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Penn, LLC, et al v. Prosper Business Development

October 20, 2011

PENN, LLC, ET AL., PLAINTIFFS,
v.
PROSPER BUSINESS DEVELOPMENT CORPORATION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Judge Gregory L. Frost

Magistrate Judge Terence P. Kemp

OPINION AND ORDER

This matter is before the Court for consideration of Plaintiffs' Motion for Partial Dismissal of Claims Without Prejudice (ECF No. 52), Defendants Phil Rist's and Gary Drenik's Memorandum Opposing Plaintiffs' Motion for Partial Dismissal of Claims Without Prejudice (ECF No. 55), Defendants Phil Rist's and Gary Drenik's Motion for Judgment on the Pleadings (ECF No. 56), the Response of Plaintiffs to the Motion of Phil Rist and Gary Drenik for Judgment on the Pleadings (ECF No. 70), the Reply Memorandum of Defendants Phil Rist and Gary Drenik to Plaintiffs' Response to the Motion of Phil Rist and Gary Drenik for Judgment on the Pleadings (ECF No. 73), and Defendant Prosper Technologies, LLC's Motion to Dismiss (ECF No. 74). For the reasons that follow, the Court DENIES Plaintiffs' Motion for Partial Dismissal of Claims Without Prejudice, GRANTS Defendants Phil Rist's and Gary Drenik's Motion for Judgment on the Pleadings, and GRANTS Defendant Prosper Technologies, LLC's Motion to Dismiss.

I. Background

Unless otherwise indicated, the allegations in this section were taken from the complaint and the exhibits attached to or referred to in the complaint.

Plaintiff Penn, LLC ("Penn") filed this action on behalf of itself and derivatively on behalf of BigResearch, LLC ("BigResearch") for restitution and damages. Plaintiff BigResearch is a Delaware limited liability company primarily engaged in the business of market research. Plaintiff Penn and Defendant Prosper created BigResearch.

In October 2000, Penn and Prosper entered into an Operating Agreement that would control the affairs of BigResearch. The "day to day" management of the business and affairs of BigReseach was delegated to Prosper and the other decisions were delegated to BigResearch's Board of Members ("Board"). (ECF No. 2.1 at 4-5; Operating Agreement §§ 5.01 and 5.02.) That Board consisted of three individuals: two representatives of Prosper and one representative of Penn. Id. Prosper's representatives were Gary Drenik and Philip Rist, owners of Prosper and Prosper Technologies, LLC ("Prosper Technologies").

When formed, BigResearch was owned equally by Penn and Prosper. After its inception, BigResearch sold 5.22% ownership equity to outside investors such that Penn and Prosper were diluted to each owning 47.39% of BigResearch. At some point, Prosper purchased some of the outside investors' stock, making it currently the holder of 50.71% of BigResearch's stock. Penn alleges that it should have been permitted to purchase some of the outside investors' stock. In its briefing, Prosper explains that one outside investor, Robert Kamerschen, remained a 1.9% equity holder.

The relationship between Penn and Prosper deteriorated and in 2004 BigResearch's Board passed several resolutions, including one that removed Penn as a member and divested Penn of its ownership interest in BigResearch. Penn believed these actions were illegal and on May 6, 2004, Penn submitted a demand for arbitration to BigResearch.

In the month prior to Penn's arbitration demand, April 2004, BigResearch entered into a business relationship with MarketStar Corporation ("MarketStar"). That relationship ultimately deteriorated and on February 2, 2007, Drenik and Rist, acting on their own behalf and through their company Prosper, filed a notice of arbitration based on the contractual relationship with MarketStar. The parties then arbitrated the dispute ("MarketStar Arbitration").

On April 9, 2007, Defendant Prosper engaged James E. Arnold & Associates, LPA and James E. Arnold ("Law Firm Defendants") to represent it in connection with the MarketStar Arbitration. During the arbitration, Drenik, Rist, and the Law Firm Defendants allegedly represented that "BigResearch and Prosper were one in the same." (ECF No. 2 ¶ 41.) As a result of the arbitration, Prosper was awarded $4,750,000 on January 23, 2009 ("MarketStar Arbitration Award"). This award was confirmed by the Common Pleas Court of Franklin County, Ohio on September 4, 2009 and a judgment was entered in favor of Prosper against MarketStar in the amount of $4,750,000.

Penn alleges that the business opportunity from which the MarketStar Arbitration Award and judgment arose belonged to BigResearch, not Prosper. Penn avers that Drenik, Rist, Prosper, and the Law Firm Defendants concealed from Penn the business opportunity from which the MarketStar Arbitration Award came. Penn alleges that Drenik, Rist, and Prosper fraudulently self-dealt in prosecuting the MarketStar Arbitration on behalf of Prosper, rather than on behalf of BigResearch. Penn further alleges that Drenik, Rist, and Prosper paid their legal expenses incurred in pursuing the MarketStar Arbitration from BigResearch.

The arbitration requested by Penn in May 2004 did not come on for a hearing until May 2008. The arbitrator issued his initial arbitration award on September 15, 2008. In that award, the arbitrator agreed with Penn that several resolutions of BigResearch's Board had no legal force, including the resolution that divested Penn of its ownership interest in BigResearch and removed Penn's representative from BigResearch's Board. The Penn arbitrator ordered BigResearch to pay Penn its proportionate distributions that BigResearch had paid to other members during the period that Penn was improperly divested of its membership interest. The arbitrator appointed a Special Master to determine the amount BigResearch owed to Penn. The Special Master's report was completed in November 2009 and submitted to the arbitrator.

In December 2009, BigResearch's Board voted two-to-one to allow 1.9% equity holder Kamerschen to withdraw from BigResearch, with Drenik and Rist voting to allow withdraw and Penn's representative voting to prohibit withdraw. Once Kamerschen was removed, the Board voted on dissolution of BigResearch. In another two-to-one vote that mirrored the Kamerschen withdraw vote, Drenik and Rist voted to dissolve BigResearch and ...


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