Opposition__otherOppositionCal. Super. - 4th Dist.October 3, 201810 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 WALTERS LAW GROUP Christopher L. Walters, Bar No. 205510 1901 First Avenue, Second Floor San Diego, CA 92101 Telephone: 619.888.5759 E-mail: clw@walters-law-group.com Attorney for Defendants Jennifer Barnes, Loren Barnes ELECTRONICALLY FILED Superior Court of California, County of San Diego 1019/2018 at 04:55:00 Fi Clerk of the Superior Court By Richard Day, Deputy Clerk SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF SAN DIEGO PRO BACK OFFICE, LLC, a California limited liability company; MICHAEL FORD, an individual; and SCOTT PALKA, an individual, Plaintiffs Vv. JENNIFER BARNES, an individual; LOREN BARNES, an individual; and DOES 1-50 Defendants. Case No.:37-2018-00049928-CU-BC-CTL DEFENDANTS’ OPPOSITION TO PLAINTIFFS’ EX PARTE APPLICATION Date: October 10, 2018 Time: 8:15 a.m. Dept.: C-71 Judge: Hon. Gregory W. Pollack Complaint Files: October 3, 2018 OPPOSITION TO MOTION FOR PRELMINARY INJUNCTION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 L INTRODUCTION Plaintiffs have taken actions to expel Barnes from PBO. They escorted her off the premises with security, barred all access she has to the physical premises, eliminated all access to Company accounts (including operations & financial), conducted meetings/taken actions as a Membership without any notice to/vote by Barnes, instructed staff and clients not to speak with Barnes (when nobody in the Company owns more equity interest than her), and obtained a Court order restraining her from taking any actions on behalf of PBO either publicly or within the Company. Whether or not such actions were taken properly and in good faith is another matter (and Barnes reserves all rights and remedies), the question now is what are the consequences of Plaintiffs’ actions now that they have successfully removed Barnes from every aspect of Company operations? Plaintiffs have not shown a likelihood of prevailing on the merits. Barnes’ position is that she does not have an ongoing fiduciary duty to the Company. The California Corporations Code is clear that Barnes has the right to operate in this industry separate and apart from PBO. A member does not breach any duty “merely because the member’s conduct furthers the member’s own interest" and any duty of loyalty “is limited” to those identified in the statute. §17704.09(e). Due to Plaintiffs’ actions, any duty owed by Barnes to Plaintiffs was terminated when she was expelled/dissociated and/or removed from a management role. Under California law, there are two categories of members: transferees who hold only an economic interest and full members who have voting/management rights. §17705.02. This distinction is recognized in the PBO Operating Agreement. When a member is expelled, he/she becomes a dissociated member and owes no ongoing fiduciary duty. “A person is dissociated as a member from a limited liability company when ...(c) The person is expelled as a member pursuant to the operating agreement.” §17706.02. “When a person is dissociated as a member of a limited liability company... the person’ s fiduciary duties as a member end.” §17706.03 (a)(2). Further, a fiduciary duty is only owed in member-managed LLCs. §17704.09(f). Unless they serve in a management role, “a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member.” §17704.09(f)(3). In this case, it is clear that -1- OPPOSITION TO MOTION FOR PRELMINARY INJUNCTION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 Barnes has been removed from any management position and has been expelled. The balancing of the harms requires denying the injunction. Barnes has been fired from her job, offered no severance, is not receiving any commissions for the business that she brought into the Company, no membership distributions are planned, and Plaintiffs attempt to prevent Barnes from earning a living in her chosen profession. Barnes remains a 45% owner of PBO, she has a duty to maintain the confidentiality of all PBO information, but she is otherwise entitled to start a business. PBO customers and staff are entitled to make a choice on who they wish to work with. II. STATEMENT OF FACTS A. Barnes’ Role at PBO Barnes is the Co-Founder of PBO. In 2012, Ford and Barnes started what is now PBO as 50/50 owners. Ford had a single client and Barnes brought over all of the other initial PBO clients. e Between 2012 and 2015, Barnes brought in every single client (with the exception of Ford’s initial client and one additional client) and was therefore directly and personally responsible for all of PBO’s initial revenue/profits. e In 2016, PBO signed up approximately 94 clients and Barnes secured 71 of those (75%). e In2017, PBO signed up 125 clients and Barnes signed up 65% of those clients. eo For 2018 YTD, PBO obtained 126 new clients and Barnes brought in 78 of those clients. e Of the current 275 PBO clients: Barnes is responsible for signing up 167 (60%), Ford secured 50, and Palka secured 13. Barnes’ contribution amounts to 71% of PBO’s 2017/2018 revenue. It is clear Barnes was the one who secured the vast majority of clients and overall firm revenue. In addition to this tremendous business development, Barnes was the one responsible for the majority of day to day operations. There were two divisions at PBO: out-sourced accounting and consulting. Divisions were split between Barnes and Ford with Barnes responsible for out- sourced accounting which was 75% of PBO’s revenue in 2018. Barnes was the primary person responsible for recruiting PBO staff. Of the current PBO staff, Barnes personally recruited approximately 60%. PBO was built upon the hard work of Barnes. This includes both the oversight/ -2- OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 administration of the company’s business operations as well as the relationships that Barnes has built in the San Diego business community. These relationships that Barnes has are personal in nature. These are relationships she established as Jennifer Barnes and include individuals that she knew prior to starting PBO and relationships that she deepened on a personal level. B. Stated Reason for Termination/Expulsion The Company’s stated reason for terminating Barnes was a single comment made during a Company happy hour. The comment was made to an African-American employee that Barnes interviewed/hired, supervised and supplied virtually all of his client work. This is an employee that Ford did not want to hire, did not want to retain after he started working, and went out of his way to not invite to Company staff meetings. Exh. A. One month after the alleged derogatory comment, the employee at issue sent an email to Barnes stating I really do appreciate the way you speak of me when you are speaking with my peers. Whether is to introduce me or someone seeking to find aid with work they need done. I have notice time and time again how you really do uplift and it really makes me as an individual and as an employee feel great about myself. Exh. A. While the comment made by Barnes was ill-advised, the employee was not upset afterwards as shown by this email. The true reason for the termination was Ford/Palka’s inability to work with Barnes. They were envious of the recognition that Barnes obtained for building PBO. Ford even instructed PBO to stop submitting Barnes’ name for awards. Ford and Palka wanted to increase their ownership interest in the Company, but they had to remove Barnes. Plaintiffs now seek to endanger the relationships Barnes has built within San Diego by imposing a gag order upon her. C. Terms of Operating Agreement 1. Expulsion Under the Operating Agreement The Operating Agreement does provide for expulsion of Members.' “The expulsion of a Member. Reason for expulsion may include, but is not limited to: being charged with, or convicted of, a crime; professional misconduct; the Member is engaged in wrongful conduct that adversely and materially affected the partnership business; or the Member materially and " Barnes does reserve all rights regarding the conduct of Cross-Defendants, including her expulsion from PBO. This includes claims that Cross-Defendants’ actions constitute both a breach of contract and tortious misconduct. _3- OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 willfully breached the partnership agreement.” Operating Agreement (“OA”), §7.4; see also §7.4.3 (“Expulsion of a Member shall be a Triggering event. Notwithstanding any other provision of this Agreement, the purchase price paid to an expelled member shall be the price determined under Section 7.8 herein, reduced by 25%.”). No further details are provided regarding the procedure, and Ford/Palka have demonstrated their intention and practice of taking Member action without a noticed meeting or formal vote (including the termination of Barnes from her officer role). Under the terms of OA expulsion and taking of the membership interest itself are 2 separate matters. “Expulsion of a Member shall be a Triggering event.” §7.4.3. “[O]n receipt of actual notice of any Triggering Event . . . (the “Option Date”), the Company shall have the option .. . to purchase the Membership Interest in the Company.” §7.7. So, when a Member is expelled, they retain their ownership interest in PBO for some period of time during the Option Period and determination of the “Fair Option Price”. These are two separate events: Expulsion and later sale of the Membership Interest. 2. Two Categories/Classes of Members The Operating Agreement provides for two categories/classes of Members and recognizes that there are two distinct rights associated with membership: voting/control and economic interest which may be separated, resulting in a member having an economic interest but no voting or control rights. The Operating Agreement defines these classes of membership interest. eo ‘“"Transferable Interest" means a person's right, as originally associated with a person's capacity as a member, to receive distributions from the Company, as provided in the Operating Agreement, but does not include any other rights of a Member, including the right to Vote or to participate in management.” eo “"Membership Interest" means a Member's entire interest and rights in the Company, collectively, including the Member's Transferable Interest, any right to Vote or participate in management, and any right to information concerning the business and affairs of the Company.” This definition recognizes that the “Transferable Interest” does not include the right to vote, participate in management, or a right to information. eo “"Voting Interest" means, with respect to a Member, the right to Vote or participate in management and any right to information concerning the business and affairs of the Company.” An individual may hold a Transferable Interest which is the right to the economic benefits of membership, but not have the right to participate in the management of the company. _4- OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 D. Barnes Has Been Deprived of Rights, Privileges of Member Plaintiffs did much more than simply terminate Barnes’ role as an officer of Pro Back Office. They have eliminated any and all roles, control or access she had regarding the Company.” 1. Barnes Has Been Deprived of Member Management Rights Under the Operating Agreement PBO is stated to be a Member-Managed LLC meaning that each Member has rights to control the business. “The business of the Company shall be managed by the members. . . . Any Member may bind the Company in all matters in the ordinary course of business, subject to the then current delegation of authority limits for each Member.” OA, §4.1. Barnes has been denied such management right and authority by Plaintiffs’ actions. Full members have a right to review the accounts/information regarding PBO’s operations. “Accounts. Complete books of account of the Company's business, in which each Company transaction shall be fully and accurately entered, shall be managed by the CFO and shall be open to inspection and copying on reasonable notice by any Member.” §5.1. Full members of the Company also have the right to vote. The holder of a Transferable Interest does not have the right to vote. (“does not include any other rights of a Member, including the right to Vote or to participate in management”), but the holders of full Membership Interest do have this right. “Members and Voting Rights. Members shall have the right and power to vote on all matters with respect to which this agreement or California law requires or permits such Member action. . . . the vote of the Majority of Member Interests shall be required to approve or carry an action.” §6.1. Barnes has been denied such rights by both the actions of Plaintiffs and the Temporary Restraining Order obtained by Plaintiffs. She no longer serves in the role of a Manager of the LLC and therefore owes no fiduciary duty. 2. Plaintiffs Have Taken Action to Deprive Barnes of Any Management Role Plaintiffs have taken actions to deprive Barnes of any role in Pro Back Office. e She was escorted out of the Company’s offices by security. e¢ PBO demanded the immediate return of her car, computer and phone. PBO suspended 2 Barnes will argue that such conduct was unlawful and will seek damages; but, the instant focus is whether or not Barnes has been expelled terminating her fiduciary duty pursuant to Cal. Corp. Code §§17706.02, 17706.03 (a)(2) -5- OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 Barnes’ phone number by impermissibly using her personal PIN number. e Her email account was disabled: she is not allowed to send outgoing messages and all incoming messages are being redirected at PBO’s direction. Barnes has no access to incoming email or voicemails as they are being redirected. e Plaintiffs have attempted to remove all access and authority that Barnes has to all PBO accounts, including third-party financial/banking accounts and internal administrative/operational accounts. For some, Barnes is a personal guarantor yet Plaintiffs are now trying to block any access/authority that Barnes has. e Plaintiffs sent an email to clients (including many whom Barnes had brought to PBO) stating “Jennifer Barnes is no longer with the company.” e Plaintiffs are attempting to bar all contact Barnes has with any PBO employees, this includes sending an email blast to all staff stating “Please notify Fran San Diego if you or any PBO clients are directly or indirectly contacted by or on behalf of Jennifer as we are serious about monitoring Jennifer’s compliance with the Court Order.” e As discussed in the Cross-Complaint, Plaintiffs have contacted organizations and associations that Barnes is a member of and attempted to have her membership revoked. e Plaintiffs removed Barnes from all PBO business accounts such as LinkedIn, Facebook, and the email/domain server. ¢ Plaintiffs have re-written the PBO website to remove all references to Barnes. Plaintiffs have attempted to eliminate 100% of access and information flow that Barnes has relating to PBO. There have been no Membership meetings or votes since Barnes’ termination. So, while there are clearly management decisions being made (including but not limited to the promotion of Ford to President of the Accounting Services Division), there have been no meetings or votes so Ford and Palka are making such decisions on their own.” Plaintiffs’ actions have: (i) Expelled/Dissociated Barnes and (ii) Removed Barnes from a management role. 3. Plaintiffs’ TRO Has Eliminated Any Role of Barnes in PBO Management Plaintiffs obtained a TRO on October 10, 2018. At that hearing, Barnes argued that she had already been dissociated and that the relief/order sought by Plaintiffs would further evidence that dissociation. The Court did grant the relief sought by Plaintiffs. This included e No access to “PBO’s technological or administrative systems”, e No right to sell/transfer any PBO property, e No ability “to act as a spokesperson for, or authorized representative of, PBO”, e Barred from “Issuing any statements in the name of or on behalf of PBO without the prior written authorization of Michael Ford and Scott Palka”, e No role in the Company’s finances, including “Authorizing any expenditure by or on behalf of PBO, causing PBO to incur expenses, or committing PBO to any obligation without the prior written authorization of Michael Ford and Scott Palka.” The issue now is what are the consequences of restricting such rights of Barnes concerning PBO. 3 Again, Barnes has not consented to such conduct and reserves all rights for damages resulting from the alleged misconduct; but, the instant motion is to determine the effects of such action (justified or not) on the injunction. -6- OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 III. PLAINTIFFS FAILED TO SUSTAIN THEIR BURDEN OF PROOF TO SHOW LIKELIHOOD OF PREVAILING ON THE MERITS FOR THEIR CLAIMS. Plaintiffs have the burden of proving that they are likely to prevail on the merits for those claims that underlie the requested injunction. To sustain this burden, Plaintiffs must produce admissible evidence for each element of each claim. Plaintiffs have not satisfied each element. Further, they have failed to offer admissible evidence regarding its legal arguments. Defendants have filed objections/motion to strike Plaintiffs’ evidence, including the failure to include declarations/documents from the individuals involved in the alleged misconduct and instead Ford stating that person X told him that customer Y said Barnes contacted customer Y. Plaintiffs have the burden of proof concerning the legal elements and issues. Regarding the main argument below (whether Barnes owes a continuing fiduciary duty), Barnes does not need to prove that she was expelled/dissociated and removed from a management role. Instead, Plaintiffs must prove that Barnes remains a valid manager of PBO and that was not expelled/dissociated. If there is a factual issue requiring discovery/evidence, then the injunction must be denied. A. There is No General Fiduciary Duty to Not Compete Plaintiffs are simply wrong when they say that all members of an LLC owe a duty of loyalty to not compete. First, this is not a correct statement of the duty as any duty owed is limited. Secondly, as discussed below, not every member owes the same duty to the LLC. There are two primary examples applicable to this matter when a member would NOT owe a fiduciary duty. e If a member has been expelled/dissociated, then no ongoing duty is owed. \ e Ifa member is not a manager, then no fiduciary duty of loyalty is owed. Plaintiffs have the burden of proof and therefore must show that neither of these situations applies. Plaintiffs have failed to cite law establishing a duty of members to not compete with the LLC that they are a member of. In fact, applicable law states that "A member does not violate a duty or obligation under this article or under the operating agreement merely because the member’s conduct furthers the member’s own interest." §17704.09(e). There is a limited duty not to compete. “(b) A member's duty of loyalty to the limited liability company and the other -7- OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 members is limited to the following: . . . (3) To refrain from competing with the limited liability company in the conduct or winding up of the activities of the limited liability company.” §17704.09(e). Regarding competition, the duty only applies to the conduct and winding up of the LLC. Plaintiffs cite no case law holding that a member is not able to start another business in the same industry. There is a general right for individuals to engage in business, and this includes with a former employee. “A former employee has the right to engage in a competitive business for himself (or with others) and to enter into competition with his former employer, even for those who had formerly been the customers of his former employer, provided such competition is fairly and legally conducted.” Continental Car-Na-Var Corp. v. Moseley (1944) 24 Cal.2d 104, 110. Further, a departing employee may not use “confidential information or trade secrets” but is not 2 required to “wipe his or her memory clean.” Morlife, Inc. v. Perry (1997) 56 Cal. App.4™ 1514, 1519. This includes a former employee’s ability to solicit and call upon customers of the former employer. Moss, Adams & Co. v. Shilling (1986) 179 Cal. App.3d 124, 129. In this situation, there is no allegation or proof that Barnes took any list of customers from PBO or that she sent a mass email to all of its customers. Barnes should be entitled to speak with individuals that she has a personal relationship with through her work in the community. Those individuals can then decide what they would like to do regarding any business relationship with PBO. Plaintiffs should be not permitted to utilize an injunction to compel these companies to continue to do business with PBO. B. Plaintiffs Are Unlikely To Prevail on the Claim for Breach of Fiduciary Duty As Barnes No Longer Owes a Duty to PBO of Ford/Palka Plaintiffs must produce admissible evidence to demonstrate a likelihood of prevailing on the merits for the breach of fiduciary duty claim. Plaintiffs must show that: (1) a fiduciary duty is owed by Barnes after her termination and going forward; (2) Barnes has breached this fiduciary duty; and (3) Plaintiffs suffered damages as a direct and proximate result of this breach of duty. 1. Under Cal. Law, There are Two Classes of Membership Interests: Voting/Management Rights & Economic/Distribution Rights Under the California Limited Liability Company law, there is a distinction between ownership of an equity interest and possession of management rights. While a full member -8- OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 possesses both, it is possible to be an economic owner without the management responsibilities. (a)(3) Subject to Section 17705.04, a transfer does not entitle the transferee to do any of the following: (A) Participate in the management or conduct of the activities of a limited liability company. (B). . . have access to records or other information concerning the activities of a limited liability company. (b) A transferee has the right to receive, in accordance with the transfer, distributions . . . §17705.02. The California Revised Uniform Limited Liability Act is based upon the Uniform Limited Liability Company Act. The comments to the Uniform Act reaffirm this point: “A member’s rights in a limited liability company are bifurcated into economic rights (the transferable interest) and governance rights (including management rights, consent rights, rights to information, rights to seek judicial intervention).” Unif. Ltd. Liab. Co. Act § 502 (2006) Cmt. California authorities agree on this point. A transferable interest is personal property. . . .a transfer does not entitle the transferee to do any of the following:(A) Vote or otherwise participate in the management. . .(B) . . . have access to records or other information concerning the activities of an LLC. . . A transferee has the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled. Cal. Bus. Law Deskbook §3:24 Chapter 3. California Revised Uniform LLC Act, 3.24. (Dec. 2017); see also Marsh’s Cal. Corp. L Section 3A.07; 1 Cal. Transactions Forms - Bus. Entities Section 1.96 (Sept. 2018) (“a transferee of a member's interest cannot participate in the management of the LLC or become a member, although the transferee is entitled to receive the share of profits”). A member that is dissociated is treated as a transferee. [A] person's dissociation does not entitle the person to a distribution, and. beginning on the date of dissociation, the dissociated person will have only the right of a transferee of a transferable interest with respect to that person's interest in the LLC, and then only with respect to distributions. . . upon dissociation a person is treated as a mere transferee of its own transferable interest. Cal. Bus. Law Deskbook Section 3:17. The analysis for partnership interests, which are treated the same as LLC interests, reaches the same result. Like an LLC member, a RUPA general partner owns a transferable economic interest in entity profits, losses, and distributions. This transferable interest is distinct from the partner's right of entity management and control. 4 Cal. Transactions Forms — Bus. Entities Section 20:29. Dissociation splits the membership interest rights: financial & management. “Dissociation terminates the partner's rights to participate in entity management and control, and the partner's statutory duties of loyalty and care. . . .Where the partnership continues after a partner dissociation, the dissociated partner’s -9.- OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 economic interest must be purchased by the partnership.” 4 Cal. Transactions Forms — Bus. Entities §20:30. 2. Under California Law, Members That Are Expelled OR Removed as Managers Have No Ongoing Fiduciary Duty a. As An Expelled/Dissociated Member, Barnes Has No Ongoing Fiduciary Duty and May Compete with PBO. The actions of Plaintiffs have resulted in Barnes’ dissociation from the LLC. “A person is dissociated as a member from a limited liability company when any of the following occur: ... (c) The person is expelled as a member pursuant to the operating agreement.” §17706.02. The actions of Plaintiffs in eliminating access the right to vote/control the Company’s actions constitute expulsion under the terms of the OA. Further, Plaintiffs alleged misconduct by Barnes in her membership role, sought judicial relief, and obtained an Order which cut off all access and control by Barnes relating to her membership interest in PBO. This request by Plaintiffs, and the subsequent order of the Court, further constitute dissociation of Barnes. On application by the limited liability company, the person is expelled as a member by judicial order because the person has done any of the following: (1) Engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the limited liability company’s activities. (2) Willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under Section 17704.09. (3) Engaged, or is engaging, in conduct relating to the limited liability company’s activities that makes it not reasonably practicable to carry on the activities with the person as a member. §17706.02(e). It is clear that both by their actions and by the Court order they obtained, Plaintiffs have eliminated Barnes’ ability to manage PBO and even obtain information regarding the PBO’s finances or operation which constitutes dissociation. “(a) When a person is dissociated as a member of a limited liability company all of the following apply: (1) The person’s right to vote or participate as a member in the management and conduct of the limited liability company’s activities terminates.... (3)...any transferable interest owned by the person immediately before dissociation in the person’s capacity as a member is owned by the person solely as a transferee.” §17706.03. Barnes’ role in PBO has been reduced to a transferee and this has consequences. When a person is dissociated as a member of a limited liability company all of the following apply: . . .If the limited liability company is member-managed, the person’s fiduciary duties as a member end with regard to matters arising and events occurring after the person’s dissociation. §17706.03 (a)(2). Barnes’ expulsion/dissociation relieves her of an ongoing fiduciary duty. -10 - OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 b. Barnes Is No Longer a Manager of PBO and Therefore She Does Not Owe the Same Fiduciary Duty as Ford/Palka The purpose of the fiduciary duty is to avoid the conflict when an individual owes an obligation to two separate entities. In the LLC context, the duties owed to a member’s private business affairs and the management/control of an LLC (with other members). When the person is dissociated and the interest becomes a mere transferee, that person no longer (1) has access to confidential information and (2) has no authority to manage or direct the LLC. There is no longer a conflict as the individual will reap the financial benefits of ownership, but is essentially a passive investor with no management role. When the member is removed from that management role, the individual’s fiduciary duty (which is based upon being in such a management role) is removed. While Barnes argues that she was expelled/dissociated, at the very least it is clear that she has been removed from any and all management role in PBO which alters any fiduciary duty. (a) The fiduciary duties that a member owes to a member-managed limited liability company and the other members of the limited liability company are the duties of loyalty and care under subdivisions (b) and (c). skoskosk (f) In a manager-managed limited liability company, all of the following rules apply: (1) Subdivisions (a), (b), (c), and (e) apply to the manager or managers and not the members. (2) Subdivision (d) applies to the members and managers. (3) Except as otherwise provided, a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member. §17704.09. Authorities analyzing this law are in agreement. §17704.09 imposes a duty of care and a duty of lovalty upon the managers (but not members) for manager-managed company; and upon the members in a member- managed company. . . . For member-managed LLCs, given that members play a vital managerial role in the LLC, CRULLCA provides that members owe both the company and its members the twin duties of care and loyalty. However, because members' managerial roles are far more limited amid manager-managed LLCs, these fiduciary duties apply only to managers in a manager-managed LLC. * * * For manager-managed LLCs . . . a member does not have any fiduciary duty to the LLC or to any other member solely by reason of being a member. Cal. Bus. Law Deskbook §3:22 California Revised Uniform LLC Act — Fiduciary duties and other standards of conduct for members and managers; see also Marsh’s Cal. Corp. L §3A.04); Cal. Bus. Law Deskbook §3:1 (distinguishing between a manager-managed and member- * Plaintiffs cite Am Master Lease LLC v. Idanta Partners, Ltd. 225 Cal. App.4™ 1451, 1480 for the proposition that all members owe a fiduciary duty, but that case actually stands for the position that the manager owes the duty to the LLC (and those members who are also managers). S11 - OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 managed LLC “and imposing fiduciary duties only on persons in control of a limited liability company,”); Cal. Prac. Guide Corps. Chap. 2-A, §2:36-19 (recognizing that the “fiduciary duties of care and loyalty” are only owed by “An LLC member in a member-managed LLC, and an LLC manager in a manager-managed LLC”); 3 Cal. Transactions Forms §16.1 (“Among other things, the RULLCA . . . distinguishes between a manager-managed LLC and a member- managed LLC for purposes of defining the scope of a member's agency and imposing fiduciary duties only on persons in control of an LLC”). Unless Barnes has a management role at PBO, she does not owe a fiduciary duty. 3. Plaintiffs Have Expelled and Dissociated Barnes From the Membership and Removed Her From a Management Role Plaintiffs have made it clear that they no longer wish to be partners with Barnes. Whether or not this was done properly is not the issue relevant to this matter (and Barnes reserves all rights), the issue is that when Barnes retains the economic interests associated with the membership but has lost management, control, and access rights of a member, what is the effect on her fiduciary duty? Barnes’ argument is that the majority of Members of PBO have expelled and dissociated her from the membership. “When a person is dissociated as a member of a limited liability company all of the following apply: (1) The person’s right to vote or participate as a member in the management and conduct of the limited liability company’s activities terminates.” §17706.03 (a); see also Unif. Ltd. Lib. Co. Act, §603 (“EFFECT OF PERSON’S DISSOCIATION AS MEMBER. (a) When a person is dissociated as a member of a limited liability company: (1) the person’s right to participate as a member in the management and conduct of the company’s activities terminates.”). Since her termination (and effective expulsion), Barnes has been denied the rights and access of management that she not only formerly held but that are guaranteed to her under the terms of the Operating Agreement. Under the PBO Operating Agreement, individuals who hold a full Membership interest have “management” rights. “Any Member may bind the Company in all matters in the ordinary course of business.” OA, §4.1. This right to management includes “the right and power to vote on all matters with respect to which this S12 - OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 agreement or California law requires or permits such Member action.” §6.1. Those holding a full Membership interest have the right to review PBO’s accounts. “Complete books of account of the Company's business, in which each Company transaction shall be fully and accurately entered, shall be managed by the CFO and shall be open to inspection and copying on reasonable notice by any Member.” §5.1. Those who hold only a Transferrable Interest do not have such rights. They do not have “the right to Vote or to participate in management” and do not have “any right to information concerning the business and affairs of the Company” (OA, pg 2 Definitions). Plaintiffs also obtained an Order from the Court limiting Barnes’ rights relating to PBO. This includes denying Barnes access to “PBQO’s technological or administrative systems”; barring her from speaking on behalf of PBO in any way; and denying her any role in the Company’s finances. She has no authority to conduct the Company’s business (despite the fact that it is member managed) and no right to the Company’s books and records. In the instant matter, Barnes’ fiduciary duty to PBO would be different (and less) than the duty owed by Ford and Palka who are operating and managing PBO since she has no control over PBO’s actions and no access to any confidential or proprietary PBO information. Barnes has no ongoing fiduciary duty as a result of her removal from management of the LLC. In an LLC managed by a manager, the members (who are not managers) do not owe a fiduciary duty of loyalty and in fact do “not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member.” §17704.09 (f). 4. Plaintiffs Have Failed to Satisfy Their Burden for the Other Elements of Breach of Fiduciary Duty Plaintiffs have failed to show any breach of fiduciary duty. There was an outburst after Barnes was terminated without any notice and escorted off the premises. Plaintiffs have not identified any PBO clients/customers that Barnes has solicited or a single piece of proprietary information that Barnes has taken/used against PBO. Similarly, Plaintiffs have not proven any damages. They have not identified any PBO staff/ employees or client who left as a result of any improper actions by Barnes. In total, - 15. OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 Plaintiffs have failed to sustain their burden of proof for a breach of fiduciary duty claim. C. Plaintiffs Have Not Shown a Likelihood of Prevailing on Their Other Claims Plaintiffs have brought other claims but make no effort to submit evidence or argue such claims. The entire matter relies upon showing that Barnes had an ongoing fiduciary duty to not compete and that she has violated this duty. There is no showing of what proprietary information Barnes has used improperly. Plaintiffs do not allege any relationships that Barnes has interfered with (and this assumes that announcement of plans to continue business in this industry separate from PBO is not protected and may form the basis for legal claims). Regarding the computer related claims, Barnes denies any misconduct. See Decl. of L. Barnes. IV. BALANCING OF HARMS WEIGHS AGAINST GRANTING THE INJUNCTION AND RESTRAINING BARNES’ ABILITY TO WORK IN THE INDUSTRY The injunction sought by Plaintiffs is very broad. It includes “Engaging in competition with PBO”; “Engaging in any solicitation of PBO’s clients/customers; employees; or referral partners”; and “Interfering with relationships between PBO and its clients/customers; employees; referral partners; or vendors or service partners.” While it may be appropriate to grant an injunction relating to specifically identified proprietary information, Plaintiffs instead seek to prevent Barnes from doing any work in this industry. This would result in tremendous harm to Barnes. Barnes will suffer much more harm if the injunction is granted than PBO will suffer if the injunction is denied. The majority of Barnes’ professional career was been in the outsourced accounting industry. That is the work that she knows, and it would be very difficult for her to go back to working for a client directly. If the injunction is granted, then Barnes will be unable to earn a living using the skill set/experience she has developed in this field over the last 10 years. On the other hand, PBO is unlikely to suffer any extensive harm. Barnes is not seeking to shut down PBO’s operations. Now that she has been removed from management, she simply seeks the ability to work apart from PBO. Clients/staff should be permitted to decide whether to stay or to work with a new company (one involving Barnes or an unrelated third party). Barnes has suggested that the Parties prepare and send a joint letter to all staff and clients announcing -14 - OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 Barnes’ new venture and each individual/company could then decide who they would go work with. Barnes was terminated from PBO with no warning or notice. Barnes was not offered any type of severance package, and PBO has not compensated her via its commission schedule for revenue that she was responsible for developing. She has also been deprived of all benefits from her ownership interest in PBO (which Plaintiffs are using as a sword). Barnes is not able to manage or play any role in Company operations such that she could increase the value of her equity interest. There are no announced plans for making financial distributions to the Members (which is OK with the other Members because they receive salaries from PBO and would have the only say in increasing each other’s salaries). PBO has made no offer to purchase her Membership interest. This is an unreasonable restraint on trade/competition and should not be permitted. V. POSTING OF BOND Projecting 2018 revenue through the end of the year, Barnes was responsible for $4.64 Million of PBO revenue. If Barnes went to work for another company, she would be entitled to a commission for such business which would result in monthly compensation of $30,000 - $40,0000.° If Barnes is permitted to start a new business herself, she estimates $1 Million per year in gross margins ($600,000 per year net income). Barnes’ inability to work would result in annual damages of $360,000 - $600,000. Barnes seeks a bond in the minimum amount of $500,000. VI. CONCLUSION Plaintiffs have failed to produce admissible evidence to demonstrate that it is likely to prevail on the merits of its claims. The requested injunction should be denied. Dated: October 18, 2018 WALTERS LAW GROUP ChisleopleF ovitin.. y: Christopher L. Walters Attorney for Defendant B > It is true that Barnes was only paid $210,000 base salary (plus $33,500 in bonus) at PBO. She was willing to accept this because she owned 45% (and was building equity value) and PBO could not afford to pay such commissions. -15- OPPOSITION TO EX PARTE APPLICATION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 WALTERS LAW GROUP 1901 FIRST AVENUE, SECOND FLOO! SAN DIEGO, CA 92101 PROOF OF SERVICE At the time of service, | was over the age of 18 and not a party to this action. [ am employed in the County of San Diego, State of California. My business address is 1901 First Avenue, Second Floor, San Diego, CA 92101. On October 19, 2018 I served the following document(s) described as: OPPOSITION TO MOTION FOR PRELIMINARY INJUNCTION By Facsimile Transmission: As follows: The papers have been transmitted to a facsimile machine by the person on whom it is served at the facsimile machine telephone number as last given by that person on any document which he or she has filed in the cause and served on the party making the service. The copy of the notice or other paper served by facsimile transmission shall bear a notation of the date and place of transmission and the facsimile telephone number to which transmitted or be accompanied by an unsigned copy of the affidavit or certificate of transmission which shall contain the facsimile telephone number to which the notice of other paper was transmitted to the addressee(s). By US Mail: By placing a true copy thereof in an envelope, properly sealed, addressed as shown above for collection and mailing on the below indicated day pursuant to the ordinary business practice of this office which is that correspondence for mailing is collected and deposited with the United States Postal Service, postage prepaid, on the same day in the ordinary course of business for sending of mail. XXXX By E-Mail: I declare under penalty of perjury under the laws of the California that the above is true and correct. Executed on October 19, 2018 at San Diego, California. Christopher L. Walters -16 - OPPOSITION TO EX PARTE APPLICATION
