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Ferk Family, LP v. Frank

Florida Court of Appeals, Third District

February 28, 2018

Ferk Family, LP, Appellant,
v.
Gail Frank, etc., et al., Appellees.

         Not final until disposition of timely filed motion for rehearing.

         An Appeal from the Circuit Court for Miami-Dade Count Lower Tribunal No. 13-24371y, John W. Thornton, Jr., Judge.

          Robin Bresky and Jonathan Mann (Boca Raton), for appellant.

          Mark, Migdal & Hayden, LLC, and Donald J. Hayden and Lara O'Donnell Grillo, for appellees.

          Before SALTER, EMAS and LOGUE, JJ.

          EMAS, J.

          I. INTRODUCTION

         Ferk Family, LP (defendant and counter/third-party plaintiff below) appeals two final summary judgment orders entered in favor of Gail Frank, COJO Holdings, Swastic Srihari Kaveeshwar, Joe Mitchell and the Estate of Walter Frank (plaintiffs and counter/third-party defendants below). For the reasons that follow, we affirm in part and reverse in part.

         II. FACTS AND PROCEDURAL HISTORY

         a. The Creation and Operation of Med-Rite

         Med-Rite Laboratories, LLC ("Med-Rite" or "the Company") was formed in April 2010 for the purpose of manufacturing, marketing and selling a medical device to treat hemorrhoids, which was developed by Frank Melendez. Melendez partnered with Larry Ferk and Ted Morgan to find investors for the startup, and successfully obtained investments from, inter alia, Gail and Walter Frank, a married couple. The original Members of the Company were Alex Melendez, [1]Gail Frank, Larry Ferk, Swastic Srihari Kaveeshwar ("Swastic Srihari") and Ted Morgan.

         Early on, there were serious disagreements between the Members over issues related to financing, the location of the device's manufacturing plant, [2] and termination of key personnel. In July 2011, the members agreed to raise at least $1 million in capital, which they were able to secure with a capital investment of $1 million from Joe Mitchell at the end of 2011.[3]

         b. The Relevant Provisions of the Operating Agreement

         On January 16, 2012, an Amended and Restated Limited Liability Company Operating Agreement (the "Operating Agreement") was executed. At the time of this Operating Agreement, the Members were: Larry Ferk, Gail Frank, Mas-Rite, LLC, Alternative Technologies International, Inc., Swastic Srihari, and Joe and Connie Mitchell. The Operating Agreement identified the managers in section 5.1 as: Larry Ferk, Gail Frank, Walter Frank, Joe Mitchell and Ted Morgan.

Under the terms of the Operating Agreement:
- A Manager may be removed at any time from the Board of Management, including for "Cause" (as defined below) as determined by the Members holding a Majority in Interest. . . . In the event of the death, incapacity, removal or resignation of any of the Managers, a successor Manager shall be selected by the Members holding a Majority of the Interests. For purposes of Article V, "Cause" shall mean fraud, willful misconduct, gross negligence, breach of fiduciary duty or other gross misconduct by a Manager with respect to a material matter relating to the affairs of the Company. § 5.1(e), Operating Agreement.
- A "Majority in Interest" is defined as "the affirmative vote of the Members holding greater than 60% of the Percentage Interests or the affirmative vote or presence of greater than 60% of the Managers." § 1.1, Operating Agreement.
- Any Member may loan Med-Rite an aggregate of $500, 000 with approval of a Majority of the Board of Management. § 3.1(c), Operating Agreement.
- A Member may not transfer his interest in the company, with certain exceptions, without the prior written consent of the Members holding a majority-in-interest. Any such transfer is void and shall not bind the company. § 9.1, Operating Agreement.
- In the event any Member wants to transfer his interest, the Member shall notify the company and the other Members in writing, offering to sell the interest to the company or the other Members pro-rata. § 9.3(a), Operating Agreement.

         Shortly after the Operating Agreement was executed, Ted Morgan resigned from the management board and the other Members bought him out.

         c. The Member Interests in Med-Rite

         Following Ted Morgan's resignation and the buyout of his interest in the Company, and during the relevant time periods thereafter, the Member interests in Med-Rite were as follows:

MEMBER

MANAGER

% INTEREST

Ferk Family, LP (Larry Ferk)

26.49%

Gail Frank

28.99%

COJO Holdings (Joe Mitchell)

24.90%

Mas-Rite, LLC (Alex/Frank Melendez)

16.21%

Swastic Srihari

3.41%

Walter Frank

0%

          The remaining members continued to have problems. On June 26, 2012, Ferk sent an email to Gail Frank, stating that he refused to continue working with Swastic Srihari. On June 28, 2012, Walter Frank wrote to Larry Ferk to inform him that he was being terminated for cause from the board of management, pursuant to section 5.1(e) of the Operating Agreement.

         d. The Transfer of Interest in Mas-Rite to Ferk Family

         Shortly thereafter, on July 17, 2012, Mas-Rite, LLC ("Mas-Rite") transferred Alex Melendez's majority interest in Mas-Rite to Ferk Family, which, as a practical matter, resulted in a transfer of Mas-Rite's voting interest in Med-Rite to Ferk Family.

         e. The Litigation

         On August 1, 2012, Ferk Family filed a member derivative action on behalf of Med-Rite against Gail and Walter Frank and Joe Mitchell, alleging a breach of fiduciary duty, and seeking to inspect records. The trial court appointed Herbert Stettin to conduct an independent investigation, and Mr. Stettin issued a report, finding it was not in the best interest of the company for the derivative action to proceed. Thereafter, the trial court dismissed the derivative action.

         During the discovery process it came to light that Ferk Family had purchased a majority interest in Mas-Rite, giving it voting rights in Med-Rite. However, because the Operating Agreement prohibits the transfer of interest in Med-Rite without the consent of the other members, and also requires compliance with a right-of-first-offer clause, Gail Frank, along with COJO Holdings (Joe Mitchell) and Swastic Srihari filed suit against Ferk Family, Mas-Rite and Alex Melendez, seeking declaratory relief and damages for breach of contract and specific performance. The complaint was later amended, and the operative Second Amended Complaint added claims for breach of implied covenant of good faith and fair dealing.

         Ferk Family answered, asserted affirmative defenses, counterclaimed, and asserted third-party claims against Joe Mitchell and Walter Frank, claiming Larry Ferk was wrongfully removed as a manager in violation of the Operating Agreement, depriving Ferk Family and other minority members of their voice in the operation and management of Med-Rite, as well as virtually destroying their investment and equity interest in the company. In addition, it was alleged that Gail and Walter Frank had loaned more than the permissible amount for loans by members, in violation of the Operating Agreement. Counts were alleged against the counter-defendants and the third-party defendants, collectively, for breach of fiduciary duty, two counts of breach of contract, and two counts of breach of implied covenant of good faith and fair dealing.

         Gail Frank, COJO Holdings, Joe Mitchell, Swastic Srihari and the Estate of Walter Frank[4] moved for summary judgment on their Second Amended Complaint, and on Ferk Family's counterclaim and third-party claims. Ferk Family also moved for summary judgment on the Second Amended Complaint. The court denied the motions for summary judgment.

         Thereafter, Counts One and Two of the Second Amended Complaint for declaratory judgment were withdrawn, and all parties later agreed to submit the summary judgment papers and existing record for the trial court's final determination in lieu of a trial on the remaining claims of the Second Amended Complaint.

         The court conducted a bench trial on the counterclaims and third party claims, following which it entered an order in favor of counter/third-party defendants Gail Frank, COJO Holdings, Joe Mitchell, Swastic Srihari and the Estate of Walter Frank.

         f. The Orders on Appeal

         On January 28, 2016, the trial court entered two orders: (1) granting final summary judgment in favor of Gail Frank, COJO Holdings and Swastic Srihari on the remaining claims in their Second Amended Complaint; and (2) entering judgment in favor of counter/third-party defendants Gail Frank, COJO Holdings, Joe Mitchell, Swastic Srihari and the Estate of Walter Frank on Ferk Family's counterclaims/third-party claims.

          g. The ...


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