Tolani v. Shreveport Natchez Hospitality L L C

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF LOUISIANA

LAFAYETTE DIVISION

SUNIL A TOLANI CIVIL ACTION NO. 6:20-0730

VERSUS CHIEF JUDGE S. MAURICE HICKS, JR.

SHREVEPORT NATCHEZ HOSPITALITY MAGISTRATE JUDGE WHITEHURST

LLC

MEMORANDUM RULING

Before the Court is Plaintiff, Sunil Tolani’s, Motion for Default Judgment. Rec. Doc.

16. Pursuant to Federal Rule of Civil Procedure 55(b)(2), Mr. Tolani seeks default

judgment against Defendant, Shreveport Natchez Hospitality LLC (hereafter “SNH”). For

the following reasons, the Motion for Default Judgment is GRANTED IN PART and

DEFERRED IN PART.

I. Factual and Procedural Background

This suit revolves around Mr. Tolani’s and SNH’s joint ownership and management

of two LLCs: Prince Preferred Hotels Shreveport, LLC (hereafter “PPH Shreveport”); and

Prince Preferred Hotels of Natchez (hereafter “PPH Natchez”, and together with PPH

Shreveport “the LLCs”). Rec. Doc. 1. Initially, both LLCs, each of which own and operate

one hotel in their respective cities, were owned by Mr. Tolani. Rec. Doc. 16-2, Ex. A;

Rec. Doc. 16-2, Ex. B (showing Mr. Tolani with 100% interest initially). In 2016, however,

Mr. Tolani brought SNH into the LLCs, with SNH “holding a 49% equity interest in each”

and Mr. Tolani retaining a majority interest in each. Id. ¶ 8; see also Rec. Doc. 16-2, Ex.

F, p. 4; Rec. Doc. 16-2, Ex. G, p. 4 (showing amended operating agreements bringing

SNH into LLC).

Certain organizational structures of the LLCs are key to this case. First, regarding

withdrawal, members can only withdraw from the LLCs “prior to the dissolution and

winding up of the Company with the unanimous consent of the other Members, or if such

Member transfers or assigns all of his or her Membership Interests.” Rec. Doc. 16-2, Ex.

A §7.1; Rec. Doc. 16-2, Ex. B §7.1. Members could transfer their “Membership Interests

to any other Person without the consent of any other Member.” Rec. Doc. 16-2, Ex. A

§7.2; Rec. Doc. 16-2, Ex. B §7.2. Additionally, with the addition of SNH to the LLCs’

ownership, most general management decisions required approval of both Mr. Tolani and

SNH, and any changes to the Operating Agreement required unanimity as well. Rec.

Doc. 16-2, Ex. H, §§(3)(b-c); Rec. Doc. 16-3, Ex. I, §§(3)(b-c). Thus, any major decisions

regarding the LLCs’ management require the approval of both parties.

In the aftermath of bringing SNH into the LLCs, Mr. Tolani claims that the

management of the hotels deteriorated, leading to a decline in revenue. Rec. Doc. 1, ¶¶

15-19. This decline in revenue caused both LLCs to struggle to meet their financial

obligations, leading to missed payments on debts, unpaid taxes, and the threat of

foreclosure on both properties. Id., ¶¶ 20-21, 29. In response to this decline in business,

SNH has allegedly tried to unilaterally withdraw from the LLCs entirely, but has not done

so as permitted by the Operating Agreement. Id., ¶¶ 20-24. Because SNH has not

effectively withdrawn, and because the structure of the LLCs requires unanimity in most

decisions, Mr. Tolani is unable to effectively manage the hotels alone, leaving him unable

to remedy any of the existing problems. Id.

As a result of these events, Mr. Tolani brought two claims against SNH regarding

both LLCs. The first alleges that, due to its inattention and ineffective withdrawal, SNH

has violated fiduciary duties owed both to Mr. Tolani and the LLCs. The second alleges

that SNH breached the Operating Agreement Contract by failing to effectively withdraw

from the LLCs. Mr. Tolani is seeking specific performance and damages as a result of

these alleged breaches. Id., ¶¶ 32-35. SNH is an LLC registered in Georgia, and service

was completed pursuant to Ga. Code §14-11-209(f) on February 11, 2021. Rec. Doc. 7.

SNH never responded or answered in this claim, leading Mr. Tolani to move for an Entry

of Default. Rec. Doc. 10. The Clerk entered default against SNH. Rec. Doc. 11. Mr.

Tolani subsequently moved for a Default Judgment. Rec. Doc. 16.

II. Legal Standard

Rule 55 of the Federal Rules of Civil Procedure governs when a default or default

judgment can be entered. Fed. R. Civ. P. 55. “A default judgment involves three steps:

(1) default, (2) entry of default, and (3) default judgment.” G&G Closed Circuit Events,

LLC v. Maracs Mexican Restaurant, LLC, 2016 WL 5316259 at *1 (W.D.La. 2016) (citing

N.Y. Life Ins. Co. v. Brown, 84 F.3d 137, 141 (5th Cir. 1996)). “A default occurs when a

defendant has failed to plead or otherwise respond to the complaint within the time

required by the Federal Rules.” Brown, 84 F.3d at 141. The clerk can then enter a default

if the failure of the defendant to respond “is shown by affidavit or otherwise.” Fed. R. Civ.

P. 55(a). At that point, the “plaintiff may apply for a judgment based on such default.”

Brown, 84 F.3d at 141.

When a defendant defaults, he “admits the plaintiff’s well-pleaded allegations of

fact.” Nishimatsu Const. Co., Ltd. v. Houston Nat. Bank, 515 F.2d 1200, 1206 (5th Cir.

1975) (citations omitted). Thus, to be granted default judgment, the plaintiff must show

in their pleadings that a viable cause of action exists. Id. (“[A] defendant’s default does

not in itself warrant the court in entering a default judgment. There must still be a sufficient

basis in the pleadings for the judgment entered”). Factors for the court to consider in

whether to grant a Motion for Default Judgment include: “whether material issues of fact

are at issue, whether there has been substantial prejudice, whether the grounds for

default are clearly established, whether the default was caused by a good faith mistake

or excusable neglect, the harshness of a default judgment, and whether the court would

think itself obliged to set aside the default on the defendant’s motion.” Lindsey v. Prive

Corp., 161 F.3d 886, 893 (5th Cir. 1998). Finally, while Rule 55 does not require a

hearing, the Court may hold a hearing on several issues including to “determine the

amount of damages” or to “investigate any other matter.” Fed. R. Civ. P. 55(b)(2).

III. Discussion

a. Jurisdiction

The Court notes at the outset that subject-matter jurisdiction exists in this case.

The defendant, SNH, is a limited liability company that resides in Georgia. Rec. Doc. 1,

¶ 3. The plaintiff, Mr. Tolani is a resident of California. Id., ¶ 2. The damages being

sought are in excess of $1,000,000. Id., ¶ 4. Thus, the Court finds that it has subject-

matter jurisdiction pursuant to 28 U.S.C. §1332.

b. Liability regarding PPH Shreveport

Under Louisiana law, members of an LLC who are also managers are “deemed to

stand in a fiduciary relationship to the limited liability company and its members.” La. R.S.

12:1314(A)(1). Liability can incur if the “member or manager acted in a grossly negligent

manner…or engaged in conduct which demonstrates a greater disregard of the duty of

care than gross negligence….” La. R.S. 12:1314(B). Gross negligence is statutorily

defined as “a reckless disregard of or a carelessness amounting to indifference to the

best interests of the limited liability company or the members thereof.” La.

R.S.12:1314(C). Notably, this Section does not “derogate from any indemnification

authorized” by Louisiana Revised Statute 12:1315. La. R.S. 12:1314(A)(1).

Here, Mr. Tolani has successfully alleged that SNH has breached its fiduciary

duties. Mr. Tolani has alleged in his complaint that the Hilton hotel in Shreveport, the sole

asset of PPH Shreveport, has declined in value and quality since SNH became involved

in the management of the hotel. Rec. Doc. 1, ¶¶ 16-17. This has led to PPH Shreveport

being unable to pay debt obligations, face the “threat of imminent foreclosure,” and get

behind in tax obligations. Id., ¶¶ 20. Further, despite these issues, SNH has effectively

sought to disengage itself from the company by seeking to walk away from the venture.

Id., ¶¶ 20-24. Because SNH has not effectively withdrawn from PPH Shreveport,

however, this has left Mr. Tolani with no options under the Operating Agreement of

seeking to remedy these issues. Id., ¶¶ 24-30. Thus, Mr. Tolani has established in his

complaint that SNH has breached its fiduciary duty through gross negligence.

None of the indemnification articles in the Operating Agreement would serve to

protect SNH in this instance as regards its breach of fiduciary duty. The main

indemnification clause, Article 9 of the Operating Agreement, does provide broad

indemnification but only when the party “acted in good faith and in a manner that such

Person reasonably believed to be in the best interests of the Company.” Rec. Doc. 16-2,

Ex. A, §9.1. This would not apply as Mr. Tolani has shown that SNH has not acted in

good faith or in the best interests of the company. There is another indemnity clause

contained in the amendment to the Operating Agreement which was meant as an

inducement to have SNH join PPH Shreveport. Id., Ex. H, §4. This clause promises that

Mr. Tolani and Prince Organization shall “indemnify[,] save and hold the New Member

[SNH] harmless from and against any and all claims, costs, expense, damage, liability,

loss or deficiency suffered or incurred by the Company” which arose from claims or tax

obligations made prior to the amendment date. Id. Thus, while SNH was indemnified

from any obligations or claims which arose prior to their joining PPH Shreveport, this

amendment does not provide indemnification for issues which arose after SNH had

become a member.

Mr. Tolani has also established that SNH breached the Operating Agreement by

failing to effectively withdraw from PPH Shreveport. To state a claim for a breach of

contract under Louisiana law, a plaintiff must “prove by a preponderance of the evidence

(1) defendants owed them an obligation; (2) defendants failed to perform that obligation;

and (3) defendants’ failure resulted in damages owed to the plaintiffs.” Hayes Fund for

First United Methodist Church of Welsh, LLC v. Kerr-McGee Rocky Mountain, LLC, 193

So.3d 1110, 1115 (La. 2015) (citations omitted); see also La. Civ. Code Art. 1994. Here

Mr. Tolani has clearly shown that SNH owed an obligation to withdraw in certain specified

ways, that SNH has failed to do so, and that this has caused him damage as he is unable

to manage the hotel without SNH’s proper withdrawal.

Thus, the Court finds that Mr. Tolani has established in his well pleaded complaint

that SNH is liable for both a breach of fiduciary duties and a breach of contract relating to

its role in PPH Shreveport. The Lindsey factors also favor a grant of default judgment

regarding liability. There are no material issues of fact, Mr. Tolani is being substantially

prejudiced by SNH’s inaction, the grounds for default regarding liability are clear, and

there is no argument that SNH’s actions are either mistaken or excusable neglect.

Lindsey, 161 F.3d at 893. Consequently, default judgment regarding SNH’s liability as to

PPH Shreveport is proper.

c. Liability regarding PPH Natchez

Members and managers of an LLC also have fiduciary duties to one another under

Mississippi law. See Brothers v. Winstead, 129 So.3d 906, 921-22 (Miss. 2014);

Bluewater Logistics, LLC v. Williford, 55 So.3d 148, 161 (Miss. 2011). Here, the

allegations regarding PPH Natchez are essentially the same as with PPH Shreveport,

namely that SNH allowed the Hampton Inn & Suites in Natchez to diminish in quality and

thus value. Rec. Doc. 1, ¶¶ 18-19. This led to unpaid debts, unpaid taxes, and the

potential for foreclosure on the property. Id., ¶¶ 20-24. SNH has also failed either to act

to remedy any of the issues or to withdraw to allow Mr. Tolani to assert control. Id., ¶¶

20-31.

As to indemnification, the Court here notes that the original Operating Agreement

does not contain an indemnification clause. Rec. Doc. 16-2, Ex. B. And while the

amendment adopted at the time SNH became a member of PPH Natchez includes some

indemnification, it is the same limited language that only protects against claims and tax

liability that arose prior to the amendment. Id., Ex. I, p. 3-4.

Mr. Tolani has also established that SNH has breached the PPH Natchez

Operating Agreement. In Mississippi, “[a] breach-of-contract case has two elements: (1)

‘the existence of a valid and binding contract,’ and (2) a showing ‘that the defendant has

broken, or breached it.’” Maness v. K&A Ent. of Miss., 250 So.3d 402, 414 (Miss. 2018).

As with PPH Shreveport, Mr. Tolani has made a showing that SNH has violated the

Operating Agreement by their unilateral and ineffective withdrawal.

Thus, the Court finds that Mr. Tolani has established in his well pleaded complaint

that SNH is liable for both a breach of fiduciary duties and a breach of contract relating to

its role in PPH Natchez. As with PPH Shreveport, the Lindsey factors would again favor

default judgment regarding liability.

d. Remedies Sought

Mr. Tolani is seeking two different forms of remedy. The first is specific

performance, essentially asking the Court to transfer SNH’s interests in both PPH

Shreveport and PPH Natchez to Mr. Tolani. The second remedy is to seek monetary

damages stemming from SNH’s mismanagement of both PPH companies.

As to specific performance, Louisiana law gives a court discretion on whether to

grant specific performance when a party fails “to perform an obligation that has another

object, such as an obligation to do.” La. Civ. Code Art. 1986. Louisiana courts have “by

and large proceeded on the premise that specific redress should be ordered whenever

possible, unless disadvantages of the remedy outweigh its advantages.” J. Weingarten,

Inc. v. Northgate Mall, Inc., 404 So.2d 896, 901 (La. 1981).

Likewise, Mississippi law views specific performance as “a remedy for breach of

contract that is not a matter of right but of sound judicial discretion.” Osborne v. Bullins,

549 So.2d 1337, 1339 (Miss. 1989) (citations omitted). Mississippi courts generally look

at “the adequacy of damages to protect the expectation interest of the injured party” and

the “level of transaction costs between the parties, and unless those costs are so high

that no voluntary exchange can take place, the court should order specific performance.”

Id. at 1340.

In the present case, Mr. Tolani requests that the Court grant him specific

performance by requiring SNH to grant its interests in both PPH Shreveport and PPH

Natchez to Mr. Tolani. Rec. Doc. 1. However, the Court notes that for both LLCs,

withdrawal can either be through unanimous consent or the transfer or interests to any

other person. Therefore, requiring SNH to transfer its interests to Mr. Tolani would seem

to impose an additional restriction on the transferability of interests that does not exist in

the Operating Agreements.

Further, as to the monetary damages, the Court feels that a hearing is required to

better quantify the damages. First, the Court notes that at all times during this decline of

the two LLCs, Mr. Tolani was also responsible for the management and decision making

of the LLCs as he was in the same member-manager role as SNH. Both SNH and Mr.

Tolani were essentially required for making all major decisions. It is thus unclear to the

Court what responsibility Mr. Tolani may bear for the decline of the two hotels, as well as

the associated damages. The Court expects evidence to be presented on this issue.

Because the Court feels that greater clarity is required regarding both the specific

performance requested as well as monetary damages, the Court will hold a hearing on

April 12, 2022 at 1:30 p.m. At a minimum, at that hearing, Mr. Tolani is expected to do

the following: 1) explain why it is proper that the Court order SNH to transfer its interests

to Mr. Tolani specifically rather than ordering SNH to transfer its interests to any other

party and 2) present evidence as to what damages he has sustained as a result of SNH’s

breach of its fiduciary duties and the Operating Agreements.

IV. Conclusion

For the foregoing reasons, the Motion for Default Judgment is GRANTED as to

issues of liability as the Court finds that SNH has breached its fiduciary duties and the

Operating Agreements of both PPH Shreveport and PPH Natchez. The Court DEFERS

the issues of damages and remedies sought until after a hearing to more fully establish

the record on these issues. A hearing on the issue of damages and remedies is hereby

set for April 12, 2022 at 1:30 p.m. in Courtroom 4, Lafayette, Louisiana.

THUS DONE AND SIGNED, in Shreveport, Louisiana, this 2nd day of March,

2022.

on [pele /

S. MAURICE HICKS, JR., CHIEF JUD

UNITED STATES DISTRICT COURT

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