Opinion
CV 12 786125
01-29-2013
PAUL SHERLOCK, et al., Plaintiffs, v. ANDREW C. BURGESS, et al., Defendants
Robert D. Barr, Esq., Attorney for plaintiffs. Harold E. Farling, Esq., Attorney for defendants.
Robert D. Barr, Esq., Attorney for plaintiffs.
Harold E. Farling, Esq., Attorney for defendants.
JOURNAL ENTRY
John P. O'Donnell, J.
STATEMENT OF THE CASE
The plaintiffs filed their complaint on June 29, 2012. Then, on August 3, a first-amended complaint was filed to add Infinite Capital, LLC, Infinite Capital Real Estate Investment Company, Andrea Burgess and the Infinite Capital Profit Sharing Plan as defendants. With the amended complaint, the plaintiffs filed an amended motion for preliminary injunction. The defendants opposed the motion for preliminary injunction by a brief filed August 14, 2012.
An evidentiary hearing on the motion for preliminary injunction was held on August 21 and 22, and the parties then filed post-hearing briefs. This entry follows.
STATEMENT OF THE FACTS
The parties
Plaintiff Paul Sherlock is the sole member of plaintiff 1795 Wright Avenue, LLC. Defendant Andrew C. Burgess is the sole member of defendant Big Moon Holdings, LLC. Plaintiff Urban Loft Ventures I, LLC is a limited liability company owned by 1795 Wright Avenue, LLC and Big Moon Holdings, LLC. Currently, 1795 Wright Avenue, LLC owns 73.5% of Urban Loft Ventures I, LLC, and the other 26.5% is owned by Big Moon Holdings, LLC.
Sherlock and Burgess formed their respective limited liability companies to hold the membership interests in Urban Loft Ventures I, LLC. Urban Loft Ventures I, LLC was formed to acquire a parcel of real estate in Columbus and develop it as a 55-unit condominium complex.
Defendant Andrea Burgess is defendant Andrew C. Burgess's wife. Defendant Infinite Capital, LLC is a limited liability company solely owned by Andrew Burgess. Defendant Infinite Capital Real Estate Investment Company, Inc. is a subchapter S corporation solely owned by Andrew Burgess. Defendant The Infinite Capital Profit Sharing Plan is, as its name suggests, the profit sharing plan of defendant Infinite Capital, LLC. The trustee of the plan is Andrew Burgess.
Urban Loft Ventures I, LLC
Paul Sherlock and Andrew Burgess met around July, 2004. Sherlock was interested in developing real estate and Burgess was knowledgeable about financing real estate developments. With a third person, Thomas J. Fortin, they formed Urban Loft Ventures I, LLC to develop a condominium complex in Columbus. The initial capital contributions to the limited liability company were $724,000 from Sherlock, $212,000 from Burgess, and $212,000 from Fortin.
In order to complete the development, Urban Loft Ventures I, LLC borrowed over $9.3 million from U.S. Bank and $1.15 million from Capital South. Each of those loans was secured by the real estate. A third, unsecured, loan of $2.355 million was taken from the Michael W. Lenhart 1998 Trust. All three loans were personally guaranteed by Sherlock, Burgess and Fortin.
Fortin's personal guaranty was released when his membership interest was bought out by the two remaining members. Burgess's personal guaranty was discharged by bankruptcy filed in 2009. Sherlock's personal guaranty remains in effect.
The condominium project was not as successful as hoped. The two secured lenders have been satisfied and their liens released, but after all the condominium units were sold, Urban Loft Ventures had only about $740,000 in proceeds with the entire $2.3 million still owing to the Lenhart Trust.
After Burgess's bankruptcy, the operating agreement for Urban Loft Ventures I, LLC was amended. Its provisions include the following:
AMENDED AND RESTATED URBAN LOFT VENTURES I, LLC OPERATING AGREEMENT
Recitals
WHEREAS, the parties have operated the Company in accordance with an amended operating agreement dated January 2005;
WHEREAS, the sole member of Big Moon Holdings, LLC filed a voluntary petition in bankruptcy on November 6, 2009;
WHEREAS, the parties now wish to operate the Company in accordance with the terms and subject to the conditions set forth in this Agreement.
Section I
Defined Terms
" Interest Holder" means any Person who holds a Membership Interest, whether as a Member or an unadmitted assignee of a Member.
Section IV
Profit, Loss and Distributions
4.2 Distribution of Capital Proceeds and Allocation of Profit or Loss from Capital Transactions .
4.2.3. Capital Proceeds . Capital Proceeds shall be distributed and applied by the Company in the following order and priority:
4.2.3.1. to the payment of all expenses of the Company incident to the Capital Transaction, then
4.2.3.2. to the payment of debts and liabilities of the Company then due and outstanding (including all debts due to any Interest Holder); then [to the Interest Holders in proportion to their Adjusted Capital Balances].
Section V Management: Rights, Powers, and Duties
5.1 Management . The Company shall be managed by the Members. Except as otherwise provided in this Agreement, each Member shall have the right to act for and bind the Company in the ordinary course of its business.
5.6 Consulting . The Company shall pay to Infinite Capital, LLC a consulting fee of $5,000 per month for consulting services (" Consulting Fees") unless and until such consulting services are no longer required as approved by the Members.
Burgess testified that the consulting fee allowed by Section 5.6 and Sherlock's oral agreement that the two would equally share the proceeds of any sales were added after his bankruptcy to provide him an incentive to continue to try to sell the condominium units. Since his personal guaranty was discharged in bankruptcy and there was no reasonable prospect that the company would make enough money to cover the return of his capital contribution, he had no reason to expend effort to advance the interests of Urban Loft Ventures I, LLC unless he was getting the monthly consulting fee and half of what he brought in.
Burgess's contested actions
By May, 2012, Burgess had taken consulting fees totaling $130,000. Those fees were proper under the operating agreement. (However, in May, 2011, he took an unauthorized withdrawal of $10,000. That payment caused Urban Loft Ventures I, LLC to default on its then outstanding loan from U.S. Bank.)
Also around the spring of 2012, Burgess made three offers on behalf of Urban Loft Ventures I, LLC to buy real estate. Ultimately, none of those offers came to fruition but Burgess's actions concerned Sherlock since Burgess was being paid a consulting fee to conclude the affairs of Urban Loft Ventures I, LLC, not to continue them.
To this point, Urban Loft Ventures I, LLC had a single bank account and Burgess was the only person with authority to sign the company's checks. Sherlock decided to protect himself by becoming a signatory on the bank account. He met with Burgess in March, 2012, to discuss adding himself as an account signatory. Burgess did not object to Sherlock's demand and the two met at the Rocky River branch of U.S. Bank in late March where forms were filled out to change the account. But while Sherlock assumed he was being added as a required signature on the account -- i.e., that checks could only be made with both signatures -- the effect of the transaction was only to add Sherlock as a second authorized signatory, which did not prevent either signatory from authorizing a payment with just one signature.
Around this same time, Sherlock and Burgess, recognizing that their venture was going to wind up in the red, began to negotiate how to account for the project's losses. As these negotiations were progressing, Sherlock discovered that, in May, 2012, Burgess had taken $190,500 from Urban Loft Ventures I, LLC's account at U.S. Bank. The money was apportioned in two separate checks payable to Infinite Capital, LLC. The first check was for $5,000 and the second for $185,500.
Burgess testified that the $190,500 was deposited into Infinite Capital Real Estate Investment Company, Inc.'s bank account at First Federal Bank of Lakewood. After the money was deposited on May 10, the following transfers were made: a $7,000 check to Andrea Burgess on May 11; a $2,000 check to Burgess's health savings account on May 11; a $100,000 check to Andrea Burgess on May 25; two checks totaling $7,500 to Burgess or his wife on May 25; and a May 29 check for $54,666.67 to the Infinite Capital Profit Sharing Plan. Some of the rest of the money has been used by Burgess to pay his taxes and " company expenses."
Burgess testified that the profit sharing plan is a retirement account and he believes that the money in there, including the $54,666.67, is " protected" from attachment. He further testified that none of the money transferred to his wife remains in her account. Much of it was used to pay the Burgess family's mortgage, car payments, and other household bills.
Worried that Burgess would drain the account, Sherlock took the remainder of the money in the U.S. Bank account and placed it into a separate account accessible only by him. This lawsuit followed.
The amended complaint
Count one of the amended complaint is a cause of action for conversion against Burgess, Big Moon Holdings, LLC and Infinite Capital. Count two claims that Burgess, Big Moon Holdings, LLC and Infinite Capital stole the $190,500 and are thereby liable for triple damages under section 2307.61 of the Ohio Revised Code. Counts three and four of the amended complaint allege breach of fiduciary duty and fraud by Burgess. Count five alleges an unauthorized distribution of funds pursuant to R.C. § 1705.23. Counts six and seven seek to set aside fraudulent transfers to Andrea Burgess and The Infinite Capital Profit Sharing Plan. Count eight of the amended complaint is a derivative action for the benefit of Urban Loft Ventures I, LLC to recover the $190,500.
By the amended motion for a preliminary injunction, the plaintiffs seek to enjoin any of the defendants from spending or using any of the $190,500 still in their possession. The plaintiffs also want the court to order the defendants to return any of the remaining money to the Urban Loft Ventures I, LLC account.
LAW AND ANALYSIS
In deciding whether to grant a preliminary injunction, a court must look at four factors:
1) Whether there is a substantial likelihood that the plaintiff will prevail on the merits;
2) Whether the plaintiff will suffer irreparable injury if the injunction is not granted;
3) Whether third parties will be unjustifiably harmed if the injunction is granted; and
4) Whether the public interest will be served by the injunction. VanGuard Transp. Sys., Inc. v. Edwards Transfer and Storage Co., Gen. Commodies Div. , 109 Ohio App.3d 786, 790, 673 N.E.2d 182 (10th Dist. 1996).
No one factor is dispositive. When there is a strong likelihood of success on the merits, preliminary injunctive relief may be justified even though the plaintiff's case of irreparable injury may be weak. Cleveland v. Cleveland Elec. Illum. Co. (1996), 115 Ohio App.3d 1, 14, 684 N.E.2d 343. Finally, the party seeking the preliminary injunction must establish a right to the preliminary injunction by showing clear and convincing evidence of each element of the claim. VanGuard , supra. Clear and convincing evidence is defined as that degree of proof which will provide in the mind of the trier of fact a firm belief or conviction as to the facts sought to be established. Huntington Nat'l Bank v. Prospect Park, LLC , 8th Dist. No. 96218, 2011 Ohio 5391, ¶ 8.
Since the plaintiffs have eight causes of action all seeking the return of the same money, a showing of a substantial likelihood of success on any one of them is enough to establish the first factor. However, because of the divergent testimony from Sherlock and Burgess, the available evidence does not create " a firm belief or conviction as to the facts sought to be established" and the plaintiffs have not demonstrated a likelihood of success on the merits by clear and convincing evidence.
Success on any of the plaintiffs' claims requires, in essence, a finding that neither Burgess nor any of his limited liability companies has a right to any part of the $190,500. But Burgess testified to an oral agreement by Sherlock that, given the Lenhart Trust's write off of Urban Loft's debt, the two men would split the proceeds of any sales Burgess could generate. While it is true that the operating agreement was not amended in writing to reflect this agreement, it is also true that there is evidence of similar past oral agreements between Burgess and Sherlock. Additionally, there is a common sense attraction to Burgess's description of the agreement that lends it credibility: he had no reason to devote his time to what had proven to be a money-losing project unless he had a chance to recoup some of his losses. That chance came in the form of the agreement to equally share any money his efforts could generate. At the same time, Sherlock's denial of the agreement is itself credible considering that the money ultimately taken by Burgess was, as a fraction of the total proceeds, nearly exactly equal to the percentage of his membership interest in Urban Loft, suggesting that he took it as an interest holder's distribution. Therefore, while the competing versions are each credible to a degree and a finder of fact is eventually going to have to decide by a preponderance of the evidence which man is telling the truth, neither version has been shown by clear and convincing evidence.
But even assuming the plaintiffs have a substantial likelihood of success on the merits, their claim for a preliminary injunction is missing the second factor: irreparable harm. There is no question that the dispute here is over a specific amount of money, namely $190,500. Irreparable harm is harm for which there is no plain, adequate and complete remedy at law, and for which money damages would be impossible, difficult, or incomplete. Mike McGarry & Sons, Inc. v. Gross , 8th Dist. No. 86603, 2006 Ohio 1759, ¶ 18. While it is possible that Burgess and the other defendants might not be able to pay an eventual judgment, that prospect cannot justify a preliminary injunction. For better or worse, and even in cases that are substantially likely to be meritorious, this country's civil justice system has always required a plaintiff alleging only money damages to actually prove entitlement to the money before disgorging it from a defendant. The circumstances here do not present a compelling case for deviating from that practice.
Prejudgment attachment under R.C. 2715.01 et seq might be warranted but isn't sought by the plaintiffs.
Since the plaintiffs have not produced clear and convincing evidence of the first two elements necessary to obtain preliminary injunctive relief there is no need to address the third (harm to third parties) and fourth (public interest) elements.
CONCLUSION
Because the plaintiffs did not demonstrate by clear and convincing evidence that 1) they are substantially likely to succeed on the merits of any of their claims against the defendants and 2) the existence of irreparable harm for which money damages would be impossible, difficult, or incomplete, the plaintiffs' amended motion for a preliminary injunction, filed August 3, 2012, is denied.
IT IS SO ORDERED.