Question: When two members of a privately held LLC get together and conspire to wrongfully expel the third member, what is the worst possible course of action they can take?
Answer: Insist that the wrongfully expelled member is STILL a member and is bound by a non-compete, then litigate the matter until the bitter end. Let’s take a look.
The First Platinum Company
In early 2009, Robert Sofia and two brothers, Robert Fross and Thomas Fross, founded a company called Platinum Advisor Strategies, LLC to provide marketing services to financial advisors. From the outset, all three – Sofia and the Fross brothers – were members of Platinum. Sofia held a 20% membership interest. Sofia was responsible for managing the company’s day-to-day operations because the Fross brothers owned and managed a separate venture. The Fross brothers are both licensed financial advisors who co-own a substantial financial advisory business called Fross & Fross Wealth Management. Fross & Fross presently manages more than $600 million in assets.
The Second Platinum Company
Business went very well for Platinum. In 2012, Sofia told his partners that he was interested in forming another business that would provide websites and social media marketing for financial advisors. The Fross brothers wanted to be involved. After some negotiations, the three partners agreed that they would form a second company for Sofia’s web marketing venture. This second company was Platinum Strategies, LLC. Because Sofia had done such a great job leading the original Platinum, and because the Fross brothers did not want Sofia exiting the business, they agreed to various concessions in connection with Platinum Strategies. First, unlike in the original Platinum, all three parties received an equal 1/3 ownership interest in Platinum Strategies. Second, unlike the original Platinum operating agreement, the Platinum Strategies operating agreement did not contain a non-compete provision. To the contrary: Sofia negotiated for and obtained a provision explicitly providing that the members were allowed to own, operate and work in competing ventures.
The Platinum companies grew quickly and were very successful under Sofia’s leadership. But due to personal differences with the Fross brothers, Sofia expressed his desire to exit the Companies through a buyout of his membership interests. Sofia believed Platinum’s future growth was in technology. The Fross brothers disagreed. Further, Sofia was concerned with the personal behavior of the Fross brothers and believed their behavior could negatively affect Platinum and his own reputation. The Fross brothers rejected Sofia’s buyout requests.
The Possible Sale for $10 Million
In mid to late 2015, a company called Advantage Media Group, Inc. became interested in possibly acquiring the Platinum entities. After conducting thorough due diligence, Advantage made an offer to acquire Platinum at a valuation of approximately $6.8 million. The Fross brothers rejected this offer as too low. Advantage made two subsequent offers, ultimately offering to acquire Platinum based on a valuation of $10 million. The Fross brothers were not interested.
The Plan to Replace Sofia
All of the parties understood that the time would eventually come for Sofia and the Fross brothers to part ways. So, to facilitate this, in September 2015, Platinum hired an operations director. The goal was to train the operations director to replace Sofia. Once the operations director was up to speed, Sofia would sell his shares to the Fross brothers and exit the company. By March of 2016, the new operations director had been in place for several months. Sofia approached the Fross brothers about selling them his membership interest. But the Fross brothers had no interest in paying Sofia anything for his shares.
The Wrongful Expulsion
On April 19, 2016, Thomas Fross sent Sofia an email, copying Robert Fross, entitled: “Revocation of Membership.” The email purportedly terminated Sofia’s employment and revoked his membership interest in the Companies pursuant a vote of the majority members. The email went on to advise Sofia to keep off the premises and not discuss the matter with any Platinum employees. When Sofia replied and asked if they had any intention of paying him for his membership interest, Robert Fross merely told him to look at the operating agreements.
The following day, the Fross brothers held a meeting at Platinum and told the employees that Sofia had resigned to pursue volunteer work. One Platinum employee was so upset by the Fross brothers’ dishonesty that she resigned. She sent a company wide email advising informing everyone that the Fross brothers had thrown Sofia out of the company and that their explanation was dishonest. The next day, the Fross brothers – acting through counsel – threatened to sue that employee for defamation unless she retracted her statement. She refused.
On April 26, 2016, the Fross brothers sent Sofia a letter via certified mail which mirrored the exact language of the the explusion email.
On June 19, 2016, Sofia initiated arbitration against Platinum and the Fross brothers. His goal was to recover something for his membership interest and to clear up the issue of whether or not he was subject to a non-compete agreement. Sofia had other business prospects, but certain investors and potential business partners were not comfortable with possible risk tied to the non-compete.
Rather than make a reasonable decision, come to the table and attempt to negotiate a resolution with Sofia, the Fross brothers and their lawyers at McLin Burnsed in Leesburg, Florida hatched a fantastical plan: They would take the position that Sofia was still a member. The letter was all a mistake of words! They meant to fire him as an employee. They meant to terminate him as a managing member. But of course they didn’t mean to revoke his membership interest. Of course they legally had no right to do so. They didn’t owe Sofia anything because he still had all of his shares! And it gets even better: In order to strengthen their position in arbitration, team Fross/McLin decided they needed to countersue. And so they did! They counter-sued Sofia for breach of the non-compete provision contained in the first Platinum operating agreement. They also sued Sofia for $7.3 million, claiming that he failed to transmit to them one of the offers to buy Platinum, and that they would have accepted that offer had they received it.
After nearly a year-and-a-half in arbitration, after the Fross brothers paid their lawyers more than $500,000 in attorneys fees, and the Defendants rejected numerous offers to settle the matter, the case ended in a final arbitration award in Sofia’s favor. A three arbitrator AAA panel found that the Fross brothers breached the operating agreements, wrongfully threw Sofia out of the Platinum companies, and breached their fiduciary duties. The panel awarded Sofia just north of $1 million in damages and attorneys fees. Further, the panel awarded Sofia a declaratory judgment holding that the second operating agreement extinguished the non-compete. On the flip side, the panel disposed of the Fross’ non-compete and fiduciary duty claims.
- As folks may know, this was my case and I represented Robert Sofia. I’m not happy with the $1 million award. Based on the facts and the law, it should have been much higher. In my view, the panel significantly undervalued Sofia’s membership interest in the Platinum companies based on record evidence. Likewise, the Fross brothers conduct could have supported an award of punitive damages. If this was a jury trial, it would have been a $3+ million verdict. The upshot: Think carefully before agreeing to arbitration. The only time you should ever consider arbitration is if you are a large, sophisticated company. Three arbitrator AAA panels cost real money. And in certain jurisdictions, the AAA roster is so weak that you will never be able to field a competent panel. Further, it is virtually impossible to get an arbitration award overturned for anything short of fraud. I rank options as follows: (1) Federal court (2) DE state court (3) Arbitration in NYC/SF/DC or a jurisdiction with a loaded roster of great arbitrators (4) State court other than DE (5) Arbitration in a jurisdiction with a weak roster.
- The defendants and their counsel relied on the classic litigation strategy of doubling down on b.s. (DDOB). That’s a bad strategy. Right from the jump, we had their number. They could have come to us in the first month or two of the arbitration and offered $75,000 and a full release of any applicable non-compete agreement. And at the time, we probably would have taken that deal it just so our client could have global peace and move on with his life. But instead of doing the reasonable thing, the Defendants and their counsel went with the World War III plan. All told, it wound up costing the defendants roughly $1.5 million MORE than it would have cost them to just wrap this thing up back in June 2016. But hey, it was a good year for the Defendants’ lawyers.