Ferk Family, Lp v. Frank
240 So.3d 826 (2018)
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Rule of Law:
An LLC operating agreement's transfer restrictions on 'interests in the company' do not apply to the transfer of an interest in a member entity unless explicitly stated, and manager removal provisions requiring a 'Majority in Interest' by 'Members' refer to members' percentage interests, not managers' votes. Even if an operating agreement is breached, the business judgment rule can shield managers from monetary liability if their actions were made in good faith and do not meet statutory exceptions for liability.
Facts:
- In April 2010, Med-Rite Laboratories, LLC was formed to manufacture, market, and sell a medical device developed by Frank Melendez.
- Frank Melendez partnered with Larry Ferk and Ted Morgan to find investors, including Gail and Walter Frank, who invested, making them original members along with Alex Melendez, Larry Ferk, Swastic Srihari Kaveeshwar, and Ted Morgan.
- Serious disagreements arose among the Members regarding financing, the location of the manufacturing plant, and termination of key personnel.
- In July 2011, Members agreed to raise at least $1 million in capital, which Joe Mitchell invested by the end of 2011.
- On January 16, 2012, an Amended and Restated Limited Liability Company Operating Agreement for Med-Rite was executed, listing Members including Larry Ferk, Gail Frank, Mas-Rite, LLC, Swastic Srihari, and Joe Mitchell; Managers included Larry Ferk, Gail Frank, Walter Frank, Joe Mitchell, and Ted Morgan.
- The Operating Agreement defined 'Majority in Interest' 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,' and stated a Manager could be removed 'by the Members holding a Majority in Interest'.
- On June 28, 2012, Walter Frank informed Larry Ferk that he was being terminated for cause from the board of management; the termination letter was signed by Gail Frank (28.99% interest), Walter Frank (0% interest), and Joe Mitchell (whose entity, COJO Holdings, held 24.90% interest).
- On July 17, 2012, Mas-Rite, LLC (a Member of Med-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; this transfer did not comply with the notice, consent, or right-of-first-offer provisions of Med-Rite’s Operating Agreement.
Procedural Posture:
- On August 1, 2012, Ferk Family filed a member derivative action on behalf of Med-Rite against Gail and Walter Frank and Joe Mitchell in the Circuit Court for Miami-Dade County (trial court), alleging breach of fiduciary duty and seeking to inspect records.
- The trial court appointed Herbert Stettin to conduct an independent investigation, who found it was not in the best interest of the company for the derivative action to proceed.
- The trial court subsequently dismissed the derivative action.
- During discovery, it came to light that Ferk Family had purchased a majority interest in Mas-Rite, giving it voting rights in Med-Rite.
- Gail Frank, along with COJO Holdings and Swastic Srihari, sued Ferk Family, Mas-Rite, and Alex Melendez in the Circuit Court for Miami-Dade County, seeking declaratory relief and damages for breach of contract and specific performance.
- The complaint was later amended to add 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, alleging Larry Ferk's wrongful removal as a manager and unauthorized loans by Gail and Walter Frank.
- Gail Frank, COJO Holdings, Joe Mitchell, Swastic Srihari, and the Estate of Walter Frank moved for summary judgment on their Second Amended Complaint and on Ferk Family’s counterclaims/third-party claims; Ferk Family also moved for summary judgment on the Second Amended Complaint.
- The trial court denied the motions for summary judgment.
- Counts One and Two of the Second Amended Complaint for declaratory judgment were withdrawn.
- 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 trial court conducted a bench trial on the counterclaims and third-party claims.
- 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.
- Ferk Family (Appellant) appealed these two final summary judgment orders to the Third District Court of Appeal (intermediate appellate court).
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Issue:
1. Did the trial court err in concluding that an indirect transfer of voting interest in an LLC (via transfer of a member entity's interest) violated the LLC's operating agreement's direct transfer restrictions? 2. Did the trial court err in its interpretation of the LLC operating agreement's provision for manager removal, specifically regarding whether 'Majority in Interest' for removal refers to Members' percentage interests or Managers' votes? 3. Did the trial court err in determining that Ferk Family’s claims were solely derivative and not maintainable as direct actions? 4. Did the trial court err in applying the business judgment rule to bar Ferk Family’s claims for monetary damages arising from Larry Ferk’s removal and other alleged breaches?
Opinions:
Majority - Emas, J.
No, the trial court erred in granting summary judgment on the transfer claims because the Med-Rite Operating Agreement's transfer restrictions applied only to a transfer of 'Interest in the Company' (Med-Rite), not to a transfer of an interest in a member entity (Mas-Rite). Under well-established principles of contract interpretation, the clear and unambiguous terms of an agreement should be given their plain meaning. Melendez, not being a direct 'Member' of Med-Rite, was not required to comply with Med-Rite’s Operating Agreement when transferring his interest in Mas-Rite, as Mas-Rite itself retained its interest in Med-Rite, meaning the provisions of section nine were not triggered. Yes, the trial court erred in its construction of the Operating Agreement regarding Larry Ferk's removal. Section 5.1(e) plainly authorized manager removal 'by the Members holding a Majority in Interest.' While 'Majority in Interest' includes an alternative definition referencing Managers' votes, the context of manager removal, and other provisions such as Section 5.1(d) (voting and quorums for Board meetings) and Section 5.2(a) (Board of Management authority limitations), makes clear that removal must be determined by Members holding greater than 60% of the Percentage Interests. Allowing managers to remove another manager solely by their own vote would render other limitations on the Board's authority meaningless. Larry Ferk was removed by signatories representing less than 60% of the Member interests. No, the trial court erred in determining Ferk Family’s claims were solely derivative. Florida's Revised LLC Act (Section 605.0801, Fla. Stat. (2016)) and the Operating Agreement's Section 11.12 both explicitly allow Members to bring direct actions against other Members for breach of the agreement's provisions. Section 605.0105(2) provides that the statute governs only where the operating agreement does not otherwise provide, and subsection (3)(k) states an operating agreement may not unreasonably restrict such a right of action. Therefore, the exception established in Dinuro Investments, LLC v. Camacho, allowing direct actions when the operating agreement provides for them, remains viable under Florida law, and Ferk Family was not required to satisfy the two-prong direct harm/special injury test. No, the trial court did not err in applying the business judgment rule. Despite the court’s erroneous interpretation of the contract regarding the Mas-Rite transfer and Larry Ferk’s removal, and the finding that direct claims were permissible, the business judgment rule (codified in section 608.4228, Fla. Stat. (2012), now 605.04093, Fla. Stat. (2016)) shields managers from personal monetary liability for management or policy decisions. The trial court's determination that the counter- and third-party defendants exercised business judgment in their complained-of actions, including Larry Ferk's removal, was supported by competent substantial evidence, and Ferk Family sought only monetary damages, not equitable relief like reinstatement. Therefore, the application of the business judgment rule to bar these claims for damages was proper.
Analysis:
This case significantly clarifies how Florida courts interpret LLC operating agreements, particularly concerning transfer restrictions and manager removal. It reinforces the principle that contract terms are given their plain meaning, and courts will consider contextual provisions to avoid absurd results or rendering other clauses meaningless. The decision also affirms that Florida’s Revised LLC Act preserves a member’s contractual right to bring direct actions against other members, departing from a strict derivative action requirement when the agreement provides for direct claims. Critically, the case demonstrates the broad protective scope of the business judgment rule, which can shield managers from monetary liability for decisions made in good faith, even if those decisions technically breach the operating agreement, as long as the statutory conditions for overcoming the rule are not met.
