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InteliClear, LLC v. Victor

United States District Court, D. Connecticut

October 3, 2016

INTELICLEAR, LLC, Plaintiff,
v.
ROBERT J. VICTOR, Defendant.

          RULING GRANTING PLAINTIFF'S MOTION FOR A PRELIMINARY INJUNCTION

          Janet Bond Arterton, U.S.D.J.

         On August 17, 2016, Plaintiff InteliClear filed this action against Defendant Robert J. Victor ("Victor") alleging breach of fiduciary duty (Count One); civil theft in violation of Conn. Gen. Stat. § 52-564 (Count Two); conversion (Count Three); and demanding an accounting of all financial transactions regarding InteliClear assets and funds performed by Victor or at his direction (Count Four). On September 1, 2016 Plaintiff filed an amended complaint adding a claim for tortious interference with business expectancies (Count Five); and seeking a declaratory judgment that Defendant has been properly dissociated as an InteliClear member, that Member Martin Barretto ("Barretto") has replaced him as General Manager and Tax Matters Member and that Victor may not continue to act on InteliClear's behalf (Count Six).

         That same day, Plaintiff filed a Motion [Doc. # 11] for an Ex Parte Temporary Restraining Order and Preliminary Injunction[1] directing Victor to: (1) deliver all InteliClear assets, funds, books, records and property to InteliClear's principal office and (2) authorize Union Savings Bank and Wells Fargo to transfer all InteliClear funds at their banks to a bank account in the name of InteliClear as designated by Barretto, the new General Manager. (Pl.'s Mem. Supp. Mot. for Preliminary Injunction [Doc. # 11-4] at 16-17.) Additionally, Plaintiff asks the Court to enjoin Victor and all others acting in concert with him from: "(1) holding himself out as a member, General Manager, and Tax Matters Member of InteliClear; (2) continuing to act on InteliClear's behalf; (3) filing any tax returns or amended returns on InteliClear's behalf; and (4) interfering with InteliClear's continuing business and customer relations, opportunities, and expectancies." (Id. at 17.)

         Defendant opposes Plaintiffs motion, arguing that the Court lacks jurisdiction (incomplete diversity) to hear the case because Victor has not been effectively dissociated from InteliClear and thus Plaintiff LLC still shares his citizenship. As explained below, the evidence and arguments presented at the two-day injunction hearing are sufficient for the Court to conclude it has subject matter jurisdiction and that Plaintiffs motion for a preliminary injunction should be granted in part.

         I. Background

         On February 20, 2004 Victor filed the Articles of Organization of Stockbridge Systems, LLC (whose name was later changed to InteliClear) with the Connecticut Secretary of the State. (Transcript I at 59-60.) Just under a year later, on January 1, 2005, Victor, Guy T. Powell ("Powell"), Antonio Martinho Barretto, and John Paul DeVito ("DeVito") entered into an Operating Agreement (the "Operating Agreement") (Pl.'s Ex. 2), a Members Agreement (the "Members Agreement) (Pl.'s Ex. 1), and a Members Confidentiality and Non-Compete Agreement (the "Non-Compete Agreement") (Pl.'s Ex. 3) setting out the terms of membership in InteliClear and the manner of its operation. (Transcript I at 25-26.) Victor, Powell and each had a 30% interest in InteliClear and DeVito had a 10% interest. (Id. at 169.) Victor was appointed General Manager with authorization to manage the day-to-day operations of InteliClear. (Id. at 28; Pl.'s Ex. 2, § 6.2(a).) He was also appointed the Tax Matters Member. (Pl.'s Ex. 2, § 7.4.)

         However, the relationship between Victor and the other three Members began to sour, resulting in litigation in both state and federal courts. In September 2015, Victor brought an injunctive action against Powell, Barretto, Brandon Consulting Associates, Inc. (a company controlled by Barretto), and InteliClear (as a nominal defendant who Victor later agreed to drop from the action) in Connecticut superior court seeking to enjoin Powell and Barretto, among other things, from improperly taking control of InteliClear's bank accounts after they attempted to close InteliClear's bank account in Connecticut and open a new one in New Jersey, over which Powell and Barretto would have sole control. (Def.'s Mem. Opp'n to Pl.'s Mot. for Preliminary Injunction [Doc. # 18] at 4-6; Pl.'s Ex. 9 at 7, 21.) Prior to filing his lawsuit, Victor had retained attorney Ann Rubin of Carmody & Torrance, LLP ("Carmody") to represent InteliClear (Transcript I at 84), and she and her colleague had "repeatedly advised Powell and Barretto that their actions violated their duties to InteliClear as well as the terms of InteliClear's operating agreement."[2] (Def.'s Mem. Opp'n to Pl.'s Mot. for Preliminary Injunction at 4; see also Def.'s Exs C, D, E.) In the context of Victor's state court action, mediation sessions were held and the parties reached an agreement on how InteliClear would continue to function pending the resolution of the suit. (Def.'s Mem. Opp'n to Pl.'s Mot. for Preliminary Injunction at 7; Def.'s Exs. A, B.)

         Thereafter, the defendants removed Victor's action to federal court claiming diversity jurisdiction, and Powell and Barretto moved to dismiss, contending that these were not Victor's individual claims but were based upon alleged injury to InteliClear. (Def.'s Mem. Opp'n to Pl.'s Mot. for Preliminary Injunction at 7-8.) In response, Victor voluntarily dismissed his action because bringing InteliClear into the action would defeat diversity jurisdiction (id. at 8-9), and advised the court and opposing counsel that he intended to re-file these claims on behalf of InteliClear in state court as derivative claims, which would provide a single forum to resolve all the competing claims and counterclaims. (Id. at 10.) The federal district court dismissed the action without prejudice on August 15, 2016. Victor v. Powell et at, 16-cv-817-VLB, Doc. # 29 (D. Conn). Baretto, Powell and Divito then deemed the prior mediation agreement to have expired. (Transcript II at 415-16.)

         The next day, Barretto, Powell, and DeVito passed a "Unanimous Written Consent of the Members of InteliClear, LLC" (the "Consent"), which removed Victor as General Manager. (Pl.'s Exs. 21, 22.) On August 17, they passed a series of accompanying resolutions which, among other things, purported to change the company's address and to authorize closing InteliClear's existing bank account and opening a new one, with all payments received by InteliClear to be directed to the new account. (Pl.'s Ex. 10.) That same day, counsel for Barretto and Powell, who also represented InteliClear, filed the instant action. Complaint [Doc. #1], InteliClear v. Victor, No. 3:16-CV-1403 (JBA) (D. Conn. August 17, 2016). On August 18, Barretto, Powell, and DeVito sent Victor a letter by email communicating the steps they had taken to dissociate him[3] and directing him to cease acting on InteliClear's behalf and to return all InteliClear property to InteliClear's New Jersey office. (Pl.'s Ex. 4.)

         As grounds for their actions, Barretto, Powell, and DeVito alleged that throughout Victor's tenure as General Manager of InteliClear he had breached the Operating Agreement and the Members Agreement in a multitude of ways, as articulated in the Consent, including issuing checks in excess of $5, 000 without the written approval of a majority of the membership interest in violation of Section 6.1(b)(viii) of the Operating Agreement, [4] taking distributions without approval of a super majority of the membership interest and not in proportion to his ownership interest in InteliClear in violation of Section 5.1 of the Operating Agreement, [5] and repeatedly paying with InteliClear funds his personal expenses not claimed as business expenses and without advance approval by InteliClear, in violation of Paragraph 4 of the Members Agreement.[6] (Pl.'s Ex 21 at 1.)

         As provided in their letter to Victor, Barretto, Powell and DeVito treated Victor's breaches as a "default ... in the performance of [his] covenants, obligations, responsibilities, duties or undertakings set forth and provided for under the provisions of the Agreements, and elected, pursuant to Paragraph 12, [7] to treat the default as a withdrawal by Victor as a Member of InteliClear, and to treat the withdrawal as an Event of Dissociation under Paragraph 8.B of the Members Agreement, and Section 9.1(b)(4)(C) of the Operating Agreement.[8] (Pl.'s Ex. 4.)

         The three remaining Members decided to continue the business of InteliClear in accordance with Section 9.2(b) of the Operating Agreement, [9] and elected Barratto as the new General Manager. (Id. at 2.) Thus, Plaintiff contends that as of August 16, 2016 Victor was effectively dissociated from InteliClear and is no longer its Member, General Manager, or Tax Matters Member. (Compl. ¶ 30.) However, Victor vehemently disputes that he has been effectively dissociated from InteliClear and continues to hold himself out as a member and General Manager of InteliClear.[10] InteliClear's Union Savings Bank account was frozen by the bank pending resolution over Victor's authority to act on InteliClear's behalf.[11] (Transcript I at 201.)

         Victor claims that "Guy T. Powell and Antonio M. Barretto caused InteliClear to bring this action to further their personal interests in taking away defendant Robert J. Victor's membership interest in InteliClear, which is likely worth at least several million dollars"[12] (Def.'s Mem. Opp'n to Pl.'s Mot. Preliminary Injunction [Doc. # 18] at 1), and that Powell and Barretto were "staging a coup to take over InteliClear":

The present claim for injunctive relief thus has been completely manufactured by Powell and Baretto's actions in violation of their agreements, by which they have sought once again to take control of InteliClear's banking and customer relationships, with the result that InteliClear's bank accounts and its practical ability to function both have been frozen.

(Id. 7-8.)- Victor asserts that "Powell and Barretto took their most drastic action, purporting to remove Victor as a member of InteliClear shortly after Victor presented a draft term sheet and memorandum of understanding describing a new transaction that is potentially worth more than ten million dollars to InteliClear." (Id. at 13.)

         Five months earlier, in March 2016, Victor sold his home in Goshen, Connecticut, which had been InteliClear's principal office, [13] and in June he moved to Tampa Bay, Florida (Transcript I at 13-15), moving all of InteliClear's business records, furniture, and equipment from the Connecticut Office with him (Id. at 19) unbeknownst to Barretto, Powell, and DeVito until Victor's testimony at the hearing. (Transcript II at 267.)

         The day after the email about his dissociation was sent to him, on August 19, Victor wrote several checks drawn on InteliClear's bank account at Union Savings in Connecticut.[14] (Transcript I at 46; Pl.'s Ex. 5.) Two of the checks, in the sums of $5, 000 and $95, 000 were made out to InteliClear and deposited in Sun Trust checking and savings accounts opened by Victor in Tampa Bay, Florida. (Transcript I at 43.) A third check for $30, 000 with a notation "September draw, " was made out to Victor individually and deposited into his personal Wells Fargo account, also located in Tampa. (Id. at 43-45.) Plaintiff claims these actions were an effort by Defendant to "sweep" InteliClear's bank account. (Pl.'s Mem. Supp. Mot. for Preliminary Injunction at 8.)

         II. Discussion[15]

         A. Subject Matter Jurisdiction[16]

         A federal court must ascertain as early as possible whether it has subject matter jurisdiction over a plaintiffs claims, including a request for a preliminary injunction. Defendant vehemently disputes the asserted diversity jurisdiction because he contends he remains a member of the Plaintiff LLC, which by law takes the citizenship of each of its Members, and thus InteliClear cannot be diverse from him. See Roll-A-Cover, LLC v. Cohen, No. 3:09-CV-1378 CSH, 2010 WL 5146435, at *2 (D. Conn. Dec. 13, 2010) ("the citizenship of a limited liability company is determined by the citizenship ... of each of its members.") (citing Bayerische Landesbank, New York Branch v. Aladdin Capital Mgmt. LLC, 692 F.3d 42, 49 (2d Cir.2012)). On the other hand, if Plaintiff is correct that Defendant has been properly dissociated, the Court has jurisdiction under 28 U.S.C. § 1332 because Defendant and InteliClear would be citizens of different states, leaving complete diversity intact.[17] It is clear, therefore, that the Court's jurisdictional determination cannot be separated from Plaintiffs claim that Defendant, as a dissociated Member, must be enjoined from continuing to act as a Member of InteliClear in ways that are harming it.

         Defendant argues that the Court may not "assume" jurisdiction for purposes of deciding the merits. Here, however, the Court is not "decid[ing] the merits, under the guise of determining jurisdiction, without the ordinary incidents of a trial" because this is a case where merits and jurisdiction determinations necessarily coincide. See Continental Cas. Co. v. Dept. of Highways, 379 F.2d 673, 675 (5th Cir. 1967). Moreover, the evidentiary hearing on the Plaintiffs preliminary injunction motion provided "the ordinary incidents of trial" on the injunction issues. See Id. The Court is satisfied that the appropriate way to proceed is to hear and decide the factual issues bearing on its subject matter jurisdiction, recognizing that they also implicate elements of at least one of the substantive claims as well as the basis for the injunctive relief sought.

         Absent relevant case law from and within the Second Circuit, the Court looks to how other Circuits that have addressed this intersection of subject matter jurisdiction and claims' merits. The Eleventh, Fourth and First Circuits have addressed this issue in the context of federal question jurisdiction at the motion to dismiss phase. See Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981); Garcia v. Copenhaver, Bell & Associates, M.D. 's, P.A., 104 F.3d 1256 (11th Cir. 1997); United States v. North Carolina, 180 F.3d 574 (4th Cir. 1999); Torres-Negron v. J & N Records, L.L.C., 504 F.3d 151 (1st Cir. 2007). In Williamson, plaintiffs filed suit alleging that "joint venture interests" were securities within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. 645 F.2d at 416. The district court dismissed the case for lack of subject matter jurisdiction finding that "joint venture interests" were not securities. Id. at 409-10. The Fifth Circuit reversed, stating, "[i]n this case it is clear that the jurisdictional issue reaches the merits of the plaintiffs' case; if the joint venture interests and notes are not securities, there is not only no federal jurisdiction to hear the case but also no federal cause of action on the stated facts." Id. at 416.

         Similarly, in United States v. North Carolina, the District Court's subject matter jurisdiction to dismiss a Title VII case on a motion to dismiss was challenged, despite the defendant's concession that the plaintiff had pled adequate jurisdictional facts in its complaint. 180 F.3d at 580. Because the defendant argued that those jurisdictional allegations were false, the court found itself in a position similar to this Court's. The Fourth Circuit held that "[w]hen a factual attack on subject matter jurisdiction involves the merits of a dispute, [t]he proper course of action for the district court... is to find that jurisdiction exists and deal with the objection as a direct attack on the merits of the plaintiffs case" because the question of subject matter jurisdiction "is not suited for resolution in the context of a motion to dismiss." Id. at 580-81.

         These cases provide some guidance on how to proceed when the merits of the case and the jurisdictional question are so entangled that it becomes impossible to separate them. While in this case the issue arises in the context of a motion for a preliminary injunction, the setting is analogous. Should the Court determine it does not have jurisdiction, it would be necessary to dismiss the case, whether in the context of deciding a motion for preliminary injunction or to dismiss. Likewise, where federal question jurisdiction depends upon the action "arising under the Constitution, laws, or treaties of the United States" 28 U.S.C. § 1331, diversity jurisdiction hinges, in part, upon each party being a citizen of a different state, 28 U.S.C. § 1332. Moreover, the rationale for assuming jurisdiction and for deciding the merits of the injunction applies with equal force in the context of both diversity and federal question jurisdiction. As the Williamson court noted, "[n]o purpose is served by indirectly arguing the merits in the context of federal jurisdiction. Judicial economy is best promoted when the existence of a federal right is directly reached and, where no claim is found to exist, the case is dismissed on the merits." 645 F.2d at 415-16.

         The test articulated by the First Circuit is: "[i]f the plaintiff presents sufficient evidence to create a genuine dispute of material (jurisdictional) facts, then the case proceeds to trial, so that the factfinder can determine the facts, and the jurisdictional dispute will be reevaluated at that point." Torres-Negron v. J & N Records, LLC, 504 F.3d 151, 163 (1st Cir. 2007). For the reasons discussed below, here, Plaintiff has "presented enough evidence to create a genuine dispute of material jurisdictional facts." (See id.) Thus the Court finds that it has jurisdiction to rule on the motion for a preliminary injunction. Later, if Defendant were to prove he was not dissociated, the case would be dismissed for lack of jurisdiction.

         B. Preliminary Injunction

         "[A] preliminary injunction is an extraordinary remedy that should not be granted as a routine matter." JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 80 (2d Cir. 1990). Generally, a party seeking a preliminary injunction must show "(a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and (c) a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Citigroup Global Markets, Inc. v. VCG Special Opportunities Master Fund Ltd., 598 F.3d 30, 35 (2d Cir. 2010) (internal quotation marks omitted). However, "[a] mandatory preliminary injunction that alters the status quo by commanding some positive act, as opposed to a prohibitory injunction seeking only to maintain the status quo, should issue only upon a clear showing that the moving party is entitled to the relief requested, or where extreme or very serious damage will result from a denial of preliminary relief." Id. at 35 n.4 (internal citations and quotation marks omitted).[18]

         i. Plaintiff has Established a Likelihood of Success on the Merits

         To warrant a preliminary injunction, Plaintiff "need not show that there is a likelihood of success on the merits of all of [its] claims for relief. Rather, [it] must show a likelihood of success on the merits of at least one of [its] claims." Westchester Legal Servs., Inc. v. Westchester Cty.,607 F.Supp. 1379, 1382 (S.D.N.Y. 1985); see also Kaufman v. Cooper Companies, Inc.,719 F.Supp. 174, 185 (S.D.N.Y. 1989) (granting a preliminary injunction where movant "demonstrated a likelihood of success on the merits of at least one of [its] claims.")); Montano v. Suffolk Cty. Legislature,268 F.Supp.2d 243, 261 (E.D.N.Y. 2003) ("[I]n order to grant injunctive relief, the plaintiffs must show a likelihood of success on the merits of at least one of [its] claims.")). As described below, the Court finds that the evidence presented at the preliminary injunction hearing about Defendant's repeated misappropriation of Plaintiffs funds over which he had sole control supports the ...


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