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E2018000947
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 02/20/2018
v.
Defendants,
and
PARTIES
Broad Street, Rochester, County of Monroe, State of New York, is, and at all times pertinent
was, a domestic limited liability company that as of December 1, 2017, owned 80,000 Class A
2. Plaintiff Robert C. Morgan is, and at all times pertinent was, an individual
residing in the County of Monroe, State of New York and who, as of December 1, 2017, owned
3. Plaintiff Richard Crossed is, and at all times pertinent was, an individual residing
in the County of Monroe, State of New York and who, as of December 1, 2017, owned 80,000
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(" Capital"
4. Plaintiff Kenyon Capital Holdings II, LLC Kenyon ) is, and at all times
pertinent was, a domestic limited liability company that as of December 1, 2017, owned 80,000
Class A units of Greenlight and has a principal place of business at 180 Canal View Blvd.,
5. Plaintiff E. Philip Saunders is, and at all times pertinent was, an individual
residing in the County of Livingston, State of New York and who, as of December 1, 2017,
6. Defendant Mark Murphy is, and at all times pertinent was, an individual residing
in the County of Monroe, State of New York and who, as of December 1, 2017, owned 510,000
("Greenlight" Company"
7. Defendant Greenlight Networks, LLC or "the ) is, and at
all times pertinent was, a domestic limited liability company engaged in the business of
providing fiber networks used to offer customers Ethernet connections and internet service.
8. FBD &, Associates ("FBD") is, and at all times pertinent was, a domestic
partnership with individual partners residing in the County of Monroe, State of New York and
which, as of December 1, 2017, owned 80,000 Class A units of Greenlight. Plaintiffs have
named FBD as a party solely on grounds that it may have an interest in the issues in and outcome
NATURE OF ACTION
ends, the first of which is to enforce a partially performed agreement among the Greenlight
Parties reached on December 22, 2017 to recapitalize Greenlight and partially performed
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thereafter through the payment of funds, the acceptance of such funds, and the deposit of such
10. The action also seeks declaratory and injunctive relief associated with
enforcement of provisions of Greenlight's governing Operating Agreement and assuring that any
transactions involving the Company and unit owner interests are conducted solely as permitted
by such agreement.
11. Finally, and in the alternative, the action seeks to recover, through the imposition
of a constructive trust on, the benefit Defendant Murphy has negotiated for himself through the
negotiation of a transaction that serves to benefit him to the detriment of Plaintiffs and FBD.
FACTUAL BACKGROUND
13. On or about May 30, 2014, the Greenlight Parties executed a Second Amended
and Restated Operating Agreement of Greenlight Networks, LLC ("the 2014 Operating
Agreement"
Agreement").
raising of capital and transactions affecting changes to the Company, its assets, and its
ownership.
b. Increase or decrease of the aggregate number of Units, including both Class A and
Class B Units;
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Units;
e. Alteration of the rights, preferences and limitations of all or part of Class A and
16. Section 7.2(b) prohibits, so long as there are any Class A Units outstanding, any
of the following actions other than with the prior approval of the Class A Majority in Interest:
b. into a transaction with any Member or any affiliates or related parties of any
Entry
Rights,"
17. Section 7.9, which provides for certain "Drag-Along applies to
circumstances where one or more members who together hold a Majority in Interest receive a
bona fide offer from an Independent Third - a defined term one who is not an
Party meaning
Affiliate of a Member and who has no economic relationship with any Member or Affiliate of a
outstanding units.
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18. In such circumstance, the Selling Majority Members have the right to require each
other member to participate in the sale in the manner set forth in Section 7.9, which includes the
following terms:
such member's units that such member would receive under Section 9.2(c).
19. Greenlight has since 2013 had principal financing from M&T Bank ("M&T")
21. Over a period of several years prior to December 1, 2017, Plaintiffs and FBD
extended funds to Greenlight in the form of debt subordinated to support the financing supplied
22. In or about the beginning of June, 2017, Plaintiffs learned that Greenlight had
default"
entered into what was known as a "leverage with M&T.
23. As of December 2017, Greenlight was in need of operating funds for its next
round of expansion. All Greenlight Parties concurred. In or about May, 2017, the Company's
unit owners began talking about additional funding to support the Company and its growth
strategies. By November 2017, discussion. was centering around the conversion of the
units) and the contribution of the additional $2 million as capital, and not as subordinated debt.
24. Following these discussions, ultimately the parties met at the offices of Morgan
Management on December 22, 2017 to negotiate finally the terms of subordinated debt equity
participation as part of a larger recapitalization to inject the new funds for growth and operations,
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an associated management incentive plan ("MIP") and related concerns as to corporate control
25. At the December 22 meeting, the parties negotiated the extent to which
subordinated debt equity participation would occur, evening up of subordinated debt exposure,
the MIP, the extent to which subordinated debt equity participation would dilute Defendant
Murphy's then existing unit ownership were he not to participate in the additional cash infusion,
2,6. After lengthy and detailed explication of the terms that would govern these
changes in the Company, the Greenlight Parties verbally agreed to detailed terms encompassing
such changes and that such terms would be effective going forward immediately.
Pre-Recapitalization Post-Recapitalization
Member Class A Class B Overall Class A Class B Overall
Units Units % Units Units %
28. In reliance on such verbal agreement, Plaintiffs Morgan and Crossed tendered
checks representing their initial pro rata shares of additional contributions, the first in the amount
of $163,786 and the second in the amount of $107,119, respectively. Principals of FBD stated
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their intent to tender payment of FBD's pro rata share before the end of the year, and, upon
29. Consistent with such verbal agreement, Defendant Murphy accepted all three
payments on behalf of Greenlight. At no time in connection with the tendered checks did
Defendant Murphy evidence an understanding that no agreement existed, but rather conducted
himself and Greenlight exactly as if the arrangements to which the Greenlight Parties verbally
30. There were no material outstanding items left to negotiate as of December 22,
2017. The agreement permitted Mr. Murphy to contribute funds as well, and he had indicated
that he was going to do so. He later requested that a new investor, Ron Ricotta, be allowed to
purchase his pro rata interest in the new round of equity, which would further reduce Mr.
Murphy's interest in the Company to 26.04%, and that Mr. Ricotta would serve as his appointed
board member after the new transaction closed. Post-closing, Plaintiffs and FBD will have
contributed equity of $4,480,000 and will own 74% of the outstanding Class A and Class B
units, and Defendant Murphy will have contributed equity of $80,000 and own 31% (or 26.04%
to the extent Mr. Ricotta provides Defendant Murphy's pro rata equity contribution) of the
31. Thereafter, Gordon Forth, who attended the December 22 meeting on behalf of
FBD, prepared a term sheet intended to set forth elements of the agreement reached at such
32. Mr. Forth added to the term sheet a legend noting that comprehensive written
documents would be drawn and that the term sheet was not intended to be an enforceable written
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agreement, which was not part of the agreement to which the Greenlight Parties intended to be
bound.
33. The agreement reached at the December 22 meeting, as evidenced by the fact that
funds were delivered, accepted and cashed, some even before a term sheet was circulated, was
that it would be effective immediately and that the Company and Greenlight Parties would be
governed in accordance with the new, agreed upon economic arrangements, including those
Governance,"
reflected in the document titled "Employment, Capitalization and which outlined a
Plaintiffs'
number of issues that had been under discussion throughout 2017 and set forth the
position on changes to accommodate the issuance of new Class A Units to effectuate the
recapitalization, changes to the governance of the Company, and the proposed terms of Mr.
term sheet, Defendant Murphy and his advisor, Mr. Thomas Bonadio, ceased communicating
with Plaintiffs, and efforts to implement the December 22 agreement were either unanswered or
rebuffed.
34. Late in the week of January 30, 2018, Defendant Murphy began contacting
several of the Plaintiffs to inform them that he had reached an agreement with B. Thomas
Golisano under which an entity to be formed by Defendant Murphy and Mr. Golisano would
(a) acquire all of the units of Greenlight, although FBD and Plaintiffs other than DKBS and
Kenyon Capital would be permitted to retain units in the purchaser entity if they so chose; and
(b) pay in full the outstanding subordinated debt, including accrued interest.
35. Defendant Murphy repudiated the agreement to which the Greenlight Parties
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setting forth elements of a proposed transaction between Greenlight and Grand Oaks, a copy of
37. Upon information and belief, the business arrangement leading to the formation of
the proposed purchaser provides for Defendant Murphy to hold a greater than 25% equity
interest in the purchaser and for him to manage the acquired business venture.
38. Upon information and belief, Defendant Murphy asserts that he presently controls
greater than a 50% interest in all of the outstanding units of Greenlight and that he therefore may
exercise the Drag-Along Rights set forth in the 2014 Operating Agreement to sell their interests
39. Plaintiffs commenced this action to enforce the agreement reached by Plaintiffs
and Defendants at the December 22 meeting, and to prevent Mr. Murphy and Greenlight from
effectuating the proposed transaction with Grand Oaks contrary to the Operating Agreement in
effect. In the agreement reached at the December 22 meeting, Mr. Murphy gave up his majority
ownership of outstanding units and lacks sufficient ownership interest to unilaterally sell the
Company. Furthermore, even if Mr. Murphy still held a majority interest, he is not permitted to
move forward with the proposed transaction absent consent by the majority of Class A Unit
holders. Plaintiffs are unwilling to yield their investments in Greenlight on the terms Defendant
Murphy seeks to impose and seek to prevent him from forcing a transaction that is more
40.. Upon information and belief, upon reaching of the agreement on December 22
and the implementation of a portion of that agreement through tender, receipt and deposit of
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associated funds, Plaintiffs and FBD obtained equitable ownership of additional Membership
Interests in the Company, and to the additional units to be issued by Greenlight reflecting those
Plaintiffs'
interests, in return for tender of the additional $2 million of capital.
41. Upon information and belief, because of such agreement, because at least two
such Plaintiffs already tendered funds, and because the other Plaintiffs remain ready, willing and
able to tender their respective funds, Plaintiffs are owners, legal and equitable, of 69% of the
42. Upon information and belief, as a result of the agreement reached at the
43. Defendant Murphy has repudiated and thereby breached the agreement reached at
the December 22 meeting and sought a new partner with whom he would continue in the
44. Upon information and belief, Plaintiffs will be irreparably harmed if the
agreement reached at the meeting of December 22 is not specifically enforced in accordance with
the terms of such agreement. Specifically, Plaintiffs will lose the benefit of no longer being in
the minority, they will lose their newly acquired protections from being forced out by a majority
position, and potentially they will lose their interests in a successful enterprise they helped build.
45. Plaintiffs seek relief declaring that in return for the respective contributions to
which the parties agreed as additional capital contributions (two of which contributions already
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have 510,000 Class B Units and 80,000 Class A Units constituting 31% of all
d. Until such transaction(s) have been completed, Plaintiffs are the equitable owners
of the additional Class A Units to which they are to become entitled, and
Defendant Murphy shall have no right or capacity to transfer to any other person
injunction and/or temporary restraining order, directing the completion of the transaction(s) to
preliminary injunction and/or temporary restraining order, enjoining Defendants from conducting
the business of the Company, entering into or consummating any agreements, or otherwise
acting on behalf of the Company other than as a 31% equitable owner of interests (or 26.04% to
I
the extent Mr. Ricotta provides Mr. Murphy's $620,000 pro rata equity contribution) in
Murphy may control, the proposed transaction with Grand Oaks set forth in the term sheet
attached hereto as Exhibit A violates express restrictions in the 2014 Operating Agreement.
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49. As noted above, Section 7.2(b) of the 2014 Operating Agreement prohibits, so
long as there are any Class A Units outstanding, any of the following actions other than with the
b. Entry into a transaction with any Member or any affiliates or related parties of any
Rights"
50. Further, Section 7.9 provides for certain "Drag-Along which arise in
circumstances where one or more members who together hold a Majority in Interest receive a
"bona fide offer from an Independent Third Party to purchase in a single transaction or series of
units."
transactions all of the Company's outstanding
51. Plaintiffs constitute the Class A Majority in Interest as a result of their ownership
52. The foregoing restrictions serve to protect the Class A Unit owners from the
otherwise unconstrained authority of Defendant Murphy, who in May 2014 controlled a greater
than 50% interest in all the Company's outstanding units, to make arrangements to flush them
from the business on terms disproportionately benefiting himself and permitting him, without
53. Upon information and belief, the proposed purchaser identified in the term sheet
Party"
attached as Exhibit A is not an "Independent Third as that term is defined in the 2014
Party"
Operating Agreement, which states that an "Independent Third is "not an Affiliate of any
Member" Member."
and "has no economic relationship with any Member or any Affiliate of a
54. Upon information and belief, the proposed purchaser, whether currently or by
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offer"
55. Upon information and belief, such offer is not a "bona fide to the extent
that it may involve efforts to hide Defendant Murphy's eventual planned involvement in ongoing
56. Upon information and belief, the proposed purchaser is an affiliate of Defendant
"Affiliate"
Murphy, whether presently or by proposed step transaction, within the definition of
57. By reason of the foregoing, Section 7.2(b) of the 2014 Operating Agreement
forecloses the transaction proposed in the term sheet attached hereto as Exhibit A absent
Plaintiffs'
objections.
58. By reason of the foregoing, Section 7.9 of the 2014 Operating Agreement does
Rights"
not provide for "Drag-Along with respect to the transaction proposed in the term sheet
attached hereto as Exhibit A, and such transaction may not proceed. Plaintiffs seek relief
declaring that the 2014 Operating Agreement prevents the transaction proposed in the term sheet
attached hereto as Exhibit A absent (a) consent of a Class A Majority in Interest under
Section 7.2(b) of the 2014 Operating Agreement, and (b) Section 7.9 does not afford Drag-Along
Rights with respect to the transaction proposed by the term sheet attached as Exhibit A.
59. Plaintiffs also seek relief enjoining and restraining, effective immediately, and
whether by permanent injunction, preliminary injunction and/or temporary restraining order, the
transaction proposed by the term sheet attached hereto as Exhibit A and delivered by Defendant
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60. Upon information and belief, Defendant Murphy has delivered the term sheet
Section 7.9 of the 2014 Operating Agreement and with the purpose of invoking the procedures
61. As alleged above, the proposed transaction, even if it were a legally binding offer,
would not be a bona fide offer from an Independent Third Party within the meaning of
Section 7.9(a), which is a necessary condition to invoke the provisions of Section 7.9.
62. Plaintiffs further assert that Defendant Murphy has failed in other respects to
63. Section 7.9(b) establishes certain notice requirements with respect to invoking the
d. The proposed date, time and location of the closing of the sale.
64. Upon information and belief, the notice, including the term sheet, delivered by
Defendant Murphy fails to provide each of the foregoing elements of required notice, and most
notably the proposed definitive agreements associated with the proposed transaction.
65. Section 7.9(e) provides among other requirements for pro rata, and not joint,
Majority Member.
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66. Upon information and belief, the term sheet attached hereto as Exhibit A and
67. The term sheet attached hereto as Exhibit A does not reflect the willingness of the
purchaser to accept indemnities limited as set forth in Section 7.9(e) of the 2014 Operating
Agreement.
68. Upon information and belief, the failure of the materials delivered on February 5,
2018 to set forth these required elements of what Defendant Murphy characterizes as the
69. Upon information and belief, as a result of the defects in the purported notice
delivered by Defendant Murphy, Plaintiffs have no obligation to address it or respond to it, and
their failure and refusal to do so holds no consequence to them and their rights under the 2014
Operating Agreement.
70. Plaintiffs ask relief declaring that the purported notice delivered by Defendant
Murphy is defective and without legal significance and that failure to respond to it or to take
Plaintiffs'
steps under Section 7.9 of the 2014 Operating Agreement impairs none of rights under
such agreement.
preliminary injunction and/or temporary restraining order, enjoining and restraining Defendants
72. Alternatively, Plaintiffs ask that the Court impose a constructive trust on the
consideration to be paid by Grand Oaks in connection with the proposed transaction until such
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WHEREFORE, for the reasons set forth herein, Plaintiffs respectfully request this Court
to issue an Order:
a. Declaring that the December 22, 2017 agreement between the parties was valid
and enforceable and that the respective ownership interests of the Greenlight
transaction proposed by the term sheet attached hereto as Exhibit A and delivered
Defendants Greenlight and Murphy from taking any action that an owner of a
minority interest may not take on behalf of Greenlight pursuant to the 2014
Operating Agreement;
d. Alternatively, and only in the event the Court declines to grant the relief requested
Defendant Murphy has negotiated for himself through the transaction proposed by
the term sheet attached hereto as Exhibit A and delivered by Defendant Murphy
on February 5, 2018 that serves to benefit him to the detriment of Plaintiffs and
FBD; and
e. Granting such other and further relief as the Court may deem just and proper.
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Douglas A. os's
David J. Edwards
Svetlana K. Ivy
Kara E. Stoddart
99 Garnsey Road
(585) 419-8697
dfoss@harrisbeach.com
sivy@harrisbeach.com
dedwards@harrisbeach.com
kstoddart@harrisbeach.com
2942003308398v6
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