McGee v. Best
| Decision Date | 04 April 2002 |
| Parties | Patrick McGEE v. Timothy BEST, et al. |
| Court | Tennessee Court of Appeals |
G. Kline Preston, IV, Nashville for Appellant, Patrick McGee.
Tim K. Garrett, Nashville, For Appellees, Timothy Best, Robert Frank, David Ingram, Ingram Entertainment, Inc., and McGee, Best, Frank & Ingram LLC.
OPINION
This case involves the termination of membership and employment of a member of an LLC. The terminated member and employee filed suit against the LLC and the other members thereof alleging breach of contract, breach of covenant of good faith and fair dealing, breach of fiduciary duty, civil conspiracy, unfair competition, fraud, and misrepresentation. The trial court granted defendants' motion for judgment on the pleadings as to all claims except the claim for breach of contract and breach of the covenant of good faith and fair dealing. Thereafter, the trial court granted defendants' motion for summary judgment on the remaining two claims. Plaintiff appeals. We affirm, modify, reverse in part, and remand.
On January 4, 1999, the plaintiff, Patrick McGee (hereinafter "McGee"), filed a "Complaint and Application for Extraordinary Relief' in the Chancery Court for Davidson County, Tennessee against the defendants, Timothy Best (hereinafter "Best"), Robert Frank (hereinafter "Frank"), David Ingram (hereinafter "Ingram"), Ingram Entertainment, Inc. (hereinafter "IEI") and McGee, Best, Frank and Ingram LLC (hereinafter "MBF & I"), alleging a violation of the LLC Operating Agreement and the Tennessee Limited Liability Act; breach of contract; breach of fiduciary duty; and breach of the covenant of good faith and fair dealing.
McGee avers in the complaint that in January of 1997, he, along with Frank, Best and K.K. Wiseman, formed the Nashville, Tennessee advertising firm of McGee, Best, Frank & Wiseman, and he owned more than a 50% interest. The complaint states that McGee had been the president of another advertising firm prior to the formation of McGee, Best, Frank and Wiseman. In May of 1997, the members of McGee, Best, Frank & Wiseman converted the firm into an LLC, and IEI joined as a member with David Ingram, acting as the representative of IEI and as an officer of the LLC. After the formation of the LLC, the ownership interests were as follows: McGee owned a 33 1/3% membership share; IEI owned a 33 1/3% membership share and Frank and Best each owned a 16 2/3% membership share. The LLC name was then changed to McGee, Best, Frank & Ingram, LLC.
The complaint avers that the members executed an "Operating Agreement" on April 22, 1997, which provides in pertinent part:
1.1 Formation. The Members hereby form a limited liability company pursuant to the Tennessee Limited Liability Company Act (the "Act").
1.2 Name. The name of the limited liability company shall be McGee, Best, Frank & Ingram LLC (the "Company").
* * * 5.4 Termination of Employment for Cause. In the event any Member employed by the LLC commits an act described in the definition of "Cause" in Section 10.4(f), such Member's employment by the LLC may be terminated by a vote of the other Members holding at least 70% of the remaining Membership Interests.
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5.7 No Exclusive Duty. Except as otherwise specifically provided below, each officer or Member may have other business interests and may engage in other activities in addition to those relating to the LLC. Neither the LLC nor any Member shall have any right to share or participate in such other investments or activities of any other Member based on the fact that each are members of the LLC. No Member shall incur any liability to any other Member or the LLC as a result of engaging in any other business or venture. Notwithstanding the foregoing, the Members shall not have other business interests and may not engage in activities which compete in any respect, directly or indirectly, with the business of the Company or which would represent a conflict of interest; provided, however, that Ingram Entertainment Inc. may continue to own, operate and manage Ingram Design Group, Inc., its in-house ad agency, and/or any successors to Ingram Design Group Inc.
6.4 Action Without a Meeting. Action required or permitted to be taken at a meeting of the Members may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by the Members holding a majority of the Membership voting power entitled to vote (or any greater proportion required by this Agreement, the Articles, or the Act) and delivered to the Secretary of the Company for filing with the Company records.
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10.4 Option to Purchase Upon Termination of Employment. In the event that the employment of any Member who is a full-time employee of the Company is terminated, the Company shall have the option to purchase the Membership Interest of the terminated Member for the Formula Value (as defined in (e) below) of the terminated Member's Membership Interest (as shown on the books of the Company as at the end of the month in which the event occurs which gives rise to the Company's option), all in accordance with the following terms and conditions:
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(e) Formula Value. The "Formula Value" of a Member's Membership Interest shall mean the greater of (i) or (ii) below; provided, however, that in the event the Member's employment is terminated for "Cause" (as hereinafter defined), the "Formula Value" of such Member's Membership Interest shall mean the lesser of (i) or (ii) below:
(i) the amount of the capital account attributable to that Membership Interest; or
(ii) three times the average of the amount of income allocated or allocable to that Membership Interest (under Section 4.1(a)) during each of the three preceding 12 month periods (or, if less than 36 months, such shorter period during which such Member had such Membership Interest).
(f) Definition of Cause. Only for purposes of this Section 10.4 and Section 5.4 hereof, "Cause" shall mean any act that is materially inimical to the best interests of the Company and that constitutes on the part of the Member personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or willful violation of any law, governmental rule or regulation.
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12.5 Binding Effect. Except as herein otherwise provided to the contrary, this Agreement shall be binding upon, and inure to the benefit of, the Members and their respective heirs, executors, administrators, successors, transferees and assigns.
McGee further alleges in the complaint that Tri-Vision International LTD (hereinafter "Tri-Vision") is a client of MBF & I and is the exclusive licensee of the "v-chip", which is an electronic device designed to permit parents to control their children's access to certain types of television programming based on rating codes. The complaint states that IEI is the primary distributor of the v-chip for Tri-Vision in the United States and that MBF & I has planned; produced and placed advertising for Tri-Vision in various markets throughout the United States. McGee avers that Tri-Vision is indebted to MBF & I in the amount of approximately $553,000 for the advertising services and IEI is indebted to Tri-Vision in the amount of $750,000 for the delivery of v-chip products that IEI will distribute. The complaint alleges that "IEI's failure to pay that obligation has hampered Tri-Vision's ability to pay the monies it owes to the LLC."
McGee further avers that IEI has directed MBF & I to reserve the entire Tri-Vision indebtedness of $553,000 as a bad debt on the firm's financial statements and that he was not advised of this decision until after it was made. The complaint further alleges that the accrual of the Tri-Vision account as a bad debt has created financial problems and states:
18. The conduct of IEI and Ingram in artificially creating and then attempting to benefit from the LLC's financial problem violates their fiduciary duties owed to McGee and to the LLC. Additionally, IEI has a conflict of interest and has violated member standards under TCA § 48-240-102. Ingram and IEI have done so by failing to act in good faith, prudently, and in the best interests of the LLC; they have directed that the LLC accrue as a bad debt the monies owed by Tri-Vision, when IEI has contributed to, if it has not actually caused, Tri-Vision's inability to pay the LLC by IEI's own failure to pay Tri-Vision the monies owed for the distribution of Tri-Vision's v-chip products.
The complaint further alleges that on December 31, 1998, Best, Frank and IEI executed a document entitled "Action Taken on Written Consent of the Members of McGee, Best, Frank and Ingram LLC," which provides in pertinent part:
The undersigned members (the"Members"), being the holders of 66 2/3% of the membership interests, and 100% of the membership interests other than those held by Patrick McGee, of McGee, Best, Frank & Ingram LLC, a Tennessee limited liability company (the "Company"), do, as of this 31st day of December, 1998, hereby consent to and take the following actions, as evidenced by their signatures below:
WHEREAS, Patrick McGee, the Chief Manager and a member of the Company ("McGee"), has committed acts described within the definition of "Cause," as set forth in Section 10.4(f) of the Company's Operating Agreement dated April 22, 1997 (the "Operating Agreement"); and
WHEREAS, as a result of such acts, the Members believe it is advisable and in the best interest of the Company to (i) remove McGee from the office of Chief Manger of the Company, pursuant to Section 5.13 of the Operating Agreement; (...
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