Opinion
CIVIL ACTION No. 07-3908, SECTION: I/3.
October 1, 2007
ORDER AND REASONS
Before the Court is plaintiff's motion requesting that this Court issue a temporary restraining order ("TRO") or preliminary injunction restraining and enjoining defendants, International Offshore Services, L.L.C., ("IOS"), Stephen J. Williams ("Williams"), Kelly B. Steele, Sr., ("Steele"), WMW, L.L.C., ("WMW"), and Stephen M. Valdes ("Valdes"), from making any disproportionate distributions, taking out loans to fund disproportionate distributions, terminating plaintiff as a member of IOS, and valuing plaintiff's interest in IOS. For the following reasons, the motion is GRANTED IN PART AND DENIED IN PART.
R. Doc. No. 4, TRO Mot.; R. Doc. No. 24-3, Reply Mem. Supp. TRO Compl.
BACKGROUND
IOS is a limited liability company ("LLC") formed pursuant to the laws of the State of Louisiana. Defendant, Williams, is the majority member and sole manager of IOS, owning over fifty percent of the company. Plaintiff holds a ten-percent interest in IOS.The constituent members of IOS are governed by an operating agreement ("Agreement"). The Agreement provides that IOS may make appropriate distributions to each member in accordance with his percentage interest. It also states that it is within the power and authority of the managers of IOS to incur indebtedness on behalf of the company if it is deemed necessary for the conduct of the company's activities. If a member chooses to withdraw from IOS, the Agreement has a provision designed to compensate the withdrawing attorney, as well as procedures governing the same. The Agreement may only be amended by the collective approval of members owning more than fifty percent of IOS.
R. Doc. No. 23-2, Defs.' Ex. A, Agreement, p. 1, pmbl.
Id. at p. 13, art. VI(L). Specifically, the Agreement provides:
The Company may make distributions to the Members as the Company determines to be appropriate and in the best interest of the Company and the Members. . . . All distributions shall be made to each Member in accordance with his/her/its percentage interest in the Company.
Id.
Id. at p. 14, art. V(A). Specifically, it states:
The following, without limitation, is included within the power and authority of the Manager(s): . . . To incur indebtedness on behalf of the Company and to commit the credit of the Company to any third party and to make expenditures and to incur such obligations deemed necessary for the conduct of the activities of the Company, including, without limitation, to borrow funds (on a recourse or nonrecourse basis) on behalf of the Company.
Id.
Id. at p. 23, art. VIII. In pertinent part, that article provides:
No member shall have the right to withdraw from IOS except as otherwise provided herein or except with the written consent of the other Members collectively owning more that fifty (50%) percent of the interest of Members not desiring to withdraw, which consent may be withheld without cause and for any reason deemed sufficient by them.
If any Member should properly withdraw from this Company, said Member shall be entitled . . . to be paid in cash the fair market value of the Member's interest as of the date of Withdrawal.
Id.
Id. at p. 16, art. V(D).
On May 29, 2007, a Members Letter Agreement was signed by all IOS members except the plaintiff. The letter's stated purpose was to acquire the consent of the members to obtain a loan in the amount of $50,000,000.00 and to fund "disproportionate distributions made payable to [Williams] in an amount up to the full value of the loan."
R. Doc. No. 1-2, Pl.'s Compl., Ex. 2, Members Letter Agreement.
Id.
On June 20, 2007, the members of IOS held a meeting at which they voted to add additional language to the Agreement. Such language addresses the issue of terminating a member's interest, with or without cause, and the valuation to be used in the event of such termination. This amendment to the Agreement ("Amendment") was passed, with Williams, WMW, Steele, and Valdes all voting for it and plaintiff voting against it.
R. Doc. No. 23-3, Defs.' Mem. Opp. TRO Mot., Ex. 3, Minutes of the June 20, 2007, Meeting.
Id.; R. Doc. No. 1-2, Pl.'s Ex. 3, Amendment to Operating Agreement. The Amendment to the Agreement ("Amendment") provides, in pertinent part:
A member may be terminated with or without cause, by a vote of the member(s) owning collectively more than seventy-five (75%) percent of the interest in the Company. . . . The valuation method used to determine the amount to be paid to a member that has been terminated shall be the terminated member's pro-rata share of the net book value of the company according to the figures reflected on the financial statement of IOS at the month's end that occurred immediately prior to the termination of a member.
R. Doc. No. 1-2, Pl.'s Ex. 3, Amendment.
R. Doc. No. 23-3, Defs.' Ex. 3, Minutes of the June 20, 2007, Meeting.
On July 19, 2007, a notice was sent to all IOS members concerning a special meeting to be held on August 3, 2007, called for the purpose of terminating plaintiff as a member of IOS and paying him book value for his interest. Before the meeting could be held, on July 21, 2007, plaintiff filed a complaint in this Court, as well as a motion for a TRO and a preliminary injunction. On August 3, 2007, all parties to this lawsuit entered into a consent order that provided that the parties would not terminate plaintiff within sixty days of that date. It further provided that the parties would proceed to arbitration.
R. Doc. No. 1-2, Pl.'s Compl., Ex. 4, Notice of Special-Called Business Meeting of IOS.
R. Doc. No. 1, Pl.'s Compl.; Red. Doc. No. 4, Pl.'s TRO Mot.
R. Doc. No. 14, Consent Order.
Id.
On September 17, 2007, plaintiff filed a motion to extend the provisions of the consent order pending the resolution of the arbitration. Because the parties could not agree to extend the consent order, the motion was denied. Plaintiff reinstates his request that this Court issue a TRO or preliminary injunction to maintain the status quo during the pendency of the arbitration proceedings.
R. Doc. No. 19, Pl.'s Mot. Extension of Provisions of Consent Order.
R. Doc. No. 20.
R. Doc. Nos. 4, 23, 24-3.
LAW AND ANALYSIS
I. Standards of Law A. TRO and Preliminary Injunction Standard
In a situation where notice and an opportunity to present evidence have occurred, a court follows the same procedure for a TRO as it would for a preliminary injunction. Lewis v. S.S. Baune, 534 F.2d 1115, 1121 (5th Cir. 1976); Kan. Hosp. Ass'n v. Whiteman, 835 F. Supp. 1548, 1551 (D. Kan. 1993) ( citing 11 Charles A. Wright Arthur R. Miller, Federal Practice and Procedure § 2951 (1973)). In order to obtain a preliminary injunction, the movant must show: (1) there is a substantial likelihood of success on the merits, (2) there is a substantial threat of irreparable injury, (3) the threatened injury to the movant outweighs the injury to the nonmovant, and (4) that granting the injunction will not disserve the public interest. PCI Transp., Inc. v. Fort Worth W. R.R., 418 F.3d 535, 545 (5th Cir. 2005); Granny Goose Foods, Inc. v. Bhd. of Teamsters Auto Truck Drivers Local No. 70, 415 U.S. 423, 441, 94 S. Ct. 1113, 1125, 39 L. Ed. 2d 435 (1974) ("[T]he party seeking the injunction . . . bear[s] the burden of demonstrating the various factors justifying preliminary injunctive relief. . . .").A "preliminary injunction is an extraordinary remedy which should not be granted unless the party seeking it has 'clearly carried the burden of persuasion' on all four requirements." Lake Charles Diesel, Inc. v. Gen. Motors Corp., 328 F.3d 192, 196 (5th Cir. 2003) ( quoting Canal Auth. v. Callaway, 489 F.2d 567, 572 (5th Cir. 1974)). Court's have wide discretion with respect to whether to grant preliminary injunctions. Fed. Sav. Loan Ins. Corp. v. Dixon, 835 F.2d 554, 558 (5th Cir. 1987).
B. Louisiana LLC Law
Louisiana has created several statutory sections directed toward LLCs, titled "Louisiana Limited Liability Company Law." See La.Rev.Stat. Ann. §§ 12:1301 to: 1369 (1994 Supp. 1998).
The Agreement, upon which this lawsuit is based, is to be governed by and construed in accordance with Louisiana law. Louisiana's LLC law "specifies that the liability of members, managers, employees or agents of an LLC is determined solely and exclusively under the provisions of Louisiana LLC law." In re Provenza, 316 B.R. 225, 230 (Bankr. E. D. La. 2003) ( citing La.Rev.Stat. Ann. § 12:1320(A) (1994 Supp. 1998)). The members and managers owe fiduciary duties to the LLC and to the other members and managers. La.Rev.Stat. Ann. § 12:1314(A)(1); Gill v. Gill, 895 So. 2d 807, 814 n. 3 (La.Ct.App. 2005). In discharging these fiduciary duties, the member or manager "shall be fully protected in relying in good faith upon the records of the [LLC] and upon such information . . . presented to the [LLC]" and shall not be liable "unless the member or manager acted in a grossly negligent manner." La.Rev.Stat. Ann. § 12:1314(A)(2), (B); In re Provenza, 316 B.R. at 230 ("In determining whether a member of a . . . LLC has breached a fiduciary duty . . ., the courts employ, at a minimum, a gross negligence standard and the business judgment rule."). Gross negligence is defined as "reckless disregard of or a carelessness amounting to indifference to the best interests of the [LLC] or the members thereof." La.Rev.Stat. Ann. § 12:1314(C).
R. Doc. No. 23-2, Agreement, p. 32, art. XV(E).
The Louisiana LLC law provides that distributions "shall be allocated among the members . . . in the manner provided in a written operating agreement." Id. § 12:1324(A). Further, unless the operating agreement of a LLC provides differently, "[t]he incurrence of indebtedness by the [LLC] other than in the ordinary course of business" needs a vote of a majority of the LLC's members. Id. § 12:1318(B)(4). The provision for amending the operation agreement is the same. Id. § 12:1318(B)(6). Louisiana's LLC law does not specifically address terminations or expulsions of members. See id. §§ 1301-1369. See also generally Susan Kalinka, Dissociation of a Member from a Louisiana Limited Liability Company: The Need for Reform, 66 La. L. Rev. 365 (2006).
II. Analysis A. Substantial Likelihood of Success on the Merits
1. Loan to IOS
The Agreement specifically provides that IOS management has the power to incur indebtedness on behalf of the company. This provision of the Agreement is entirely consistent with Louisiana LLC law which allows an Agreement to define terms and procedures related to incurring debt. Plaintiff is not, therefore, likely to prevail with respect to his argument that IOS cannot take the desired loan.
The members of IOS are limited by an obligation to discharge fiduciary duties in good faith. Outside of alleging that the loan is for the purpose of giving Williams the ability to extract $50,000,000 from IOS, thereby depriving plaintiff of his interest, plaintiff has presented no evidence that taking the loan, itself, is a breach of such duty. 2. Disproportionate Distributions
R. Doc. No. 24-3, Pl.'s Reply Mem. Supp. TRO Compl., p. 2. Even if this Court found that plaintiff would be substantially likely to prove a breach of fiduciary duty for taking the loan, there would be no irreparable harm, as this Court is enjoining defendants from making distributions, during the pendency of the arbitration, without placing ten percent of such distribution into an account. See infra. Therefore, plaintiff can collect postjudgment damages if he succeeds on the merits in arbitration.
The Agreement does not define the term "distribution," nor does it indicate whether payments to capital accounts are distributions within the meaning of that term. R. Doc. No. 23-2, Defs.'s Reply Mem. Opp. TRO Mot., Ex. A, Agreement, p. 13, art. VI(L). With regard to capital accounts, the Agreement states that the "capital account of each Member shall be . . . debited with the amount of all cash distributions made to such Member and the fair market value of property distributed to such Member." Id. at p. 4, art. VI(B). The capital account of each member consists of "the amount of cash such Member has contributed to the Company, plus . . . the agreed fair market value of any property such Member has contributed to the Company." Id. Plaintiff's capital contribution, which was assigning and transferring an exclusivity agreement to IOS, was valued at a ten-percent membership interest. R. Doc. No. 1-2, Pl.'s Compl., Ex. 1B, Act of Capital Contribution. IOS must make distributions "to each Member in accordance with his/her/its percentage interest in the Company." See id. art. VI(L).
The Agreement does not provide for the disproportionate distribution of funds, but rather provides that funds shall be distributed proportionately among the members of IOS in accordance with his percentage interest. Louisiana LLC law provides that distributions shall be made in accordance with the Agreement. Accordingly, plaintiff does have a substantial likelihood of prevailing on the merits if IOS was to disproportionately distribute funds to a member in violation of the Agreement.
3. Termination of Plaintiff
Plaintiff argues that Louisiana's LLC law does not allow expulsions or terminations of members. Although Louisiana LLC law does not dictate requirements for terminating a member, several operating agreements have been upheld by Louisiana courts despite having expulsion or termination clauses. See, e.g., Mixon v. Iberia Surgical, L.L.C., 956 So. 2d 76, 82 (La.Ct.App. 2007); Weinmann v. Duhon, 818 So. 2d 206 (La.Ct.App. 2002). The Amendment to the Agreement was passed in accordance with the Agreement and Louisiana LLC law. There was previously no provision in the Agreement addressing termination or expulsion, and the Amendment filled the gap in the Agreement. As stated, IOS members are limited by their obligation to discharge their fiduciary duties in good faith. Plaintiff has not met his burden of demonstrating that he will be substantially likely to succeed on this breach claim.
R. Doc. No. 4-2, Pl.'s Mem. Supp. TRO Compl., p. 5; R. Doc No. 24-3, Pl.'s Reply Mem. Supp. TRO Compl., pp. 5-7; Id. Ex. 1, Decl. Glen Morris. Although the declaration of Mr. Morris states that "the Louisiana LLC statute does not authorize the expulsion of a member from an LLC," the LLC statute is silent with respect to expelling a member. R. Doc. No. 24-3, Decl. Glen Morris; La.Rev.Stat. Ann. §§ 12:1301 to: 1369.
4. Valuation of Plaintiff's Interest
The plaintiff has not satisfied his burden of demonstrating that IOS members breached their fiduciary duty to him by undervaluing his interest. Without a further showing by plaintiff, this Court is unable to conclude at this stage that plaintiff is substantially likely to prove that IOS members breached their duty.
B. Irreparable Injury
With respect to plaintiff's claim of disproportionate distributions, plaintiff can be compensated with damages if he is successful in the lawsuit. As a general rule, an injunction is not permissible to secure postjudgment legal relief in the form of damages. Fed. Sav. Loan Ins. Corp. v. Dixon, 835 F.2d 554, 560 (5th Cir. 1987); see In re Amco Ins., 444 F.3d 690, 694 (5th Cir. 2006) ("[A] preliminary injunction, issued prior to any judgment essentially to prevent fraudulent transfer of assets, was an improper use of equity powers." ( citing Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 332, 119 S. Ct. 1961, 144 L. Ed. 2d 319 (1999))). However, proving that a claim for monetary damages would be difficult to collect, such as in the case of insolvency or potential distribution of assets, evinces circumstances that would support issuing an injunction. See Fed. Sav. Loan, 835 F.2d at 560
The stated purpose of the $50,000,000 loan to IOS was for potential distribution, disproportionately, to Williams. If this loan and distribution were to occur, monetary damages could be difficult to collect from IOS, thereby leaving plaintiff unable to recover damages to which he may be entitled. Accordingly, in the event of a distribution, defendants must, pending the final decision in the arbitration, set aside ten percent of the distribution in an account to be agreed upon by the parties.
C. Balancing Injury to the Parties
The Agreement clearly provides that distributions will be made proportionately. If IOS intends to make such a proportionate distribution before the close of the pending arbitration, it is free to do so. This Court has not hampered the LLC's ability to carry on its normal business. It is not enjoined from taking out loans or otherwise managing its own affairs. This Court is merely enjoining defendants from making a distribution its own Agreement prohibits. This Court does not find that distributing funds that would act as debits to capital accounts may not be deemed necessary pursuant to the good faith business judgment of IOS managers.
D. Public Interest
Defendants contend that ordering an injunction will change the management style of IOS, thereby harming the public interest. Plaintiff argues that granting an injunction will preserve the status quo until arbitration has been finalized and that the public has an interest in the enforcement of contracts. This Court agrees that a decision favoring pending arbitration and the ability of an aggrieved party to enforce a judgment is in the public interest. Only those IOS members receiving disproportionate distributions, not the public at large, are effected.
R. Doc. No. 23, Defs.' Mem. Opp. TRO Mot., pp. 14-15.
R. Doc. No. 24-3, Pl.'s Reply Mem. Supp. TRO Compl., p. 11; R. Doc. No. 4-2, Pl.'s Mem. Supp. Compl., p. 8.
E. Posting of a Bond
Pursuant to Federal Rule of Civil Procedure 65(c), a court has the discretion to require a movant to post security for payment of damages to the enjoined party. Kaepa, Inc. v. Achilles Corp., 76 F.3d 624, 628 (5th Cir. 1996). The court "may elect to require no security at all." Corrigan Dispatch Co. v. Casa Guzman, S.A., 569, F.2d 300, 302-03 (5th Cir. 1978); see Doctor's Assocs., Inc. v. Distajo, 107 F.3d 126, 136 (2d Cir. 1997) (holding that a bond was not required where there was no proof of likelihood of harm); Coquina Oil Corp. v. Transwestern Pipeline Co., 825 F.2d 1461, 1462 (10th Cir. 1987). In the event defendants prevail at arbitration, the distribution amount set aside in an interest-bearing account may be returned, without harm, to IOS. Therefore, no security is required to be posted.
Accordingly,
IT IS ORDERED that the motion is GRANTED IN PART AND DENIED IN PART. It is GRANTED in that the defendants are ENJOINED from making any distribution unless ten percent of such distribution is placed into an account during the pendency of the arbitration. In all other respects, the motion is DENIED.
If the parties cannot agree on an account into which the percentage of a distribution shall be placed, either party may return to this Court for resolution.