Penn, LLC et al v. Prosper Business Development Corporation, et al
Filing
237
ORDER granting 181 Motion for Partial Summary Judgment; denying 229 Sealed Motion. Signed by Judge Gregory L Frost on 6/24/13. (kn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
PENN, LLC, et al.,
Plaintiffs,
Case No. 2:10-cv-0993
JUDGE GREGORY L. FROST
Magistrate Judge Terence P. Kemp
v.
PROSPER BUSINESS DEVELOPMENT
CORPORATION, et al.,
Defendants.
OPINION AND ORDER
This matter is before the Court for consideration of Plaintiffs’ Motion to Supplement the
Record Instanter Based on New Evidence Adduced in Depositions that Big Research, LLC Has
Not Dissolved (ECF No. 229) and Defendants’ Memorandum in Opposition to the motion to
supplement (ECF No. 233). Also before the Court is Defendants’ motion for partial summary
judgment on “Claims that Defendants Usurped Business Opportunities” (ECF No. 181),
Plaintiffs’ combined memorandum contra and Fed. R. Civ. P. 56(d) motion for extension (ECF
No. 183), and Defendants’ combined reply in support of partial summary judgment and
opposition to Plaintiffs’ Rule 56(d) motion (ECF No. 191). For the reasons stated below, the
Court DENIES Plaintiffs’ motion to supplement, DENIES Plaintiffs’ Rule 56(d) motion, and
GRANTS Defendants’ motion for partial summary judgment.
I. Background
This case is only one action in a contentious commercial dispute involving a series of
legal actions spanning several different courts. Plaintiff Penn, LLC (“Penn”) filed this action on
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behalf of itself and derivatively on behalf of Plaintiff Big Research, LLC (“Big Research”). Big
Research is a Delaware limited liability company of which Penn and Defendant Prosper Business
Development Corporation (“Prosper”) were members. The motions currently before the Court
stem from allegations that Defendants usurped business opportunities of Big Research for the
benefit of Prosper.
Penn is a Delaware limited liability company with its principal place of business in Will
County, Illinois. Prosper is an Ohio corporation based in Worthington, Ohio. In 2000 Penn and
Prosper formed Big Research as a company in the business of conducting survey research.
At the time of formation, Penn and Prosper were equal owners with Prosper controlling
the day-to-day activities of Big Research. The Operating Agreement called for the company to
be governed by a Board of Members which consisted of two Prosper executives, Phillip Rist and
Gary Drenik, and one representative from Penn. Subsequently, Big Research sold 5.22% of its
membership units to outside investors to raise capital. This lowered Penn’s and Prosper’s
membership interests to 47.39% each.
In 2004 Prosper and the outside investors, without the vote of Penn, passed several Board
resolutions that underlie the contentions in the multiplicity of lawsuits between these parties. A
detailed discussion of the resolutions and ensuing disputes can be found in this Court’s Opinion
and Order granting in part and denying in part Defendants’ motion for partial summary judgment
with regard to certain claims contained in the Complaint. (ECF No. 179.) The instant motions
relate to later actions taken by the Board to dissolve the company after arbitration proceedings
had commenced in response to the 2004 resolutions. The facts detailed below relate solely to the
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vote and dissolution of Big Research.
Some time after the votes in 2004, Prosper purchased the membership interests of many
of the outside investors, giving it a 50.71% interest in Big Research. Robert Kamerschen was
the only remaining outside investor with a 1.9% interest. In November 2009 Kamerschen
requested to withdraw as a member pursuant to Section 4.05 of the Operating Agreement. A
majority of the Board approved, with Penn voting against. In December 2009, a majority of the
Board, again with Penn voting against, voted to dissolve Big Research. Prosper began the
winding up process pursuant to Section 10.02 of the Operating Agreement. Section 10.02
provides that “[i]n the event of the dissolution of the Company for any reason, the Management
Company shall commence to wind up the affairs of the Company.”
Penn filed suit in the Franklin County (Ohio) Court of Common Pleas to enjoin the
dissolution and winding up of Big Research. Penn, LLC v. Big Research, LLC, No. 10-cv-2909
(Franklin Cty. C.P. Ct. filed Feb. 24, 2010). Big Research moved for partial summary judgment,
asking the state court to determine whether the withdrawal of Kamerschen was a “dissolution
event” under the Operating Agreement and whether Prosper was entitled to wind up Big
Research. Penn ultimately withdrew its objection to the winding up.
In December 2011, the state court granted partial summary judgment in favor of Big
Research. Penn, LLC v. Big Research, LLC, No. 10-cv-2909 (Franklin Cty. C.P. Ct. Dec. 12,
2011) (Decision and Judgment Entry). The court “declared that (1) the withdrawal of
Kamerschen was a dissolution event; and (2) pursuant to the Big Research Operating Agreement,
Prosper is entitled to wind-up [sic] Big Research.” Id. Based on the state court judgment, this
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Court found that the doctrine of claim preclusion barred Penn from challenging the validity of
the 2009 dissolution. (Order & Op. of Feb. 8, 2013, ECF No. 179 at PAGEID # 6663-66.)
Penn filed this lawsuit while the state action was pending. Penn’s complaint on behalf of
itself and Big Research alleged (1) a violation of the Racketeer Influenced and Corrupt
Organizations Act (RICO); (2) fraud; (3) conversion/unjust enrichment; and (4) breach of
fiduciary duties. The only claims that remain are those for conversion/unjust enrichment and
breach of fiduciary duties as against Defendants Prosper, Rist, and Drenik.
II. Discussion
A. Motion to Supplement
At a status conference held on May 2, 2013, Plaintiffs orally moved for an order allowing
them to supplement their response to Defendants’ motion for partial summary judgment now
before the Court. The Court denied Plaintiffs’ motion to supplement. (ECF No. 203 at
PAGEID# 9242.) Plaintiffs now reprise their motion in written form, but fail to change the
opinion of this Court.
As this Court has explained on several occasions, for the purposes of the trial in this case,
Big Research was dissolved in December 2009. Plaintiffs have been precluded from challenging
the validity of the dissolution. (Order & Op. of Feb. 8, 2013, ECF No. 179 at PAGEID # 666366.) Therefore, this Court finds that Plaintiffs are not entitled to introduce evidence into the
record to show that “Big Research LLC Has Not Dissolved.” (Pls.’ Mot., ECF No. 229.) As far
as this Court is concerned, Big Research has been dissolved. The Court DENIES (again)
Plaintiffs’ motion to supplement.
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B. Partial Summary Judgment and Rule 56(d)
Defendants seek partial summary judgment on any claims alleging usurpation of a
business opportunity arising after the 2009 dissolution of Big Research. Summary judgment is
proper “if the movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A fact is material only
if it might affect the outcome of the case under the governing law. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 91 L. Ed. 202 (1986). There is no issue of material fact
unless the evidence is sufficient to support a reasonable jury finding in favor of the nonmoving
party. Id.
The burden is on the moving party to show that the opposing party has failed to establish
an essential element of its case. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 91
L. Ed. 2d 265 (1986); Guarino v. Brookfield Twp. Trustees, 980 F.2d 399, 403 (6th Cir. 1992).
If the moving party meets its burden, the party opposing summary judgment has the burden of
bringing specific facts to the court’s attention to show that a material issue for trial exists.
Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 89
L. Ed. 2d 538 (1986); see also Fed. R. Civ. P. 56(c)(1).
The court is not required to search the record in order to determine if a genuine issue of
material fact exists. Street v. J.C. Bradford & Co., 886 F.2d 1472, 1478-80 (6th Cir. 1989);
Guarino, 980 F.2d at 404; see also Fed. R. Civ. P. 56(c)(3) (“The court need consider only the
cited materials…”). Accordingly, this Court will review the motions and record before it and
determine whether the evidence is so one-sided that the moving party must prevail as a matter of
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law. Anderson, 477 U.S. at 252.
1. Plaintiffs’ Rule 56(d) Motion
The Court first considers Plaintiffs’ “Motion for Extension Pursuant to 56(d).” (ECF No.
183.) Fed. R. Civ. P. 56(d) provides that the court may defer consideration of a summary
judgment motion if the non-movant “shows by affidavit or declaration that, for specified
reasons, it cannot present facts essential to justify its opposition” (emphasis added). The party
seeking relief under Rule 56(d) has the burden of informing the court of its need for discovery.
Vance By and Through Hammons v. United States, 90 F.3d 1145, 1149 (6th Cir. 1996). The
Plaintiffs have failed to meet this burden.
In order to qualify for Rule 56(d) relief, the moving party must file an affidavit or
declaration. Cooper v. Commercial Sav. Bank, 2:12-cv-0825, 2013 WL 162776 *1 (S.D. Ohio
Apr. 16, 2013) (“A necessary prerequisite to meeting this burden is submitting an affidavit or
declaration to support the party’s explanation[.]”) (emphasis added). Plaintiffs have filed no
such document. Though Plaintiffs state in their own motion that “Rule 56(d)…requires only a
sworn showing that further discovery is needed and has been seasonably sought,” Plaintiffs have
made no such showing. (Pls.’ Opp’n and Mot. ECF No. 183 at PAGEID # 6711) (emphasis
added).
Even if this Court were to look past the failure of Plaintiffs to comply with the basic
requirements of Rule 56(d), Plaintiffs’ motion would still fail. This Court does not see how any
fact beyond those already contained in the record could be relevant in responding to the motion
for summary judgment. As this Court already stated when it previously denied Plaintiffs’ motion
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to “supplement” the record, the motion at issue appears to rest largely on issues that are capable
of determination as a matter of law based on the existing record. (ECF No. 203 at PAGEID #
9242.)
Plaintiffs have failed to sustain their burden of complying with the procedural
requirements of Rule 56(d) and have made no showing that there is any relevant testimony that
could be gained or what that evidence might be if it exists. The Court DENIES Plaintiffs’ Rule
56(d) motion.
2. Usurpation of Business Opportunity
Having found that Plaintiffs are not entitled to an extension pursuant to Rule 56(d), it is
appropriate for this Court to proceed to the merits of Defendants’ motion. Cf. Chilingirian v.
Boris, 882 F.2d 200, 203 (6th Cir. 1989); Shavrnoch v. Clark Oil and Ref. Corp., 726 F.2d 291,
294 (6th Cir. 1984); Cacevic v. City of Hazel Park, 226 F.3d 483, 488 (6th Cir. 2000).
Defendants move for partial summary judgment on all claims based on the usurpation of
business opportunities occurring after the dissolution of Big Research in December 2009.
(Defs.’ Mot. ECF No. 181 at PAGEID # 6690.) Plaintiffs’ claims rest on the theory that
Defendants ultimately continued to operate Big Research under the name Consumer Research
Partners (“Consumer”). (Pls.’s Opp’n ECF No. 183 at PAGEID # 6704.) Plaintiffs argue that
Consumer “has the same customers, the same panel providers, the same software, the same
employees, and the same methodology and technology” as Big Research. (Id.) Defendants
argue that Plaintiffs cannot show that Big Research had an “interest or expectancy” in any
business opportunities following dissolution and therefore Defendants cannot have usurped a
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business opportunity. (Defs.’ Mot. ECF No. 181 at PAGEID # 6690.)
a. Standard
Delaware law provides the substantive law applicable to this case.1 Delaware law
describes the doctrine of corporate opportunity as “but one species of the broad fiduciary duties
assumed by a corporate director or officer.” Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 154
(Del. 1996). “In light of the diverse and often competing obligations faced by directors and
officers…the corporate opportunity doctrine arose as a means of defining the parameters of
fiduciary duty in instances of potential conflict.” Id.
In order to show usurpation of a business opportunity, Plaintiffs must establish that
Defendants’ actions violate the four-prong business opportunity test. They must show (1) Big
Research was financially able to exploit the opportunity; (2) the opportunity was within Big
Research’s line of business; (3) Big Research had an interest or expectancy in the opportunity;
and (4) by taking the opportunity for themselves, Defendants placed themselves in a position
“inimical” to their duties owed to Big Research. Id. at 154-55.
Defendants contest only interest and expectancy (prong three). (Defs.’ Mot. ECF No.
181 at PAGEID # 6690.) The Defendants argue that Big Research could not have had an interest
or expectancy in any new opportunity arising after December 2009 because the business had
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The Court applies Delaware substantive law in accordance with the choice of law
provision in the Operating Agreement which states “[a]ll questions with respect to the
construction of this Agreement and the rights and liabilities of the parties shall be determined in
accordance with the applicable provisions of the laws of the State of Delaware, and this
Agreement is intended to be preformed in accordance with, and only to the extent permitted by,
all applicable laws, ordinances, rules and regulations of such state.” (Operating Agreement
§12.02; Ex. A, ECF No. 119-3 at PAGEID # 3886.)
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been dissolved and was in the process of winding up. Plaintiffs contend that whether a business
opportunity has been usurped is a question of fact for the trier of fact and that the Defendants’
actions are in express violation of the Operating Agreement. (Pls.’ Opp’n ECF No. 183 at
PAGEID # 6705-06, 09-11.)
b. Interest and Expectancy
This Court has precluded Plaintiffs from pressing claims on the validity of the 2009
dissolution of Big Research. (Order & Op. of Feb. 8, 2013, ECF No. 179 at PAGEID # 666366.) Recognizing Big Research as dissolved in December 2009, Plaintiffs’ claims fail as a
matter of law. Plaintiffs cannot establish an interest or expectancy because the business was not
legally able to take advantage of any new opportunities.
The Big Research Operating Agreement provides that once the company has been
dissolved, the managing company will wind down the affairs of the business and liquidate the
assets and investments. (Operating Agreement §10.02, Ex. A, ECF No. 119-3 at PAGEID #
3884.) Once Big Research was dissolved in 2009, the business had to enter the process of
winding up its affairs. Pursuant to Delaware limited liability company laws, the persons winding
up the company have the right to “prosecute and defend suits, whether civil, criminal or
administrative, gradually settle and close the limited liability company's business, dispose of and
convey the limited liability company’s property, discharge or make reasonable provision for the
limited liability company’s liabilities, and distribute to the members any remaining assets of the
limited liability company.” 6 Del. C. §18-803(b). Prosper did not have the authority, under
Delaware law, to take on new obligations on behalf of Big Research. Doing so would be
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inconsistent with the process of winding up the business and affairs of the company. An action
the company cannot lawfully take cannot give rise to an interest or expectancy within the
meaning of the business opportunity test.
At least one Delaware court has found that even when a former fiduciary starts a “new
business” after the termination of the previous business, no claim for breach of fiduciary duty
can withstand the termination of the former entity. Williams v. Don Yerkes Fine Cars, Inc., 4
Del. J. Corp. L. 552, 560-61, No. 4777, 1977 WL 2582 (Del. Ch. 1977). The court in Williams
held that there was no usurpation of business opportunity even when “[defendants] formed a new
business arrangement, obtained a new lease, and continued a [similar] business at the same
location” because at the time the act occurred the former business was “without means” to
continue the business or engage in new business. Id.
The facts of Williams are analogous to the case at bar. Prosper had the right to continue
in the same line of business. Big Research was not in the position, legally or realistically, to take
advantage of any new business after its dissolution. Big Research could not take advantage of
any opportunities and, as a result, it could not have had an interest or expectancy in such
opportunities.
Furthermore, under Delaware law the fiduciary duties of the parties in respect to
usurpation end when the entity ends. In Donisi v. DeCampli, the chancery court found that the
fiduciary duties owed by the parties to a joint venture terminate with the end of the relationship.
No. 9425, 1995 WL 398536 at *9 (Del. Ch. June 28, 1995) amended by No. CIV. A. 9425, 1996
WL 39680 (Del. Ch. Jan. 23, 1996). The court refused to “entertain a legal fiction and create
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abstract duties and speculate about breaches and consequential damages where the parties knew
then and must know now their business relationship terminated that fateful day.” Id. The court
found that the only continuing purpose of the business past “that fateful day” was to wind up its
affairs. Id. The parties here “knew then and must know now” that the business has been
dissolved and the only remaining duty is the winding up. The fiduciary duties of the parties
terminated upon the dissolution of Big Research in December 2009. See also Gen. Video Corp.
v. Kertesz, C.A. No. 1922-VCL, 2008 WL 5247120 at *18 (Del. Ch. Dec. 17, 2008) (“[I]t is the
overwhelming conclusion of this court that as of March 15, 2003, both parties knew and
understood that their venture…was at an end. Thus, any claims for breach of fiduciary
duty…predicated on acts after March 15, 2003 must fail.”).
Penn is unable to show any case law that disputes these propositions. It would be
inconsistent with Delaware law to recognize claims for usurpation of a business opportunity past
the date of the entity’s termination. The law provides that (1) an entity that has ceased to exist
cannot have an interest and expectancy in an opportunity and therefore fails prong three of the
business opportunity test; and (2) the fiduciary duty not to usurp a business opportunity
terminates with the entity. Prosper cannot, as a matter of law, have usurped any business
opportunity of Big Research arising after dissolution of the business in December 2009.
Plaintiffs’ argument that this is a factual question to be determined by the legal standard
of “entire fairness” is misguided and not relevant to the determination at hand. Entire fairness is
a burden shifting doctrine which places the evidentiary burden on the defense to prove the
transaction was entirely fair. Schreiber v. Bryan, 396 A.2d 512, 519 (Del. Ch. 1978). The
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doctrine is inapplicable in this case. In order to invoke the entire fairness standard and shift the
burden to the Defendants, the Plaintiffs must first prove that a transaction occurred which can
give rise to liability. The Plaintiffs’ claims for usurpation of a business opportunity after the
December 2009 dissolution are unable to overcome this first hurdle because Defendants cannot
usurp the opportunities of a dissolved entity as a matter of law. Thus, no transaction giving rise
to liability has occurred as a matter of law and the entire fairness standard is inapplicable.
c. Operating Agreement Section 4.08
Penn claims that Prosper has also usurped business opportunities under Section 4.08 of
the Operating Agreement. (Pls.’ Opp’n ECF No. 183 at PAGEID # 6709-11.) Section 4.08
provides that “[m]embers shall not, either during the term of this agreement or for a period of
two (2) years after the termination or expiration of this Agreement, directly or in concert with
any other person or entity, or indirectly: (1) circumvent or interfere with any of the Company’s
business relationships…” (Defs.’ Mot. ECF No. 181 at PAGEID # 6697.) Plaintiffs’ claims
under Section 4.08 of the Operating Agreement must fail for the same reasons as stated above.
See Section III. B. 2. supra.
The Operating Agreement, by its own terms, only precludes the parties from interfering
with “the Company’s business relationships.” Big Research, as a company, no longer has any
business relationships that Prosper can “circumvent.” Big Research has been dissolved and must
be wound up. The only valid purpose for its business connections is completing work in
progress and settling the affairs of the company. Prosper can hardly be “circumventing” that
purpose since it is the one in charge of the winding up. Prosper’s actions of referring
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relationships to another business or even taking those relationships for itself cannot interfere with
the business of Big Research because Big Research can no longer engage in new business going
forward.
III. Conclusion
For the foregoing reasons, the Court DENIES Plaintiffs’ Motion to Supplement (ECF
No. 229), DENIES Plaintiffs’ Rule 56(d) motion for extension (ECF No. 183), and GRANTS
Defendants’ motion for partial summary judgment on claims of usurpation of business
opportunities arising after the dissolution of Big Research in December 2009 (ECF No. 181).
IT IS SO ORDERED.
/s/ Gregory L. Frost
GREGORY L. FROST
UNITED STATES DISTRICT JUDGE
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