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Parigin v. Mills

Court of Appeals of Tennessee, Knoxville

March 16, 2017


          Session January 25, 2017

         Appeal from the Chancery Court for Knox County No. 180867-2 Clarence E. Pridemore, Jr., Chancellor

         The 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 affirm.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed

          William P. Price, III, Knoxville, Tennessee, for the appellant, M. Shane Mills.

          Wynne du M. Caffey-Knight and John Towers Rice, Knoxville, Tennessee, for the appellees, Kenneth A. Parigin and Kimberly A. Wheatley.

          Frank 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.


          FRANK G. CLEMENT, JR., P.J., M.S.

         Plaintiffs, 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.[1] 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.

         Shane 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").

         Based 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.

         Mr. 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.[2] 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.

         In his 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 one-third interest.

         Mr. 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 contribution.

         Attorney 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.

         Additionally, 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….

         Exhibit 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.

         After 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 business.

         Immediately 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. . . ."[3] 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."

         When 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.

         As Ms. 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. ...

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