Fisk Ventures, LLC v. Segal

Facts

Segal (Defendant) founded Genitrix, LLC (Genitrix), in which the equity was divided into three classes of membership, Segal (Defendant) held 55 percent of Class A; Fisk Ventures, LLC (Fisk) (Plaintiff), Johnson (who controlled Fisk (Plaintiff)), Freund, and Rose held the Class B interests; and the Class C interests were held by passive investors. Genitrix’s LLC agreement (LLC Agreement) divided power among the Class A and Class B members, but was drafted in such a way as to require the cooperation of the Class A and B members. Defendant appointed two of the five board members, while the Class B members were able to appoint the remaining three. The Class B members also had a put right, so they could, at any time, force the company to purchase any or all of their Class B interests at a price determined by an independent appraisal. If exercised, the put would subrogate what otherwise would be senior claims of new investors. This made it difficult to raise money from new investors, but the Class B members refused to relinquish or suspend their put right. The company had much difficulty raising capital, which caused a Fisk (Plaintiff) note to convert to Class B equity, which diluted the Class A and C interests. Segal (Defendant), who was desperately seeking to raise new money, drafted a Private Placement Memorandum (PPM), but the Class B board representatives refused to consent to it, claiming Defendant was acting in haste. Although the Class B representatives asked to discuss the PPM at a board meeting, the meeting never occurred because the Class A representatives refused to take part in any meetings. Even though Plaintiff continued to make capital contributions throughout, the business eventually ran out of operating cash and stalled, and Plaintiff brought suit to dissolve Genitrix. Defendant made counterclaims against Plaintiff and third-party claims against Johnson, Rose, and Freund. Specifically, Defendant contended that the counterclaim/third-party defendants breached the LLC Agreement, breached the implied covenant of good faith and fair dealing implicit in the LLC Agreement, and breached their fiduciary duties to the company—mainly by standing in the way of proposed financing. The counter-claim/third-party defendants moved to dismiss Defendant’s claims, arguing that he failed to state a claim upon which relief could be granted because his allegations suggested little more than the exercise of their contractual rights.