KENNETH A. PARIGIN et al.
M. SHANE MILLS
Session January 25, 2017
from the Chancery Court for Knox County No. 180867-2 Clarence
E. Pridemore, Jr., Chancellor
dispositive issue in this appeal is whether the defendant,
who was actively involved in the formation of a limited
liability company, is a member of the company. The trial
court held that the defendant's prospective membership
interest was contingent on making a financial contribution of
$180, 000 plus business equipment, and because he failed to
make the required contributions, he was not a member. We
R. App. P. 3 Appeal as of Right; Judgment of the Chancery
William P. Price, III, Knoxville, Tennessee, for the
appellant, M. Shane Mills.
du M. Caffey-Knight and John Towers Rice, Knoxville,
Tennessee, for the appellees, Kenneth A. Parigin and Kimberly
G. Clement, Jr., P.J., M.S., delivered the opinion of the
Court, in which Charles D. Susano, Jr. and Thomas R.
Frierson, II, JJ., joined.
G. CLEMENT, JR., P.J., M.S.
Kenneth A. Parigin and Kimberly A. Wheatley, filed this
action for a declaratory judgment, pursuant to Tenn. Code
Ann. § 29-14-102 and Tenn. R. Civ. P. 57, to identify
the members and to determine their respective membership
interests in The Zone, LLC ("The Zone"), a limited
liability company. Plaintiffs contend the defendant, M. Shane
Mills, has no membership interest in The Zone while Mr. Mills
claims he owns a two-thirds membership interest based on his
intangible contributions leading up to and during the
formation of the company.
Mills claims that in early 2008 he alone conceived of the
idea for the business and began looking for investors.
Plaintiffs dispute this fact and state that another
individual, Lee Landers, in concert with Mr. Mills, developed
the idea in 2009. Plaintiffs further assert that Ms. Wheatley
joined forces with Mr. Landers and Mr. Mills shortly
thereafter to research the concept and to determine its
viability as a business. As a result of their discussions,
Mr. Landers, Mr. Mills, and Ms. Wheatley put a business plan
together. Then, on December 14, 2009, Mr. Mills and Mr.
Landers met with an attorney, Gordon Foster, to discuss
creating a limited liability company ("LLC").
on his discussions with Mr. Mills and Mr. Landers, Mr. Foster
assumed that Mr. Mills and Mr. Landers were the only members
of the LLC and that they would have an equal interest in the
company. Mr. Foster drafted the articles of organization for
The Zone ("the Articles") and filed them with the
secretary of state on January 11, 2009. The Articles provide
that The Zone is a member-managed LLC with two members.
Shortly after filing the Articles, Mr. Foster drafted an
operating agreement listing Mr. Mills and Mr. Landers as the
members; however, the agreement was never signed.
Mills contends the Articles and the unexecuted operating
agreement incorrectly stated the LLC had two members, because
he was the only member at the time of
formation. Mr. Landers, who is not a party to this
action, disputed Mr. Mills's claim by testifying that Mr.
Mills told Mr. Landers at the time that he―Mr.
Mills―intended to invest $180, 000 and also to
contribute equipment, and that Mr. Landers would be required
to make the same financial contribution for an equal share.
Subsequent to formation, both Mr. Mills and Mr. Landers
visited a number of sites in and around Knoxville in order to
find the best location for the business. After a period of
time, Mr. Landers concluded that he did not have the
financial means to make a significant contribution, and he
walked away from the project.
search for additional investors, Mr. Mills met with Mr.
Parigin on June 23, 2010. Following their discussion, Mr.
Parigin agreed to invest, and he gave Mr. Mills a check
payable to "The Zone" for $217, 370. Mr. Mills
deposited the check in The Zone's bank account that same
day. On the memorandum line, Mr. Parigin wrote: "33 1/3
percent ownership in The Zone, LLC." Mr. Mills does not
refute Mr. Parigin's claim of a one-third membership
interest as stated on the check. Instead, Mr. Mills insists
that he owned a two-thirds interest and Mr. Parigin owned a
Parigin disagrees with Mr. Mills's testimony, stating The
Zone was to have three members, Mr. Mills, Mr. Parigin, and
Dr. Robert Davis, each with one-third interest, and possibly
another investor, Mr. Landers. Mr. Parigin also explained
that his monetary contribution entitled him to a one-half
interest in the LLC if Dr. Davis did not invest. In addition,
Mr. Parigin testified that Mr. Mills's membership
interest, if any, was contingent upon making the required
financial contribution in the form of equipment for the
business, "and I don't know‒maybe $180,
000." Mr. Mills disputed this testimony, stating that he
was a member from the LLC's inception and that his
membership interest never depended upon his financial
Gordon Foster's testimony corroborated that of Mr.
Parigin. Mr. Foster further testified that on June 22, 2010,
a day before Mr. Parigin delivered his check in the amount of
$217, 370, Mr. Foster prepared a second draft of the
operating agreement stating that Mr. Mills and Mr. Parigin
would each contribute $217, 500 and would each receive a 50
percent membership interest, specifically 43.5 shares each.
The proposed agreement also provided that Dr. Davis would
have a six-month option to become a member with a $217, 500
contribution, which would entitle him to a membership
interest equal to that of Mr. Mills and Mr. Parigin,
resulting in 43.5 shares a piece. As a consequence, if Dr.
Davis exercised his option, he, Mr. Mills, and Mr. Parigin
would each have a one-third membership interest.
Mr. Foster testified that it was at this time when he learned
Mr. Landers was not a member of The Zone because he could not
make a financial contribution. However, the operating
agreement would afford Mr. Landers the opportunity to acquire
up to ten shares. Mr. Foster "customized" Section
4.1 of the operating agreement to state:
4.1 Initial Contributions. The Company requires 650,
000 shares to be capitalized as needed. Shares of the Company
are initially valued at $5, 000.00 each. The original Members
shall have the shares designated on Exhibit A as a result of
their ideas, efforts, and services in formulating the
business concept and plan, site acquisition….
A, which was a spreadsheet, listed Mr. Mills and Mr. Parigin
in the "Initial Members" column, with $217, 500
stated along with the words, "at inception." The
spreadsheet also indicated that each would receive 43.5
shares. Mr. Foster explained that it was his understanding
"there was sweat equity involved in addition to just
money, " though he did not know specifically what
proportion of Mr. Mills's $217, 500 contribution would be
in the form of sweat equity and what proportion would be in
the form of cash. The second draft of the operating agreement
contained only two signature lines, one for Mr. Parigin and
one for Mr. Mills. Mr. Mills signed the agreement; Mr.
Parigin did not.
Mr. Parigin and Mr. Mills identified an appropriate site at
5331 Western Avenue in Knoxville for The Zone to conduct its
business, the parties applied for a loan from United Capital
Lending dba People's Home Equity, Inc. to be used to
purchase the building. The record contains two different
notices from People's Home Equity, both dated March 11,
2010, and each stating that a loan in the amount of $1, 350,
000 had been approved. One notice identified Mr. Mills and
his wife, Jenny L. Mills, as the borrowers; the other notice
identified Mr. Mills, Jenny Mills, Mr. Landers, and Ms.
"Whealey" as the borrowers. However, the parties
did not complete the loan process. Instead, Mr. Mills, Jenny
Mills, Dr. Davis, and Mr. Parigin signed a lease for the same
building for a term of ten years, beginning on July 1, 2010.
The Zone opened for business in August 2010 at the Western
Avenue address in Knoxville. During this time period, Mr.
Landers visited and called schools in the area to market the
before The Zone opened for business, the company experienced
cash shortages. Thus, Ms. Wheatley contributed $50, 000
"to keep things going, " with the understanding
that she would gain a membership interest: "Yes. We were
under the gun to get the building open. School was starting
in a couple of weeks and, you know, obviously, Ken Parigin
had already made his contribution. . . ." Mr. Mills, on the
other hand, considered Ms. Wheatley's contribution to be
a loan, and claims he never had a discussion with her about
becoming a member. Ms. Wheatley had a full-time job at the
time but worked for the company "when [she] could."
She also attended weekly management meetings. Mr. Landers,
who continued to work for The Zone without compensation until
May of 2011, explained that "I was going to try to, at
the last moment, try to get money into this. I wanted to be a
part of it, really bad."
Dr. Davis chose not to invest, Mr. Mills searched for
prospective investors. Mr. Landers testified to the
company's dire financial situation at the time, stating
that at most of their meetings, Mr. Mills, Mr. Landers, Ms.
Wheatley, and L.J. Robinson (The Zone's secretary)
repeatedly discussed the need for capital. Mr. Landers also
testified, "[W]e asked [Mr. Mills] to bring the money
that he claimed he was going to bring in and―produce
what he said he had, and it never would―never came
forth." Mr. Landers stated, "I was told at one time
[by Mr. Mills]―and I won't ever forget it . . .
that I couldn't be a part of this because I didn't
have money in it. It took money to be a part of this."
He further testified that Mr. Mills told everyone involved
that he―Mr. Mills―intended to refinance his house
so that he could put money into the business and purchase
equipment. Ms. Wheatley confirmed this testimony.
Additionally, Ms. Robinson testified that Mr. Mills told her
he had already refinanced his house and had also bought some
equipment for the business. Ms. Robinson, acting in her
capacity as secretary of the LLC, requested receipts, but Mr.
Mills never provided them.
Robinson continued to press Mr. Mills for receipts showing
his monetary contribution and his purchase of equipment, Mr.
Mills became irate, and "communication started to go
downhill." The Zone had two different bank accounts. Mr.
Mills controlled the account with the smaller balance used to
pay nominal bills and expenses. Ms. Robinson controlled the
larger account used for operating expenses. In mid-May of
2011, Mr. Mills diverted The Zone's operating revenue
into a different checking account, over which he had sole
access. He prevented Mr. Parigin, Ms. ...