the Operating Agreement by failing to obtain prior written consent from the majority members before the transfer. The specific performance claim requested enforcement of Ferk Family's option to purchase Mas-Rite's interest in Med-Rite, asserting that monetary damages would be insufficient.

Ferk Family argued that the Operating Agreement only restricted transfers of interests in Med-Rite, thus not affecting Melendez's transfer of his interest in Mas-Rite. The trial court, however, ruled that the transfer provisions applied and rendered the attempted transfer void. Upon review, it was concluded that the trial court erred in granting summary judgment regarding the breach of contract, breach of fiduciary duty, and specific performance claims. The Operating Agreement's Article IX requires majority consent for any transfer of interests, which was not obtained.

Any transfer of interest in violation of the agreement is void and does not bind the company. A member that is a legal entity may transfer its interest to any affiliate, but must provide immediate written notice to the Board of Management along with evidence of compliance with the agreement's conditions. It is established that Melendez and Mas-Rite did not comply with notice, consent, or right of first offer provisions in the Operating Agreement. Mas-Rite's sole asset was its 16.21% interest in Med-Rite, and through a transfer between Melendez and the Ferk Family, the Ferk Family acquired Mas-Rite's voting rights in Med-Rite, although Mas-Rite retained its interest. The Operating Agreement stipulates that Mas-Rite could not transfer its ownership interest in Med-Rite without prior written consent and proper notice. The critical issue is whether Melendez, not identified as a member, violated the Operating Agreement by transferring his majority interest in Mas-Rite without following the agreement's requirements. The conclusion reached is that Melendez was not obligated to comply with the Operating Agreement prior to transferring his interest in Mas-Rite, as he did not transfer Mas-Rite's interest in Med-Rite, thus the provisions of the agreement were not triggered. The trial court's contrary finding was deemed an error, leading to a reversal and remand for judgment in favor of the Ferk Family on Counts III, IV, and V.

Regarding the trial court's judgment against the Ferk Family on their counterclaims, the claims included breach of fiduciary duty related to Med-Rite's operations, breach of contract concerning reorganization and changes to Med-Rite's business, and breaches of the implied covenant of good faith and fair dealing. The counter/third-party defendants argued that these claims were derivative, not direct, and were protected under the business judgment rule. After a bench trial, the court determined that the defendants did not breach the Operating Agreement in removing Larry Ferk as a manager, that the claims were solely derivative, that the business judgment rule offered them protection from liability, and that the Ferk Family and Mas-Rite failed to demonstrate breaches of loyalty and care or establish damages from any alleged breaches.

The court reviews the trial court's factual findings for substantial evidence and legal conclusions de novo. The Ferk Family argues that the trial court misinterpreted the Operating Agreement regarding Larry Ferk's removal from the Board, asserting that a Manager can only be removed with a 60% vote from the Members. The court agrees with the Ferk Family's interpretation. At the time of Ferk's removal on June 28, 2012, the Members included Gail Frank, Ferk Family, COJO Holdings, Mas-Rite, and Swastic Srihari, while the Managers were Larry Ferk, Gail Frank, Walter Frank, and Joe Mitchell. The termination letter was signed by three Managers (75%) but only by Gail Frank as the sole Member, who held a 28.99% interest.

The key issue is whether the Operating Agreement permits Ferk's removal by a 75% Manager vote alone. Article V, Section 5.1(e) states that a Manager can be removed for "Cause" as determined by the Members holding a Majority in Interest. "Cause" includes fraud or gross misconduct. The term "Members" is defined as those listed in Exhibit A, while "Majority-in-Interest" is defined as the vote of Members with over 60% interest or the vote/presence of over 60% of the Managers. The trial court incorrectly interpreted this provision, as the Agreement only authorizes removal by the Members with a Majority in Interest, not by the Managers alone. This interpretation is reinforced by other sections of the Agreement concerning voting and quorum, indicating that "Majority-in-Interest" refers to Members rather than Managers for removal purposes.

The trial court's interpretation would allow 60% of Managers to take significant actions, like selling most of the Company's assets, without the consent of 60% of Members, undermining the limitations on the Board’s authority and enabling a majority of Managers to act unilaterally. This misinterpretation led to the conclusion that there was no breach of contract related to Ferk's removal, when in fact, the Operating Agreement requires that such determinations be made by Members holding at least a 60% interest. The termination letter was signed only by one member, Gail Frank, who holds 28.99%, and even considering COJO Holding's 24.90% interest attributed to Joe Mitchell, the total still does not meet the 60% threshold.

Furthermore, the trial court deemed the claims of Ferk Family and Mas-Rite as solely derivative and not maintainable as direct actions under Florida law. Generally, shareholders can only bring direct actions if they demonstrate direct harm and a special injury distinct from other members. However, an exception exists when the defendant owes a separate duty to the plaintiff under contractual or statutory obligations. Ferk Family argues that their claims are valid under this exception due to direct harm, special injury, and the Operating Agreement allowing direct suits among Members for breaches. They also cite a statutory duty under section 608.4225(1) concerning loyalty and due care. The Operating Agreement specifies that members' rights and remedies are enforceable by various means and do not limit other rights against one another. In contrast, a prior case (Dinuro Investments, LLC v. Camacho) indicated that the absence of a provision for direct liability among members precluded a direct action.

Members of an LLC can bring direct claims against other members for breaches of the Operating Agreement. The Camacho opinion previously stated that members are generally shielded from individual liability unless specified otherwise, citing section 608.4227(1), Florida Statutes. However, this section was repealed and replaced by Florida's Revised Limited Liability Company Act (Chapter 605) effective January 1, 2015, which governs this case. Under section 605.0801, members may maintain direct actions to enforce their rights but must demonstrate an actual or threatened injury independent of injuries to the LLC. While it initially seems the statute requires proof of direct harm and special injury, section 605.0105 clarifies that exceptions recognized in Camacho still apply. This section outlines that the Operating Agreement governs member relations and rights, but cannot vary certain statutory provisions, including those related to lawsuits, duties of loyalty and care, good faith obligations, and grounds for dissolution.

Section 605.0105(2) outlines that the statute applies only when the operating agreement does not address a matter, while subsection (3)(a) clarifies that an operating agreement cannot limit an LLC's capacity to sue or be sued, but does not similarly restrict a member's right to sue. Subsection (3)(k) allows for a member to bring a direct action against another member if the operating agreement permits it, maintaining the exception established in Camacho under Florida law. Consequently, the court affirms that Ferk Family can bring a direct claim without needing to demonstrate the two-prong direct harm/special injury test.

However, despite these findings favoring Ferk Family regarding the operating agreement's interpretation and their ability to bring a direct claim, the court upholds the final judgment against them concerning their counterclaim and third-party claim. This decision is based on the business judgment rule, codified in section 608.4228, which protects managers and managing members from personal liability for management decisions unless specific criteria are met. These criteria include violations of criminal law, improper personal benefits, unlawful distributions, conscious disregard of the LLC's best interests, or reckless actions exhibiting bad faith. The court notes that "recklessness" is defined as acting with conscious disregard of a known risk of harm.

A manager or managing member is not considered to have received an improper personal benefit from a transaction if it complies with state or federal law and the organization's governing documents, provided that the transaction and the personal benefit are disclosed to the members, and authorized by a majority vote excluding the managing member. Additionally, the transaction must be fair and reasonable to the limited liability company at the time of authorization. The criteria outlined are not exhaustive, allowing for other circumstances under which a manager may be deemed to have acted without deriving an improper benefit. The excerpt further references the “business judgment” rule, asserting that courts typically defer to the decisions of the board of directors unless there is a clear deviation from this standard. The conclusion affirms the judgment in favor of certain parties on counterclaims while reversing a summary judgment related to a complaint, directing further proceedings in line with this ruling. The court dismisses an argument regarding a higher standard of care in the Operating Agreement and does not address other appeal points raised by the Ferk Family.