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Miller v. FiberLight, LLC

Court of Appeals of Georgia, Fifth Division

October 31, 2017

MILLER
v.
FIBERLIGHT, LLC et al.

          MCFADDEN, P. J., BRANCH and BETHEL, JJ.

          McFadden, Presiding Judge.

         In this action, a minority member of a Delaware limited liability company sued the majority members and the chair of the board of directors for, among other things, breach of default fiduciary duties imposed by Delaware law and breach of the duty of good faith and fair dealing. The trial court granted the defendants' motion for summary judgment on all of the plaintiff's claims, and he appeals. We find that the plaintiff's claim that the defendants breached default fiduciary duties by unilaterally rejecting offers to purchase the company depends upon disputed issues of fact. So we reverse the trial court's grant of summary judgment to the defendants on that claim (and the related claims derivative of that claim). We affirm the grant of summary judgment in all other respects.

         1. Facts and procedural posture.

         Michael Miller filed this action challenging certain decisions made by the board of directors of defendant FiberLight, LLC, the Delaware limited liability company of which Miller was a founder, was formerly an officer and member of the board of directors, and in which he currently holds a membership interest. Defendants NT Assets, LLC and Thermo Telecom Partners, LLC are investors in and the majority members of FiberLight.[1] Defendant Jim Lynch is the chair of FiberLight's board of directors.

         Miller filed this action after he was terminated from his position as president of FiberLight. He alleges that the defendants breached their fiduciary duties to him and the other minority members of FiberLight and breached the implied covenants of good faith and fair dealing. He appeals the grant of summary judgment to the defendants.

To prevail on a motion for summary judgment, . . . the moving party must show that there is no genuine dispute as to a specific material fact and that this specific fact is enough, regardless of any other facts in the case, to entitle the moving party to judgment as a matter of law.
When a defendant moves for summary judgment as to an element of the case for which the plaintiff, and not the defendant, will bear the burden of proof at trial the defendant may show that he is entitled to summary judgment either by affirmatively disproving that element of the case or by pointing to an absence of evidence in the record by which the plaintiff might carry the burden to prove that element. And if the defendant does so, the plaintiff cannot rest on his pleadings, but rather must point to specific evidence giving rise to a triable issue.

Beale v. O'Shea, 319 Ga.App. 1, 2 (735 S.E.2d 29) (2012) (citation and punctuation omitted). We review a summary judgment ruling "de novo, viewing the evidence in the record, as well as any inferences that might reasonably be drawn from that evidence, in the light most favorable to the nonmoving party." Id. (citation omitted).

         So viewed, the record shows that Miller was an employee of telecommunications company Xspedius Corporation when he was asked to run Xspedius's fiber business as a separate, subsidiary company. Thermo Telecom Partners was the principal owner of Xspedius. For the next year or two, the subsidiary company was called Xspedius Fiber Group. Defendant Jim Lynch and nonparty Jay Monroe, who owns Thermo Telecom Partners, were Miller's bosses.

         On April 22, 2005, the entity ceased to be known as Xspedius Fiber Group and became FiberLight, LLC. At that time, Thermo Telecom Partners, Miller, Kevin Coyne, Ron Kormos, and two other individuals entered a limited liability company agreement governing the operation of FiberLight. The agreement was amended multiple times. The crux of Miller's complaint is that he was coerced by economic duress to agree to the amendments, which enabled the defendants to redeem most of Miller's interest in FiberLight upon his termination.

         Although the limited liability company agreement was amended multiple times, certain provisions were identical from one version to the next. For example, all versions provided that the agreements were governed by and would be construed under the law of Delaware. All versions provided that the board of directors was deemed the manager of FiberLight for purposes of the Delaware Limited Liability Act.

         The initial agreement set out the members' ownership interests in FiberLight as follows: Miller owned 21.111 percent, Thermo Telecom Partners owned 5 percent, and Coyne, Kormos, and the other individuals owned the remaining 73.889 percent. The initial agreement established a three-member board of directors. Two directors would be elected by the vote of members holding a majority of the percentage interests, while Thermo Telecom Partners had the right to designate the third director. Lynch was Thermo Telecom Partners's designated director as well as the chairman of the board. Miller was a director and the president, and Coyne was a director and the chief financial officer. The initial agreement provided that it could only be amended with the unanimous consent of the members. It provided that the officers served at the pleasure of the board, which could remove them from office at any time with or without cause. Defendant NT Assets was not a party to the first agreement.

         The second agreement, entitled "second amended and restated limited liability company agreement, " reflected the repurchase and allocation of an individual owner's interest in the company, which resulted in an increase in Miller's interest to 32.7704 percent and an increase in Thermo Telecom Partners' interest to 6.4678 percent. The provisions establishing a three-member board of directors, describing the election of those board members, providing for the removal of officers, and requiring unanimity of the members to amend the agreement were unchanged from the initial agreement. Defendant NT Assets was not a party to the second amended agreement.

         The pivotal third amended and restated limited liability company agreement, effective as of January 1, 2006, made many changes. Significantly, it reflected the conversion of the more than $10 million in outstanding debt FiberLight owed to its largest creditors, Thermo Telecom Partners and NT Assets, into equity in Fiberlight. Formerly creditors (with Thermo Telecom Partners owning a 6.4678 percent membership interest), Thermo Telecom Partners and NT Assets were now members holding the largest membership interest in the company. Thermo Telecom Partners' expansion of its membership interest and NT Assets' acquisition of a membership interest reduced the individual members' membership interests accordingly.

         Further, the third agreement divided the members' interests into two classes: investor interests, which were based on the amount of money the particular member had invested in the company, and incentive interests, which were intended to compensate the individual members, who were also employees of FiberLight, upon the sale of the business. Under the third agreement, Thermo Telecom owned a 25.9869 percent investor interest and NT Assets owned a 72.3536 percent investor interest, for a total ownership interest of 98.3405 percent of the company. Miller owned a .5804 percent investor interest and a .0010 percent incentive interest, for a total ownership of .5814 percent; Kevin Coyne owned a .5562 percent investor interest and a .0010 percent incentive interest, for a total ownership interest of .5572 percent; and Ron Kormos, the final individual member, owned a .5199 percent investor interest and a .0010 percent incentive interest, for a total ownership interest of .5209 percent.

          The third agreement required the redemption of the individual member's interests should that member's employment be terminated, directing that the "Company shall purchase all of the Investor Interest then owned by the Terminated Member" and that "the Company shall redeem the entire unvested portion of such terminated employee's Incentive Interest, " although the board could waive the right to automatic redemption of the incentive interests.

         The third amended agreement also changed the structure of the board of directors, giving Thermo Telecom Partners and NT Assets the right to jointly designate up to three directors, so long as they held a majority of the percentage interests; they designated Lynch as a director but had the right to add two more directors at any time. Miller and Coyne remained directors.

         The third agreement added a provision that was absent from the initial agreement and the second amended and restated agreement about the voting of directors. The new voting provision stated that

[e]ach Director shall have one (1) vote at all board meetings, except that so long as Thermo and NT Assets collectively hold a majority of the Percentage Interests, the following rules shall apply to any votes taken by the Board at any duly called Board meeting: (a) if there is one (1) Thermo/NT Assets Designee on the Board, then such Thermo/NT Assets Designee shall have three (3) votes; (b) if there are two (2) thermo/NT Assets Designees on the board, then each such Thermo/NT Assets Designee shall have two (2) votes; and (c) if there are three (3) Thermo/NT Assets Designees on the Board, then each such Thermo/NT Assets Designee shall have one (1) vote. For any action to be adopted by the Board, such action must be either (1) approved by the affirmative vote of Directors having a total of at least three (3) votes at duly called Board meeting, or (ii) approved by written consent of all Directors then serving on the Board.

         So Miller and Coyne each had one vote, and as long as Thermo Telecom Partners and NT Assets had one designated director, they had three votes, which allowed them to adopt any action unilaterally. Previously, as noted, the limited liability agreement could only be amended with the unanimous consent of the members.

         The fourth amended and restated limited liability company agreement, effective as of October 27, 2008, made no changes about which Miller complains. (Although the trial court found that the fourth amended agreement reduced Miller's interest and increased Thermo Telecom Partners' and NT Assets' interests, the agreement in the appellate record listing the parties' interests does not reflect such a change.)

         The fifth amended and restated limited liability company agreement, effective as of March 17, 2011, changed terms used to calculate payouts to investors should FiberLight be sold under certain conditions. It reduced the individual members' interests and increased Thermo Telecom Partners' and NT Assets' interests.

         Miller, Coyne, and Kormos each invested between $56, 000 and $60, 000 in FiberLight. Thermo Telecom Partners and NT Assets invested more than $14 million. Miller understood that when a company borrowed money, the lender gained more control. He conceded that Thermo Telecom Partners' and NT Assets' converting their debt to equity was not improper but instead was a financial strategy. But he did not believe the conversion of the debt into equity should have impacted his own equity position. (He testified that he believed the first and second operating agreements were entered after Thermo Telecom Partners' and NT Assets' conversion of FiberLight's debt to equity, although the third agreement, by its terms, was entered to reflect that change.)

         Miller perceived the third amended agreement as "basically stripp[ing him] of [his] 25 percent position in the company to about .0058 something or a half a percent, which was significant." Miller did not think the incentive interest structure established in the third amended agreement benefitted him because previously he had had a much larger piece of the company. He would have preferred not to have his interest diluted by additional capital contributions, given the sweat equity he had in the company. He thought the incentive interests were too low. Additionally, although he understood that the company no longer had an option but was required to redeem the investor interests, he did not agree with that change.

         Miller summed up agreements three, four, and five as follows:

Each one of those agreements did not allow and did not provide any substantial rights for the minority shareholders at all, including me. There was nothing in those agreements that allowed us to retain our equity. There was nothing in those agreements that would give us any protection as it applies to those equity and incentive interests. . . . [they] were continued efforts to strip me of any of my equity or incentive interest.

         After Miller was terminated from FiberLight and his interests largely ...


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