Crowley v. Areklett, 111213 OHCP, CV 13 801191

Docket Nº:CV 13 801191
Opinion Judge:John P. O'Donnell, J.
Party Name:CHARLES R. CROWLEY, et al., Plaintiffs, v. WILLIAM G. AREKLETT, et al., Defendants
Case Date:November 12, 2013
Court:Court of Common Pleas of Ohio
 
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CHARLES R. CROWLEY, et al., Plaintiffs,

v.

WILLIAM G. AREKLETT, et al., Defendants

No. CV 13 801191

Court of Common Pleas of Ohio, Cuyahoga

November 12, 2013

JOURNAL ENTRY GRANTING THE PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION, WITH PRELIMINARY INJUNCTION

John P. O'Donnell, J.

This lawsuit was filed on February 11, 2013, with motions for a temporary restraining order and a preliminary injunction. The request for a temporary restraining order was denied without a hearing. A five-day hearing ending June 5 was held on the motion for a preliminary injunction and this entry follows.1

The complaint and motion for preliminary injunction

All four parties to the lawsuit -- plaintiffs Charles R. Crowley and Michael C. Voinovich and defendants William G. Areklett and Jeffrey S. Boyle -- are members of Paragon Capital Group, LLC. Under the limited liability company's operating agreement these four constitute Paragon's board of managers. As the name suggests, the board is responsible for the management of Paragon's business.

Paragon is the owner and sole member of ParaCap Group, LLC. ParaCap is a securities broker and dealer whose president is defendant Areklett. All four of the parties worked in the day-to-day business of ParaCap as investment bankers.

On January 16, 2013, Areklett fired Crowley and Voinovich from ParaCap and called the police to remove them from ParaCap's office.

The lawsuit alleges a single cause of action for declaratory judgment. The plaintiffs are asking for " a declaration that defendants have acted in a manner that is inconsistent with the [Paragon] operating agreement, the fiduciary obligations owed to plaintiffs or otherwise acted unlawfully." 2 Crowley and Voinovich are also asking for a declaration that they are entitled to access to Paragon's books and records. Finally, the plaintiffs want a declaration that since they remain members of the board of managers they are entitled to continue to participate in the management of the company's business.

STATEMENT OF FACTS

Paragon was formed in 2006 and Crowley and Voinovich became members in July, 2010. Upon their admission as members of the company, Paragon's operating agreement was amended to include them as members of the board of managers. Article 3.01 of the operating agreement designates Crowley, Voinovich, Areklett and Boyle as the board of managers. Every person on the board of managers is entitled to remain on the board until he resigns, is removed, or no longer owns at least 5% of the company. A manager can be removed only on the affirmative vote of members holding at least 80% of the membership units.

Article 3.02 sets forth the powers of the board of managers as follows:

(a) The board of managers shall have the right and authority to take all actions which it deems necessary, useful or appropriate for the management and conduct of the company's business. The board of managers will exercise good faith in taking such actions. The members of the board of managers shall use reasonable efforts to consult with one another and reach consensus as promptly as practicable with respect to all matters within their collective purview. Except with respect to matters requiring the approval of the members, a majority of members of the board of managers may authorize the company to take effective action. If on any issue the Board of Managers is evenly divided, the affirmative vote or written consent of the holders of at least 60% of the units entitled to vote or consent with respect to such matter(s) shall be the decision of the company.

(b) The board of managers shall have the power and authority to take any actions not prohibited under the Act, the Certificate or this Agreement, or which are otherwise permitted by law, which it believes are necessary, useful or appropriate to the discharge of its duties under this agreement or applicable law to conduct the business and affairs of the company, including, but not limited to, the power and authority of one or more of the members of the board of managers to execute agreements and other documents on behalf of the company to the extent so authorized by the board of managers. (Emphasis in bold added.) Areklett and Boyle each own 29.98% of the company's outstanding membership units, Voinovich owns 16.71% and Crowley owns 16.63%.

Paragon's business, in essence, was to run ParaCap. Being a separate entity, ParaCap has its own operating agreement. That operating agreement permits Paragon to appoint a president of ParaCap. Areklett is ParaCap's president with " the usual and customary duties, responsibilities and authority of a president of a company under Ohio law including the general and active management power and full authority with respect to the day-to-day affairs of the company, including the hiring and firing of employees." 3

ParaCap, as a securities broker and dealer, is overseen by the Financial Industry Regulatory Authority.

Throughout their careers as investment bankers Crowley and Voinovich have concentrated on work in the financial industry. Their clients are typically banks looking for capital infusions or buyers, or banks seeking to acquire other banks. Just prior to becoming members of Paragon they worked as employees -- without ownership -- of a securities company called Stifel Nicolaus. At Stifel, Crowley and Voinovich earned a salary with the opportunity, depending on production, for a bonus: they did not share in Stifel's profits.

As part of their negotiations to join Paragon, Crowley and Voinovich prepared a summary of their past production and projected future production. Transactions for which work had started, but where a contract hadn't been signed, were known as the " pipeline deals." The summary was compiled in a document that the parties refer to as a " pitch book." The pitch book shown to Areklett and Boyle included pipeline deals that the plaintiffs were working on at Stifel.

After the plaintiffs and defendants became partners, 4 Crowley and Voinovich comprised ParaCap's financial institution group, known as the FIG. The FIG business, generally speaking, entailed retaining as clients banks that were seeking to procure additional working capital or seeking to buy other banks. Crowley and Voinovich's role, depending on the particular transaction, was to find investors or locate a target for a merger or acquisition.

In the meantime, Boyle and Areklett were doing investment banking with clients other than financial institutions. For example, Boyle focused on insurance companies as clients. As for Areklett, much of his time was spent administering ParaCap's operations and ensuring that ParaCap remained in compliance with FINRA regulations.

Crowley, Voinovich, Areklett and Boyle were paid a monthly " draw." The draw was based on anticipated production for a given year and was subject to adjustment up or down depending on the deals a banker brought to the company. The production and bonus formula called for 60% of net revenue to be designated as producers' bonuses. Of that amount, 40% would be equally split among Crowley, Voinovich, Areklett and Boyle, and the rest would go to the specific producers. In short, Crowley and Voinovich would share in the firm's profits. Both of them testified this was their primary reason for coming to Paragon from Stifel. As Crowley put it, they wanted the " entrepreneurial" opportunity.

However, all parties agree that the production and bonus formula was never set down as part of the written operating agreement or another separate written contract. For their part, the defendants assert that Areklett had the discretion to pay the plaintiffs anything, or nothing at all, by virtue of his position as the president of ParaCap. Nevertheless, for the first three six-month periods that the parties worked as partners -- the last half of 2010 and both halves of 2011 -- bonuses were calculated and paid to the plaintiffs according to the...

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