Gardner v. Larkin

• Decision Date: 20 February 2020
• Docket Number: C.A. No. 19-139JJM
• Parties: JOHN GARDNER, IV, and DAVID GARDNER, Plaintiffs/Counterclaim Defendants, v. JAMES R. LARKIN, individually and as the Managing Member of BluShield Window Systems, LLC, Defendant/Counterclaim Plaintiff, v. CUSTOM BUILT WINDOWS MANUFACTURING, LLC, CUSTOM BUILT, INC., and JOHN E. GARDNER, III, Counterclaim Defendants.
• Court: U.S. District Court — District of Rhode Island

JOHN GARDNER, IV, and DAVID GARDNER, Plaintiffs/Counterclaim Defendants, v. JAMES R. LARKIN, individually and as the Managing Member of

BluShield Window Systems, LLC, Defendant/Counterclaim Plaintiff, v. CUSTOM BUILT WINDOWS MANUFACTURING, LLC, CUSTOM BUILT, INC., andJOHN E. GARDNER, III, Counterclaim Defendants.

C.A. No. 19-139JJM

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND

February 20, 2020

REPORT AND RECOMMENDATION

PATRICIA A. SULLIVAN, United States Magistrate Judge.

Defendant/Counterclaim Plaintiff James R. Larkin is the 50% owner of two Rhode Island entities, a close corporation, Custom Built, Inc. ("CBI"), and a limited liability company, Custom Built Windows Manufacturing, LLC ("CBWM") (collectively, the "Companies"). In 2018 and 2019, he was fired from and frozen out of first CBWM and then CBI (a business he was principally responsible for building) by the owners of the other 50%, John Gardner, IV ("Johnny"), David Gardner and John E. Gardner, III (John Sr.) (collectively, the "Gardners"). This case was launched when two of the Gardners sued Larkin, claiming that he had breached a contract set out in a document titled "Ownership Agreement" that they allege required him to transfer to CBWM ownership of an entity he owned, BluShield Window Systems, LLC ("BluShield"). Larkin met this complaint with a counterclaim alleging, inter alia, that the Gardners had engaged in illegal, oppressive, and fraudulent conduct in breach of their fiduciary, contractual and statutory duties in managing the Companies' finances, in firing him and in denying him access to the books and records and that both CBI and CBWM were deadlocked.¹ Larkin's counterclaim asks the Court to declare that the alleged contract to transfer the BluShield ownership is not a contract at all, as well as to declare the parties' rights pursuant to R.I. Gen. Laws §§ 7-1.2-1314 and 1315, which address the power of a court to liquidate the assets and business of a deadlocked corporation or to avoid dissolution by ordering a share buy-out. While these matters are being resolved, Count II of the counterclaim asks the Court to appoint a temporary receiver pendente lite to manage the affairs of CBI and CBWM.

Since May 6, 2019, Larkin's emergency motion for appointment of temporary receiver pendente lite and associated preliminary injunctive relief has been pending before the Court. ECF No. 18 (the "Emergency Motion"). Over the months following its filing, the Court has been addressing the issues raised in the motion incrementally, including holding an evidentiary hearing, issuing interim orders appointing a Special Master and Interim Receiver pendente lite, and entering an interim preliminary injunction. With the receipt of the Special Master/Receiver's third report, ECF No. 140 ("Report III"), and the parties having been afforded time to object as required by Fed. R. Civ. P. 53(f), I now recommend that the motion for appointment of temporary receiver pendente lite be granted and that the requested preliminary injunction should issue.

I. PROCEDURAL HISTORY

On March 21, 2019, Johnny and David Gardner filed their First Amended Complaint (ECF No. 6 ("FAC")) against Larkin and BluShield.² On May 6, 2019, Larkin responded with the Emergency Motion, as well as with his answer to the FAC, and a counterclaim³ not only against Johnny and David Gardner, but also John Sr. Gardner, CBI and CBWM.⁴ ECF No. 41. Because the parties' deadlock prevented CBI and CBWM from engaging counsel, on May 17, 2019, with the consent of the parties, the Court appointed attorney Theodore Orson, Esq., as Special Master to report regarding the interests of the Companies with respect to the matters placed in issue by the Emergency Motion. ECF No. 26 at 2-3 ("May 17 Order"). No objection to the May 17 Order was filed, nor was any appeal was taken from it.

The Special Master's report, his first of three, was timely filed on June 14, 2019. ECF No. 60 ("Report I"). Report I is based on sworn testimony taken by the Special Master from Larkin, Johnny and John Sr. Gardner and two of the Companies' independent financial advisors, as well as on various documents that are authenticated and explained by the testimony. See ECF No. 60-3 at 19-21. Next, in June and July 2019, the Court held a three-day evidentiary hearing⁵ on the Emergency Motion and received extensive post-hearing filings from the parties. ECF Nos.76, 92-94,⁶ 95, 96, 97, 99, 101. With the evidentiary record closed, on September 27, 2019, the Court held a hearing to advise the parties of certain findings and conclusions that would be proposed in a report and recommendation to follow,⁷ but also of the need for further input from the Special Master, as well as of the need for a limited appointment of a receiver pendente lite while the Emergency Motion remained under advisement. ECF No. 109 ("Tr. 9/27/19"). After the parties were afforded time to object and provide input, the Court issued the Order Appointing Interim Receiver Pendente Lite and Adding to Duties of Special Master on October 31, 2019. ECF No. 114 ("October 31 Order"). No objection to the October 31 Order was filed, nor was any appeal was taken from it.

Mindful of the financial fragility of the Companies and of the dysfunction that the evidence establishes had tainted the parties' relationships, the October 31 Order assigned the Special Master/Receiver additional tasks related to the Emergency Motion's prayer for injunctive relief. These included the duty to investigate further and to make recommendations and advise the Court regarding the impact of reinstating Larkin as an employee of the Companies with a salary and health benefits in connection with his status as an employee, shareholder, manager or member of either or both of the Companies; a well-qualified Financial Consultant was appointedto assist and advise. Id. ¶¶ 14-15, 20. The due date for the Special Master/Receiver's report was set for December 27, 2019. See id. ¶ 15, amended by Text Order of Dec. 10, 2019.

In addition to extending the Special Mastership pursuant to Fed. R. Civ. P. 53, the October 31 Order appointed Attorney Orson as interim Receiver pendente lite, with limited duties to carry through the period while the Emergency Motion remained pending.⁸ October 31 Order at 3. Most critical to the Court's ultimate determination of the Emergency Motion's prayer for a receiver pendente lite was the duty to report whether the assignment needed to be expanded, altered, or reduced from the limited powers set in the October 31 Order and to request further instructions at any time should his "experience reveal[] that sustainable operations for the benefit of all" owners of the Companies would require him to have the authority to actually manage and/or operate the Companies instead of the Gardners. Id. ¶¶ 10-11. Otherwise, the October 31 Order left the Gardners in de facto control of the Companies subject to further proceedings with the Court's expectation that the parties would conduct themselves consistent with the themes set out during the September 27 hearing, so that an interim preliminary injunction would not be necessary. Tr. 9/27/19 at 41, 57-58.

The landscape shifted on November 20, 2019, when the Special Master/Receiver filed his second report, ECF No. 117 ("Report II"), and petitioned the Court for interim instructions. After the parties filed responses, ECF Nos. 119, 120, the Court held an expedited hearing on November 25, 2019. Report II brought disturbing new factual information to the attention of the Court: after firing and freezing out Larkin, the Gardners had embarked on a major restructuringof CBI without informing, consulting or conferring with Larkin, despite his status as the owner of 50% of CBI's shares and despite the reality that CBI's business had been built largely by Larkin's efforts. See Gardner v. Larkin, C.A. No. 19-139JJM, 2019 WL 6337686, at *1-2 (D.R.I. Nov. 27, 2019), adopted, 2019 WL 6840732 (D.R.I. Dec. 16, 2019) ("Gardner III"). Report II also advised the Court of the recommendations of the Special Master/Receiver's Financial Consultant, endorsed by the Special Master/Receiver, that, as an owner of the Companies, Larkin should be provided with the same benefits (that is, health insurance) that the Companies provided to the other owners, as well as that he should be paid $1000 per week. Report II ¶ 9. Following the hearing on November 25, 2019, the Court ordered that all owners of the Companies and the Special Master/Receiver attend weekly business meetings, with Larkin to be reimbursed for expenses associated with attendance. ECF No. 121 ¶¶ 1-2. I also recommended that Larkin be provided with health insurance for himself and his family, as well as that he be paid $1000 per week as a co-owner actively participating in the business by attending the weekly meetings; these recommendations were adopted nunc pro tunc to November 27, 2019. Gardner III, 2019 WL 6337686, at *1-2.

The Special Master/Receiver's third report (Report III) was timely filed on December 27, 2019. As contemplated by the October 31 Order, which permits ex parte communications with any party, Report III is grounded in the Special Master/Receiver's communications with the parties and their counsel and the observations he made while attending the parties' weekly business meetings. Report III at 3. In addition, it relies on a report from the Special Master/Receiver's well-qualified Financial Consultant, which sets out summary information reflecting the Companies' financial performance prepared by the Gardner side and financial forecasts provided at the Special Master/Receiver's request by the Gardners and Larkin. Id. ¶ 7;ECF No. 140-1. At its essence, Report III is based on the Special Master/Receiver's observations while performing the work assigned by the Court since the May 17 Order and on his extensive experience in performing analogous work over many years; it does not propose new factual findings...