A self-described “world-renowned Neapolitan pizza chef” won a round in court earlier this month in a dispute with his business partner over control of a popular pizzeria located in Manhattan’s Greenwich Village. The court’s opinion by Manhattan Commercial Division Justice O. Peter Sherwood in Manzella v Caporuscio, 2015 NY Slip Op 31870(U)[Sup Ct NY County Oct. 6, 2015], granted summary judgment for the chef/majority member on his counterclaim against the minority member for breach of fiduciary duty and modified a prior Consent Order to authorize termination of the minority member’s employment for cause.
The case involves a Greenwich Village restaurant called Keste Pizza and Vino founded in 2009 by pizza chef Roberto Caporuscio. Since 2012 the business is co-owned by Caporuscio and Sandra Manzella as 55% and 45% members, respectively, of Keste Group LLC. Keste has a fairly standard operating agreement for member-managed LLCs, giving Caporuscio as majority member the controlling vote with a few exceptions requiring unanimous consent such as the admission of a new member.
Keste’s operating agreement (read here) doesn’t mention much less guarantee a member’s “employment” by the LLC. What it does say — which apparently stiffened spines on both sides in the lead-up to litigation — is that “[n]otwithstanding anything to the contrary contained in the provisions of this Agreement, the Members agree that Caporuscio and Manzella shall have primary responsibility for running the day-to-day operations of the Company” (¶ 4.1).
It also provides, somewhat incongruously, that “[u]nless otherwise expressly approved by the Members, no Member shall be entitled to any compensation for services or activities undertaken in its [sic] capacity as a Member of the Company” and, in the very next sentence, “[n]otwithstanding the foregoing, each of the Members agrees that Caporuscio and Manzella shall be entitled to compensation, taken at such times and in such amounts as they reasonably determine, for running the day-to-day operations of the Company” (¶ 4.9).
Within a year the two owners had a falling out over charges and counter-charges of financial abuses, self-dealing and mismanagement, climaxing in April 2013 when Caporuscio took sole control of the company’s banking, cut off Manzella’s weekly salary and distributions, and advised staff that Manzella was “fired” and barred from the business premises, or so Manzella alleged in her complaint filed that same month seeking to enforce her alleged right to act as the co-managing member (read here).
Simultaneously with her complaint Manzella moved for, and obtained from Justice Sherwood, an interim restraining order (read here) reinstating her as Keste’s co-manager, requiring staff to be informed she was not fired, and also reinstating her weekly $840 salary. Manzella’s underlying motion for a preliminary injunction was resolved in November 2013 by Consent Order (read here) that maintained Manzella’s co-manager role and weekly salary; detailed her and Caporuscio’s respective job responsibilities; specified banking procedures; and provided for joint access to books and records. However, it also preserved Caporuscio’s rights as majority member with voting control as provided in the operating agreement, and also stated:
Should Caporuscio and Manzella be unable to agree on a matter relating to the day-to-day operations of Keste, then, consistent with Section 4.1 of the Operating Agreement, Caporuscio’s majority interest shall control with respect to that matter.
Meanwhile, Caporuscio filed counterclaims against Manzella for breach of fiduciary duty, breach of the operating agreement, and several other causes of action including judicial dissolution (read here).
About a year later, Caporuscio moved to hold Manzella in contempt of the Consent Order for various actions allegedly taken in violation of its terms, including Manzella’s withdrawal of $17,500 of company funds to pay her own attorneys, without Caporuscio’s consent. In April 2015, Justice Sherwood issued an order (read here) conditionally holding Manzella in contempt unless within seven days she repaid the “unauthorized withdrawal.”
Caporuscio then moved for partial summary judgment on his counterclaims for breach of fiduciary duty, breach of the operating agreement, and breach of Manzella’s implied duty of good faith and fair dealing. Caporuscio’s supporting brief (read here) identified an array of alleged breaches by Manzella including unauthorized withdrawal of funds, underreporting of employee payroll hours, deficient bookkeeping, and failure to make a required capital contribution, all of which, he argued, called for modification of the Consent Order to permit him to terminate Manzella’s employment and to limit Manzella’s access to Keste’s business records.
Manzella’s opposing brief (read here) denied any misconduct on her part and contended that all of her actions were appropriately taken as co-managing member with shared responsibility for day-to-day operations as specified in ¶ 4.1 of the operating agreement and in the Consent Order.
Manzella did not help her own cause by failing to file a statement opposing Caporuscio’s Statement of Undisputed Facts under Commercial Division Rule 19-a, as a consequence of which Justice Sherwood stated at page 2 of his decision that the facts in Caporuscio’s Statement “are deemed admitted for purposes of this motion.”
Justice Sherwood nonetheless agreed with Manzella that Caporuscio was not entitled to summary judgment on his counterclaim for breach of the operating agreement’s provisions concerning majority control and capital contributions. The court’s decision went even further in Manzella’s favor on Caporuscio’s counterclaim for breach of the implied duty of good faith and fair dealing, dismissing it as duplicative of the counterclaim for breach of the operating agreement.
Manzella’s luck ran out, however, when Justice Sherwood granted Caporuscio summary judgment on his counterclaim for breach of fiduciary duty based on (1) the $17,500 she withdrew without authorization to pay her personal legal fees, and (2) weekly salary payments she took even when she did not show up for work. “Taking money to which one is not entitled from one’s principal is a breach of fiduciary duty,” Justice Sherwood wrote.
And what of the remedy for Manzella’s breach? Caporuscio got exactly what he asked for, namely, the right to terminate Manzella’s employment “for cause” and limit her to read-only access to the company’s financial books and records. Justice Sherwood explained:
Manzella’s unwillingness to accept Caporuscio as the person clothed with management and control of the enterprise, including authority to set reasonable work-schedules for all employees, lies at the base of this dispute. His authority to make employment decisions in the best interest of the company should be recognized.
Because defendant’s second counterclaim must be granted, Caporuscio’s request that the Consent Order be modified and that Keste be allowed to terminate Manzella’s employment, remove her as the bookkeeper, and that she be restricted to “read-only” access to Keste’s books will be granted. The Operating Agreement gives Caporuscio, as majority Member, the power to terminate employees, including Manzella, for cause. It is undisputed that Manzella draws a salary over Caporuscio’s objection without performing her bookkeeping duties. Additionally, she has been found to have misappropriated Keste funds. Further, she has repeatedly engaged in seriously disruptive activity at the restaurant, activity which is harmful to the business.
On such evidence, Keste, through its majority Member, has ample ground to discharge Manzella from her employment. Nothing in either the Operating Agreement, or arguably the Consent Order, prohibits the company from terminating an employee for cause. The Consent Order will be amended to make this clear. However, termination of employment does not oust Manzella of her rights as a Member of Keste, including rights to distributions and information concerning company affairs.
Note the court’s statement that nothing in the operating agreement prohibits the company from terminating an employee for cause which, in my view, underscores the uncertainty injected into an otherwise clear provision for majority control in ¶ 4.1 and elsewhere in the operating agreement, by giving the two members, “notwithstanding anything to the contrary” in the agreement, a shared “primary responsibility for running the day-to-day operations of the Company.”
The same provision (¶ 4.1) arguably creates more uncertainty by stating that the LLC “shall not have any Managers within the meaning of the [LLC] Act.” Does that mean the majority member cannot exercise his voting control to remove a member-manager with or without cause, as authorized by § 414 of the LLC Law?
It’s easy to dissect and find drafting glitches in an operating agreement after things blow up. The more useful takeaway from Manzella is that the right of a member of a member-managed LLC to actively participate in company management is perhaps the most critical consideration — and likely future flashpoint — for both the minority and majority member. Therefore the drafters of the operating agreement, regardless whose interests they represent, must pay supreme attention to the agreement’s provisions delegating management authority, and the conditions under which a member can forfeit it, to avoid any inconsistencies that plant the seeds for future dissension.