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NH Company Owners Beware the “FREEZE-Out”
A recent Hillsborough County Superior Court decision affirms LLC operating agreement where members waive traditional fiduciary duties of utmost care and loyalty to one another. It’s a reminder to ALWAYS read that fine print!
A Freeze-Out is one of the dangers faced by owners of a closely held company. In a freeze-out, a majority of owners (referred to as “members” in a limited liability company) employ tactics to deprive minority members any managerial control in the company. As one can imagine, this can pose an especially precarious situation for small companies where a majority of members unfairly “team-up” and form personal allegiances against those in the minority.
For this reason, the laws of most jurisdictions provide safeguards or remedies to those victimized by a freeze-out; however, the existence of these safeguards and remedies alone may not always be a full-proof solution for aggrieved members. Instead, in jurisdictions like New Hampshire, provisions featured in a company’s operating agreement may effectively prevent the members from bringing claims of corporate freeze-outs against one another. The case discussed in this article depicts an instance where a company’s operating agreement ultimately controlled, leaving the aggrieved party exposed and without legal safeguards under relevant New Hampshire law.
The ensuing history of Ronzio v. Tannariello and the resulting litigation is complex and is only briefly summarized here. To review the full details of this case please refer to this link.
Ronzio v. Tannariello focuses on Richard Ronzio’s (“Ronzio”) request for a renewed preliminary injunction against (ex-) business partners, Joshua Tannariello and Christopher Katsoupis (the “Defendants”). In his claim, Ronzio alleged that the Defendants intentionally froze him out of multiple LLCs, of which they were all equal members, and that they unlawfully terminated his employment. See Ronzio v. Tannariello, 2020 N.H. Super. LEXIS 24, at *2 (Dec. 11, 2020).
Ronzio claimed that the Defendants breached the terms of the LLCs’ operating agreements, violated their fiduciary duties of the utmost care and loyalty, and acted contrary to the operating agreements’ imposed covenants of good faith and fair dealings. Id. In his claim, Ronzio sought the immediate reinstatement of his employment and compensation for all wages and benefits owed since the alleged unlawful termination [and freeze out]. Upon review of the underlying facts and presented evidence, the Court ultimately denied Ronzio’s requests for relief and cited relevant provisions of the operating agreements in its rationale.
The Facts from Court Documents:
Ronzio and the Defendants (collectively the “Parties”), as respective members and managers, equally owned and operated the following LLCs: Eco Stoneworks, CRJ Properties (“CJR”), and Eco Stone South (“Eco South”). Id. Eco Stoneworks was a producer, supplier, and installer of countertops with its operations based in Milford, New Hampshire. CJR leased the commercial space where Eco Stoneworks had its principal operations. Eco South served as a supplier and installer of imported countertops from Asia, with its operations in Miramar Beach, Florida . Id. Accordingly, Eco Stoneworks and CJR were domestic New Hampshire limited liability companies, while Eco South was a foreign, Florida-based limited liability company. Id.
The Parties did not contest that they owned and operated all three LLCs equally. Id. There was also no dispute between the Parties that Ronzio’s departure from the business(es) was a direct result of his substance abuse problem. Id. Instead, the primary points of contention amongst the Parties concerned the non-mutual understanding of Ronzio’s departure.
As stated in his Verified Complaint (along with additional facts remitted with his Renewed Motion for Preliminary Injection), Ronzio alleged that the Defendants “hatched a scheme that exploited his need to address a long-standing issue with drug use.” See Ronzio, 2020 N.H. Super. LEXIS 24, at *2-3. He claimed that the Defendants “falsely” promised to permit his “expeditious return to work once clean,” and to “fairly” pay him during his absence. See Ronzio, 2020 N.H. Super. LEXIS 24, at *4.
In support of these notions, Ronzio included evidence indicating the Defendants had “always know[n] of” his substance abuse problem and that it (his substance abuse) “never interfered with the success of the business”. Ronzio, 2020 N.H. Super. LEXIS 24, at *3. Ronzio further stated that prior to his departure from the company, he became aware that Katsoupis (individually) sought to eliminate a member of the LLC in order to increase its profits, and when Ronzio refused to take part in Katsoupis’s attempt to betray Tannariello, he became “a target”. Ronzio, 2020 N.H. Super. LEXIS 24, at *3.
Ronzio’s account of the events were as follows:
→ December 10, 2018 – Ronzio left the LLCs and entered into a hospital for treatment and ceased using drugs. See Ronzio, 2020 N.H. Super. LEXIS 24, at *6-8.
→ December 17, 2018 – Ronzio was discharged from the hospital but the Defendants barred him from returning to work, insisting that he check himself into a 30-day treatment clinic. Ronzio contended that the Defendants also indicated that he would be paid “slightly” reduced compensation during this period, but that he would be welcomed back after completion of the treatment. Notwithstanding such remarks, Ronzio stated that the Defendants distributed a total of $57,000.00 to him while taking “multiples of that” for themselves. Ronzio, 2020 N.H. Super. LEXIS 24, at *4-6.
→ December 19, 2018 – Ronzio was terminated as a manager of the LLC(s) without notice. See Ronzio, 2020 N.H. Super. LEXIS 24, at *4.
→ December 21, 2018 – Ronzio entered a 30-day treatment facility and whilst there the Defendants insisted he continue the program for several months before returning to work by June of 2019. See Ronzio, 2020 N.H. Super. LEXIS 24, at *4-5.
→ May 30, 2019 – Defendants delivered a letter to Ronzio that formally terminated him as a manager and employee of the business(es). The letter further stated that all benefits and compensation would cease. Ronzio would go on to allege that he received $0.00 dollars since this date, while the Defendants continued to pay themselves. Ronzio, 2020 N.H. Super. LEXIS 24, at *5.
→ Prior to or during July of 2019 –Defendants created a competing endeavor, Eco Stone USA LLC, which excluded Ronzio. Defendants further instructed their bookkeeper, Wendy Renard, to book all income generated from “fabricated” jobs to Eco Stoneworks, and those from “prefabricated” (presumably, based on surrounding context featured in the decision “non-fabricated”) jobs to Eco Stone USA LLC. Ronzio contended that the Defendants’ actions artificially inflated the book value of the company he was excluded from (i.e. Eco Stone USA) and simultaneously decreased the book value of the company he owned (i.e. Eco Stoneworks). See Ronzio, 2020 N.H. Super. LEXIS 24, at *5-11.
In response, the Defendants refuted all of Ronzio’s claims. The Defendants alleged that their decision to remove Ronzio from the companies was made in order to “restore the stability of their business[es]”. Ronzio, 2020 N.H. Super. LEXIS 24, at *6. The Defendants proffered evidence to show that: (i) the company was experiencing a great deal of financial challenges that they believed was primarily due to Richard Ronzio’s addiction to heroin and fentanyl; (ii) the LLC operating agreement(s) waived all fiduciary duties (to the extent permissible by law) and did not guarantee employment for any member; (iii) there was no commitment for Ronzio’s return once he was terminated as an employee; (iv) they believed the creation of Eco USA was a required predicate to obtain certain business financing; and (v) that sales for the business(es) doubled since Ronzio’s termination. As such, the Defendants argued that Ronzio could not reasonably be able to prove a likelihood of success on the merits of his claim.1 See Ronzio, 2020 N.H. Super. LEXIS 24, at *5-18. Ultimately, the Court ruled in favor of the Defendants. See Ronzio, 2020 N.H. Super. LEXIS 24, at 24.
The Findings of the Court
While the Court explicitly cited the longstanding view of preliminary injunctions as an extraordinary remedy for plaintiffs, the Court’s holding implied that the issues surrounding Ronzio’s claims extended far beyond usual discussions of procedural standards for review. See Ronzio, 2020 N.H. Super. LEXIS 24, at *12.
In its decision, the Court averred that the existence of a corporate freeze out claim may only arise out of the presence of fiduciary duties amongst owners of a close corporation. See Ronzio, 2020 N.H. Super. LEXIS 24, at *14-15. While the Court noted that New Hampshire law presumes that fiduciary duties exist among shareholders of close corporations (and likely therefore member/mangers of LLCs), it readily disavowed such principles in this case due to the competitive spirit and pertinent terms of the Parties’ operating agreement. See Ronzio, 2020 N.H. Super. LEXIS 24, at *22-24.
In its reasoning, the Court referred to provisions in the operating agreement that stated: “[n]o manager shall owe any duty of care or any duty of loyalty to the Company or the member; and each fiduciary duty is eliminated to the greatest extent under the Act and applicable law”; and that no manager shall have been deemed to violate the covenant of good faith and fair dealing if the manager acted “in a manner the Manager reasonably believed to be in the best interest of the Company”. See Ronzio, 2020 N.H. Super. LEXIS 24, at *16 (quoting paragraph 7.10 of the Limited Liability Company Agreement).
The Court interpreted these provisions to be the Parties’ disclaimer of all fiduciary duties imposed by law. The Court further held that by disclaiming all fiduciary duties, the Parties impliedly agreed not to bring corporate freeze out claims against one another. See Ronzio, 2020 N.H. Super. LEXIS 24, at *16. Further agreeing with the Defendants, the Court held that there was no formal provision in the operating agreement guaranteeing employment for members of the LLC. See Ronzio, 2020 N.H. Super. LEXIS 24, at *16-17. The Court implicitly reasoned that the Defendant’s decision to terminate Ronzio’s employment was a result of his own misconduct and not a breach of the covenant of good faith and fair dealings because maintaining an employee with a drug habit was not reasonably in the best interest of the company. See Ronzio, 2020 N.H. Super. LEXIS 24, at *15-21.
Forming an LLC in New Hampshire
Business owners and legal professionals not familiar with the process of forming an LLC in New Hampshire may be surprised to learn that the New Hampshire LLC statute allows for members and managers to eliminate their (otherwise imposed) fiduciary duties via the terms of their operating agreements.
Section 304-C:107 of the New Hampshire LLC statute addresses the expansion, restriction, and elimination of fiduciary duties in an LLC. Therein, it specifically outlines that any duties (including fiduciary duties) of a member or a manager may be expanded, restricted, or eliminated by provisions in the operating agreement. See N.H. REV. STAT. ANN.§ 304-C:107 (LexisNexis, Lexis Advance through the 2020 Regular Session (Act Chapter 39)).
In this case, the operating agreement dictated how the Court proceeded and the operating agreement comported with New Hampshire Law. Given that each member of Eco Stoneworks agreed that the members would owe no fiduciary duty to the LLC, and that specifically no manager owed any duty of loyalty to the members, the Court indicated that Ronzio’s claims of corporate freeze-out failed.
The Fine Print Details
Determining whether a business owner’s termination is an act of freeze-out or if the actions of other members cause a breach of any fiduciary duty depends on the facts and circumstances of a particular claim. In the case of Ronzio v. Tannariello, the Court likely was correct in its decision to uphold the terms of the operating agreement given the relevant provisions of the New Hampshire LLC statute.
If you are a member of an LLC and have not reviewed your companies operating agreement, take the time to review the sections of the agreement that cover “the covenant of good faith and fair dealing” as well as the “fiduciary duties of members and managers”. Make sure these sections are clear and that you understand your roles and responsibilities to your business partners. If they are not clear, call us to discuss.
1 “A preliminary injunction should not be issued unless the moving party demonstrates: (1) a likelihood of success on the merits; (2) that “there is immediate danger of irreparable harm to the party seeking injunctive relief”; and (3) that “there is no adequate remedy at law”. N.H. Dept. of Envtl. Servs. v. Mottolo, 155 N.H. 57, 63 (2007).