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Frank v. Linkner

Court of Appeals of Michigan

April 7, 2015

IVAN FRANK, JEFFREY DWOSKIN, PHILLIP D. JACOKES, ROY KRAUTHAMER, BLAKE ATLER, MATT KOVALESKI, JAMES BRUNK, and IJF HOLDINGS, LLC, Plaintiffs-Appellants,
v.
JOSHUA LINKNER, BRIAN HERMELIN, CRACKERJACK, LLC, formerly known as EPRIZE, LLC, CRACKERJACK HOLDINGS, LLC, formerly known as EPRIZE HOLDINGS, LLC, DAVID KATZMAN, GARY SHIFFMAN, ARTHUR WEISS, CAMELOT-EPRIZE, LLC, BH ACQUISITIONS, LLC, DANIEL GILBERT, and JAY FARNER, Defendants-Appellees

Page 364

Oakland Circuit Court. LC No. 2013-133554-CB.

For IVAN FRANK, JEFFREY DWOSKIN, PHILLIP D. JACOKES, ROY KRAUTHAMMER, BLAKE ATLER, MATT KOVALESKI, JAMES BRUNK, and IJF HOLDINGS, LLC, Plaintiffs-Appellants: DAVID HANSMA, TROY, MI.

For JOSHUA LINKNER, BRIAN HERMELIN, Defendants-Appellees: BRIAN G. SHANNON, SOUTHFIELD, MI.

Before: MARKEY, P.J., and MURRAY and BORRELLO, JJ.

OPINION

Page 365

[310 Mich.App. 171] Christopher M. Murray, J.

This is a limited liability company member-oppression case. Plaintiffs' 12-count complaint accuses defendants of member oppression, self-dealing, and related improper conduct with respect to the distribution of proceeds from the sale of plaintiffs' former employer, defendant ePrize, LLC. Plaintiffs also make several ancillary points, including challenges to ePrize's most recent operating agreement and allegations that the founder and former CEO of ePrize, defendant Joshua Linkner, promised not to dilute their interests in that company.

[310 Mich.App. 172] Plaintiffs appeal by right the trial court's order dismissing their claims as time-barred under MCL 450.4515(1)(e), arguing that the trial court erred in considering that statute to be one of repose, and that if the statute is one of limitation, their claims were timely because they did not incur damages until ePrize was sold in August 2012, a date well within the statute of limitations. Defendants counter that the applicable limitations period ran from the date when ePrize's operating agreement was amended in 2009, and that the applicable statute, as one of repose, bars all of plaintiffs' claims as untimely.

For the reasons set forth below, we hold that, based on the statute's plain language, the time limit contained in MCL 450.4515(1)(e) is one of limitations and not one of repose. We also hold that plaintiffs' claims accrued in August 2012, and their complaint was therefore timely. Accordingly, we reverse the trial court's order holding to the contrary, and remand for further proceedings consistent with this opinion, which shall include the trial court addressing defendants' alternative motions that were pending at the time the case was dismissed.

I. BACKGROUND

This case arises out of the sale of ePrize and the prioritized distribution of the sale's proceeds to defendants. As noted, ePrize (the predecessor to defendant Crackerjack, LLC) was founded by Linkner in 1999 as a Michigan limited liability company specializing in online sweepstakes and interactive promotions. It functioned until substantially all of its assets were sold in August 2012. All of the defendants were either members of ePrize or had interests in one of ePrize's corporate [310 Mich.App. 173] members.[1] Plaintiffs are former ePrize employees, some of whom were also former minority members of ePrize. According to defendants, in 2005, those plaintiff-members' interests were consolidated into a holding company known as ePrize Holdings, LLC[2] (the predecessor to defendant Crackerjack Holdings, LLC).

A. 2007 INVESTMENT--SERIES B NOTES

In 2007, ePrize needed an infusion of cash to fund certain expansion projects and to survive the national economic downturn.

Page 366

To remedy this problem, ePrize sought loans from several of its defendant-members, among others. The loans, called " B Notes," were issued in four stages of that year--January (the " B1 Notes" ), July (the " B2 Notes" ), October (the " B3 Notes" ) and December (the " B4 Notes" ). Another round of borrowing from a recently formed entity, ePrize Priority, LLC, followed in 2008. These " subordinated debentures" totaled over $28 million on the B Notes alone. Some were convertible to membership interests in ePrize. It is undisputed that neither plaintiffs nor ePrize Holdings were invited to participate in any of these investments.

B. 2009 INVESTMENT--SERIES C UNITS

By 2009, ePrize was unable to meet its loan obligations and commenced what defendants call a " corporate restructuring." As part of this plan, ePrize refinanced a $14.5 million loan with Charter One Bank, guaranteed by several individual defendants, and issued new " Series C Units" to raise an extra $4 million in cash. The Series C Units were offered to certain investors, including [310 Mich.App. 174] the defendant-managers who had obtained B Notes. To participate, investors were required, among other things, to make a capital contribution, guarantee a pro rata share of the Charter One loan, and convert their Series B Notes into new membership units, known as " Series B Units." This arrangement was formally approved in ePrize's Fifth Operating Agreement, executed on March 1, 2009. Among other changes, the Fifth Operating Agreement set forth the new hierarchy of membership-interest payment priority. Under this " waterfall" provision, any distribution would be paid first to the new Series C Units, followed by ePrize Priority's shares and the Series B Units. Last in priority were the common units, which included those held by the plaintiff-members. The waterfall went on to provide that if the full capital commitment were called, the Series C Units would receive the first $68.25 million of any available distribution.

It is this arrangement that plaintiffs claim defendants used " to set themselves up for shockingly excessive returns on investment." With the exception of plaintiff Ivan Frank, plaintiffs claim they were unaware of the preference accorded to Series C Units. But even Frank, whose acquisition of Series C Units will be explained, claims he did not understand the transaction's consequences.

C. PLAINTIFF IVAN FRANK'S PARTICIPATION

Frank was a senior executive at ePrize from 2001 through 2010. During this time, he (and his company, plaintiff IJF Holdings, LLC) acquired both voting and nonvoting units in ePrize and ePrize Holdings amounting to about a one percent stake in ePrize. Frank claims Linkner promised that these shares would never be diluted by future investments.

[310 Mich.App. 175] In 2009, Frank was invited to buy Series C Units with eased investment requirements. Specifically, Frank was not required to participate in the Charter One loan or to guarantee a share of the debt. Frank opted in and invested about $4,200 in a number of Series C Units, bringing his total investment in ePrize to $9,200. Although Frank claims he never saw ePrize's Fifth Operating Agreement or other financial data, he signed all subscription agreements, which confirmed the " restructuring" and waterfall arrangement, as well as the counterpart signature page to the Fifth Operating Agreement. On January 29, 2010, Frank resigned from ePrize. On March 1, 2010, he signed a formal release in exchange for consideration of $111,000.

Page 367

D. SALE OF EPRIZE

Having apparently " turned around" ePrize, its managers marketed the company and sold substantially all of its assets to a third party on August 20, 2012, for $120 million. The sale proceeds were then distributed (less expenses and deductions) in accordance with the § 3.1 waterfall provision; however, the available proceeds were sufficient only for distributions to the Series C Unit holders and a number of Series B Unit holders. In total, Series C investors received about $67 million, including the $89,034 Frank received for his share. All other investors received nothing, including Frank for the remainder of his shares, and the rest of plaintiffs, none of whom worked for ePrize anymore.

II. PROCEEDINGS

On April 19, 2013, plaintiffs initiated suit, alleging that defendants used the recapitalization and Series C Units " to expropriate economic value in the ePrize Companies from the minority members to themselves, [310 Mich.App. 176] and to set themselves up for shockingly excessive returns on investment." Their complaint, as twice amended, sets forth 12 counts, including: member oppression in violation of MCL 450.4515 (Count I), breach of fiduciary duty (Count II), conversion (Count III), breach of contract (Count IV), tortious interference (Count V), civil conspiracy (Count VI), aiding and abetting (Count VII), fraudulent omission and silent fraud (Count VIII), negligent misrepresentation (Count IX), accounting (Count X), unjust enrichment (Count XI), and piercing the corporate veil (as to Camelot-ePrize) (Count XII). Defendants answered, and after discovery, filed three motions for summary disposition, the latter two set forth in the alternative.

First, defendants argued that the limitations periods of MCL 450.4515 and MCL 450.4404--as statutes of repose--barred all claims under MCR 2.116(C)(7) because none of the alleged wrongful acts occurred after the Series C units were issued in March 2009--a date more than three years before the complaint was filed. Contrary to plaintiffs' position, then, the August 2012 distribution of sales proceeds was merely a ministerial act dictated by the Fifth Operating Agreement and cannot be the date on which plaintiffs' incurred harm. Second, defendants claimed that Frank's claims (and those of his company IJF Holdings) should be dismissed under MCR 2.116(C)(10) where Frank purchased Series C units, approved the Fifth Operating Agreement, executed a release, and never returned his $89,039 Series C distribution. Third, defendants maintained that the nonmember plaintiffs ...


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