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Madelone v. Whitten

Other Lower Courts

February 15, 2008

In the Matter of the Application of Paul J. Madelone, Individually and Derivatively on behalf of the Viscomm Group, LLC, Petitioner, for a Judgment dissolving the New York Limited Liability Company pursuant to sections 702 and 703 of the Limited Liability Company Law The Viscomm Group, LLC,
v.
Thomas A. Whitten, Douglas S. Harrington and Stephen V. Dzinanka, in their respective capacities as members of The Viscomm Group, LLC, Respondents.

Editorial Note:

This case is not published in a printed volume and its disposition appears in a table in the reporter.

COUNSEL

Hiscock & Barclay, LLP, Attorneys for Petitioner (William A. Hurst and Edward J. Trombly, of counsel)

Cooper, Erving & Savage, LLP Attorneys for Respondents (David C. Rowley, of counsel)

OPINION

Richard M. Platkin, J.

By his Verified Petition, Paul J. Madelone seeks to enforce the terms of the amended operating agreement of The Viscomm Group, LLC ("Viscomm") or, in the alternative, obtain an order dissolving Viscomm and appointing a receiver. Petitioner now moves for a preliminary injunction and an order holding respondents in contempt for violating the terms of the temporary restraining order previously issued by this Court (Teresi, J.).

Respondents oppose petitioner's application for preliminary injunctive relief and contempt sanctions, and also move to dismiss the causes of action asserted derivatively on behalf of Viscomm. Respondents also move to disqualify petitioner's counsel.

THE PETITION

In or about June 2003, petitioner, together with respondents Douglas S. Harrington and Thomas A. Whitten, formed Viscomm, which engages in the business of advertising, public relations and video production on behalf of corporate and individual clients. Initially, each member held a one-third (1/3) interest in the company, and Whitten was designated as manager.

Petitioner alleges that in or about 2005, Whitten presented the other members of Viscomm with a proposed amended operating agreement. Pursuant to the revised agreement ("the Agreement"), which was ratified on June 23, 2005, each member transferred a three and one-third (3.33) percent interest in the company to respondent Stephen V. Dzinanka. This left Whitten, Madelone and Harrington each with a thirty percent (30%) membership interest, with Dzinanka receiving a ten percent (10%) interest in the company.

According to petitioner, Whitten was experiencing marital difficulties at this time and, for that reason, sought revisions to the provisions of the operating agreement requiring the involuntary transfer of a member's interest under certain circumstances. As a result, Section 9.1 (a) (3) of the Agreement was amended to read as follows: "A Member must sell and the remaining Members must purchase Membership Interest as set forth below upon the occurrence of . . . a Member or their spouse filing for legal separation or divorce" (emphasis added). Further, Section 9.5 (a) was amended to read as follows:

Pursuant to Paragraph 9.1(a) . . . 3, should a member . . . become involved in a separation or divorce proceeding, they will be deemed to have offered their Membership Interest for sale as of the date of . . . separation or divorce filing. The remaining Member(s) must then exercise their right to purchase on a basis pro rata to the Membership Interests of each Member, or in a proportion unanimously agreed to by all remaining Members. The voting rights associated with the . . . separating or divorcing Member's Interest shall be transferred to the purchasing Member(s) on the date of . . . divorce or separation filing. (emphasis added). Other sections of the Agreement establish a method for computing the price to be paid for a departing member's interest in the company (Section 9.6) and the manner by which such sum shall be paid to the departing member (Section 9.5 [c]).

Petitioner alleges that in or about mid-2006, Whitten filed for legal separation from his wife, thereby triggering the involuntary transfer requirements of the Agreement. At that time, Whitten allegedly relinquished his position as manager of the LLC and was appointed to a salaried position with the company. However, upon his apparent reconciliation with his wife, Whitten was reinstated as a member and manager.

Petitioner further alleges that Whitten's marital problems continued thereafter, and on May 24, 2007, Whitten refiled an action for divorce in Supreme Court, Saratoga County. It is petitioner's contention that this filing triggered the involuntary transfer provisions of Sections 9.1 (a) (3) and 9.5 (a) of the Agreement, thus transferring Whitten's voting rights to the other members of the company and compelling Whitten to sell, and the remaining members to purchase, his membership interest. Petitioner claims that he was not informed of Whitten's divorce proceeding until August 2007.

In late 2007, petitioner and respondent Harrington retained the law firm of Hiscock & Barclay, LLP ("the law firm") to review the Agreement and determine the effect of Whitten's divorce proceeding on Viscomm and its members. By letter dated November 9, 2007, the law firm advised Whitten that, in its opinion, the involuntary transfer provisions had been triggered by his divorce filing. Also on that date, petitioner and Harrington executed a document entitled "Members Consent to Action," in which they, as the claimed holders of 85.72 percent of Viscomm's voting rights, consented to the removal of Whitten as manager of the company and the substitution of Harrington in his place.

By letter dated November 15, 2007, the law firm provided Whitten's counsel with its conclusions as to the value of Whitten's membership interest and the manner in which payment would be made, in anticipation of a meeting of the members to be held on November 19, 2007. According to the petition, a meeting of the members was held on such date, but these issues were not addressed.

Thus, petitioner claims that Whitten has failed and refused to acknowledge the applicability of the involuntary transfer provisions, has continued to hold himself out as Viscomm's manager despite his removal from that position, and has refused to acknowledge that he no longer has a vote on company business all in contravention of the Agreement.

While the primary relief sought by petitioner is enforcement of the involuntary transfer provisions of the Agreement, petitioner also contends, in the alternative, that it is no longer reasonably practicable for Viscomm to continue to operate its business in accordance with the amended operating agreement and its articles of incorporation. In addition to the claimed breaches of the Agreement, petitioner alleges that Whitten has engaged in a persistent course of conduct that threatens Viscomm's credit and financial viability. Further, petitioner claims that he has been excluded from company meetings and other business affairs and generally has been "frozen out" of the company's day-to-day business. Finally, petitioner contends that Whitten has taken steps to drive down Viscomm's value in connection with his pending matrimonial litigation. Accordingly, the petition raises claims of breach of fiduciary duty and waste against respondents.

PRELIMINARY INJUNCTION

The Court begins with petitioner's application for a preliminary injunction. By Order to Show Cause dated December 19, 2007, petitioner moved for a preliminary injunction restraining Viscomm (through Whitten and/or its members) from: (a) selling, leasing, exchanging or disposing of any or all of the assets of Viscomm, except in the normal course of business and with the signature of petitioner; (b) incurring any further indebtedness, except in the normal course of business and with the signature of petitioner; (c) removing or attempting to remove petitioner as a member of Viscomm; and (d) altering or amending the Agreement. With respect to Whitten, petitioner seeks a preliminary injunction barring him from: (a) taking any action purporting to be by or on Viscomm's behalf; and (b) using, encumbering or drawing upon Viscomm's bank accounts or credit cards, either directly or indirectly.

By way of temporary relief, the Order to Show Cause provided that petitioner shall be given notice of any Viscomm membership meetings and shall be allowed to participate and vote at such meetings. The Order to Show Cause also imposed the provisional restraints sought by petitioner against Viscomm, but not those against Whitten.

In order to obtain preliminary injunctive relief, the moving party must demonstrate "that irreparable harm will occur if the injunction is not granted, that such party has a likelihood of success on the merits, and that the balance of equities tip in its favor" ( Marietta Corp. v Fairhurst, 301 A.D.2d 734, 736 [3d Dept 2003] [citation omitted]). In determining whether petitioner has met this standard, the Court is mindful that a preliminary injunction is a "drastic remedy which is not routinely granted" (id.).

A. Likelihood of Success

1. Enforcement of Amended ...


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