Purcell v. Southern Hills Investments, LLC
| Decision Date | 22 May 2006 |
| Docket Number | No. 49A05-0504-DV-191.,49A05-0504-DV-191. |
| Citation | 847 N.E.2d 991 |
| Parties | Andrew D. PURCELL, Appellant-Defendant, v. SOUTHERN HILLS INVESTMENTS, LLC, Appellee-Plaintiff. |
| Court | Indiana Appellate Court |
Peter J. Rusthoven, Michael H. Gottschlich, Barnes & Thornburg, LLP, Edward F. Schrager, Steven M. Crell, Cohen Garelick & Glazier, Indianapolis, for Appellant.
Alan S. Brown, Julia Blackwell Gelinas, Lucy R. Dollens, Locke Reynolds, LLP, Indianapolis, for Appellee.
Appellant-Defendant, Andrew D. Purcell (Purcell), appeals the trial court's Findings of Fact and Conclusions of Law in favor of Appellee-Plaintiff, Southern Hills Investments, LLC (Southern Hills), with regard to Southern Hills' Complaint against Purcell alleging a breach of fiduciary duty and self-dealing.
We affirm.
Purcell raises three issues on appeal, which we restate as the following four issues:
(1) Whether the trial court erred by concluding that the manager of a limited liability company (LLC) breached his common law fiduciary duty to the LLC and the LLC's member;
(2) Whether the trial court erred by concluding that a manager's actions on behalf of an LLC constituted willful misconduct or recklessness pursuant to Ind.Code § 23-18-4-2;
(3) Whether the trial court erred by concluding that a member of an LLC can maintain a direct action, rather than a derivative action, against the LLC's manager; and
(4) Whether the trial court properly refused to offset the damages awarded to Southern Hills.
Southern Hills is an Indiana limited liability company related to, and having certain owners in common with, Smithville Telephone Company, Inc. (Smithville). In furtherance of Smithville's telecommunications and data transmission needs, Southern Hills purchased fiber-optic cable from Metro Xmit, LLC (Metro), based in Indiana and owned by Purcell and his wife. After Metro constructed the fiber optic cable networks, it sold indefeasible rights (IRUs) granting purchasers usage rights to certain parts of the network over a long period of time, after which such rights revert to Metro.
On December 29, 1999, Southern Hills purchased from Metro an IRU to use the six strands of fiber optic cable in the Southern Loop for a total amount of $1.5 million. The Southern Loop was a circuit of 216 fibers being constructed by Metro, forming a complete loop from Indianapolis to Bloomington to Columbus to Shelbyville to Indianapolis. Southern Hills' interest in completion of the Southern Loop caused it to loan money to Metro which, under Purcell's direction, was chronically short of cash. By March of 2000, Southern Hills had loaned approximately $3,500,000 to Metro.
In late 1999 and early 2000, Dwane Glancy (Glancy), Smithville's and Southern Hills' chief financial officer pursued discussions with Purcell to convert Metro's debt to an equity position held by Southern Hills in the Southern Loop project. In March of 2000, these discussions resulted in the formation of VillageNet Services, LLC (VillageNet), with Southern Hills and Metro as its sole members, each owning 50% of the newly created company. VillageNet's purpose was to market and sell fibers in the Southern Loop, providing its members with a return on their investments. In exchange for its 50% ownership interest in VillageNet, Southern Hills agreed to forgive Metro's indebtedness and provide additional operating capital to Metro which had an aggregate value to Metro of $5,000,000. Metro contributed an IRU for 188 of the 216 fibers in the Southern Loop. Metro and Southern Hills agreed that the IRU's value was $10,000,000, and thus, when offset against the $5,000,000 value of the forgiven indebtedness to Metro, both founding members were each deemed to have contributed $5,000,000 of value to VillageNet in exchange for their equal ownership interests.
Pursuant to VillageNet's operating agreement, each of the members was to appoint its own representative as a VillageNet co-manager. In this regard, Metro appointed Purcell, while Southern Hills appointed Glancy. Furthermore, the operating agreement stipulated that Metro would be solely responsible for the construction of the Southern Loop, including the financing thereof. In addition, both co-managers agreed that Metro would perform VillageNet's administrative functions, including accounting. Accordingly, in April of 2000, Metro hired Toni Niemann (Niemann), a certified public accountant, who was also charged with VillageNet's accounting and who reported to Purcell.
At the time VillageNet was formed, Metro was negotiating with AEP Communications, Inc. (AEP) regarding the purchase of IRUs for fibers located both in-and outside the Southern Loop. However, because VillageNet now owned the IRU for the Southern Loop fiber, Metro was not in a position to sell the right in a single contract, as requested by AEP. In order to grant AEP's request, VillageNet re-assigned to Metro a portion of the Southern Loop IRU. However when drafting this assignment (Assignment Agreement), Glancy failed to include the Bloomington to Columbus portion of the Southern Loop. In exchange for the assignment, Metro agreed to forward to VillageNet AEP payments related to Southern Loop after Metro received them. Glancy estimated the total payment to be in the amount of $2,136,664. Thereafter, Metro and AEP executed a single IRU contract.
Niemann, as the controller for Metro and in charge of VillageNet's accounting, was responsible for allocating AEP's payments to Metro between those attributable to the Southern Loop project, which needed to be forwarded to VillageNet, and those attributable to fibers outside the Southern Loop, which were to be retained by Metro. As a result of Glancy's omission to include the Bloomington to Columbus portion in the assignment, Niemann failed to mark certain AEP payments as payable to VillageNet.
On or about October 31, 2000, Southern Hills received a payment of $945,473.82 from VillageNet. On December 29, 2000, Metro received a $200,717 payment from AEP for Southern Loop fiber. Metro did not forward any of this amount to VillageNet. Thereafter, on February 2, 2001, Metro received a payment of $473,870.15 from AEP, of which $301,075.50 was earmarked as Southern Loop fiber. Metro kept all of this money. In accordance with Glancy's Assignment Agreement, these payments should have been forwarded to VillageNet, minus a certain amount for administrative fees. A three percent commission would be paid by VillageNet to the member that had generated the sale, with the remainder of the sum distributed equally between both members.
On February 2, 2001, Purcell's wife wrote a personal check for $600,000 to Mastec North America (Mastec), one of Metro's contractors and creditors. Metro owed Mastec a substantial amount of money for the installation of fibers both in- and outside the Southern Loop project. The payment by Purcell's wife was treated as a loan to Metro. Eleven days later, on February 13, 2001, Purcell directed Metro to repay the loan, increased by twelve percent interest in the amount of $2,200, with funds received from AEP.
In March of 2001, Metro obtained refinancing under a Bridge Loan Agreement with GE Capital. Under the terms of the Bridge Loan, Metro was severely restricted in its ability to independently manage its cash resources. During May of 2001, Niemann discovered that the Bloomington to Columbus portion of the Southern Loop was mistakenly omitted from the Assignment Agreement. She calculated that in addition to a $160,249.80 payment received from AEP on February 9, 2001, Metro had received and kept all other AEP payments for the Southern Loop instead of forwarding them to VillageNet. She informed Purcell of this omission and resulting accounting errors and consequently advised Purcell to inform Glancy and forward VillageNet the money it was due.
Because of Glancy's omission in the Assignment Agreement, Metro had sold AEP an IRU for fibers it did not own. In June or July of 2001, Niemann and Pat Opelt, Metro's general manager, met with Glancy to revise the Assignment Agreement. Neither Niemann nor Opelt told Glancy about the AEP money for the Southern Loop that Metro had failed to forward to VillageNet. As a result of this meeting, Glancy prepared a corrected Assignment Agreement from VillageNet to Metro for the pertinent Southern Loop segment. This IRU assignment was backdated to be effective as of June 2000, and called for a total payment of $ 3,146,249 due one year after successful completion of the testing program.
In the late spring or summer of 2001, AEP decided to return eight fibers to Metro and, consequently, only paid for twenty-eight fibers. Upon the fibers' return, Metro offered to assign these eight fibers back to VillageNet. VillageNet refused this offer. Instead, VillageNet wanted Metro to sell the fibers and distribute the proceeds. On November 26, 2001, Metro filed for bankruptcy, with the eight returned strands held as assets. One year later, on November 19, 2002, Southern Hills and VillageNet entered into a settlement agreement with Indiana Fiber Works (IFW), successor in interest to Metro through purchase of Metro's assets in bankruptcy.
On August 29, 2002, Southern Hills filed a Complaint against Purcell, which it subsequently amended on November 21, 2003. This Amended Complaint alleges a breach of fiduciary duty and acts of self-dealing. On December 6 through December 7, 2004 a bench trial was held. Thereafter, on February 14, 2005, the trial court issued its Findings of Fact and Conclusions of Law in favor of Southern Hills and awarded damages in the amount of $375,590.02, plus prejudgment interest in the sum of $120,518.18.
Purcell now appeals. Additional facts will be provided as necessary.
In the instant case, the trial court entered special findings of fact and conclusions of law pursuant to ...
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