Legal Update

September 2022

This article summarizes Agnelli v. Lennox Miami Corp., 2022 U.S. Dist. LEXIS 125346, 2022 WL 2788875 (S.D.Fl. July 14, 2022). This state of Florida case shows that nepotism does not always work out so well. The case involves misappropriation of corporate money, fair value valuations, the use of discounts for lack of control and marketability, and statutory interpretation. 

As Garry Marshall famously said, “When in doubt, you bring in relatives. Nepotism is a part of my work.” Agnelli v. Lennox Miami Corp., 2022 U.S. Dist. LEXIS 125346, 2022 WL 2788875 (S.D.Fl. July 14, 2022) shows that nepotism does not always work out so well. In this case, Plaintiff went to work for his father-in-law in the family business. For a while he prospered and rose through the ranks—nepotism can come in handy. Then the marriage failed and everything went to pieces.

Background

In 2001, Plaintiff married the daughter of Juan Castellanos (“FIL”), who was a part owner of several casinos and racetracks in Argentina. FIL brought Plaintiff into the business, and together, they invested the cash flow from those business interests into businesses and real estate projects in both Argentina and the United States. For years, all was serendipity. The businesses prospered, FIL treated Plaintiff like his own son, and he eventually turned over all management of their operations and cash management to Plaintiff.

Plaintiff and FIL both lived over the top lifestyles and both used the businesses for a variety of personal expenses. FIL was unconcerned with these minor activities. For example, Plaintiff caused Lennox to pay $39,130 in 2014, $58,162 in 2015, and $26,332 in 2016. All was well for about 15 years.

One of FIL’s businesses was the Miami Lennox Hotel, a luxury hotel in Miami Beach. FIL owned 75% of defendant Lennox Miami Corporation (“Lennox”), the corporate entity that owned the hotel, with Plaintiff and his wife each owning 12.5%. Lennox and Plaintiff entered into a formal employment agreement naming him Chief Executive Officer as well as manager of the hotel.

In 2017, Plaintiff began an affair with his administrative assistant. His needs for cash blossomed and, since he had no one looking over his shoulder, Plaintiff began dipping into corporate funds more deeply. In 2017, Lennox paid $111, 271 in Plaintiff’s personal expenses. In 2018, when he separated from his wife, those expenses jumped to $1,380,452, and in 2019, they were $728,965. All of this was on top of the $1,200,000 salary Plaintiff was drawing through his employment agreement.

While the hotel project had flourished under Plaintiff’s management, FIL learned of Plaintiff’s self-dealing in 2020 and began investigating Plaintiff’s actual activities as CEO (potentially also fueled by Plaintiff’s treatment of his wife). On June 22, 2020, FIL and his counsel, with the support of the Miami Beach police, seized control of the hotel, padlocked the door to Plaintiff’s office (posting a 24-hour armed guard there), and advised employees that there was a change in management and Plaintiff had been removed. On July 1, 2020, in the company of the police and others, Plaintiff cut the lock on the door to remove personal items from the office. Additional parries and thrusts took place over the next few weeks, and, by August 17, 2020, Lennox formally terminated Plaintiff.

Plaintiff sued Lennox and Lennox counter claimed. By the end of the bench trial, Plaintiff’s remaining claim was for judicial dissolution of the corporation. Lennox’s remaining claims were for breach of fiduciary duty, fraudulent inducement and recission of the employment contract, unjust enrichment, and accounting, and, as an alternative to the fraudulent inducement and recission claims, breach of contract. In response to Plaintiff’s claim for dissolution, Lennox exercised its statutory right to purchase Plaintiff’s shares. Since the parties were unable to reach an agreement on purchase price for Plaintiff’s shares, the court also needed to determine the value of his 12.5% interest in Lennox.

Court Findings

            Misappropriation of Lennox Funds

The court found that Plaintiff had in fact utilized substantial amounts of Lennox funds for unauthorized personal expenses. These expenses included, among other things:

• After leaving the marital home, he had Lennox pay $207,000 in rent ($11,500 per month) for an apartment for personal use;
• During the same period, Lennox paid approximately $29,000 in housekeeping services for his personal apartment (approximately $1,600 per month);
• $800,000 for, among other things, “personal trips for himself, trips for his personal athletic trainer, trips with his mistress, meals, entertainment, purchases from Apple and Amazon, groceries, clothing, sports gear, and supplements”; and
• $62,401 for construction and design work on a personally owned investment property.

In addition, the court found that Plaintiff had “usurped” corporate opportunities. In one example, he negotiated a lease for a restaurant management company to open a restaurant in the hotel. As part of the deal, an entity that Plaintiff owned separately from Lennox or FIL, received a 25% interest in the restaurant and any other restaurants the management company opened in Lennox hotels in the future. Part of the lease agreement required the restaurant management company to pay $425,000 up front, nearly half of which went to Plaintiff’s separate entity, not Lennox. As a result of these shenanigans, the court concluded that Plaintiff not only breached his fiduciary duties to Lennox, but also caused the company to file materially false tax returns in violation of his employment contract.

The litany of Plaintiff’s misdeeds did not end there. Before the litigation began, while investigating what was going on at the Lennox hotel, FIL’s counsel sent a letter to Plaintiff requesting a variety of documents. Two days later, Plaintiff opened a secret account at Wells Fargo. “In order to open the WF account, [Plaintiff] falsely certified that he was the sole owner of Lennox;” thus committing bank fraud.

In March and April of 2020, Plaintiff affixed FIL’s name on documents related to his visa to remain in the country. “As [Plaintiff] acknowledged, [Plaintiff] and [FIL] were no longer speaking by the dates of the documents that include [FIL]’s forged signatures. [FIL] did not sign these documents and his signatures contained therein were forged and unauthorized.”

Buyout of Plaintiff’s Interest in Lennox

Having addressed Plaintiff’s misconduct, the court turned its attention to Lennox’s buyout of Plaintiff’s 12.5% interest in lieu of dissolution pursuant to Fla. Stat. § 607.1436. According to the statute, when the parties are unable to agree on the value of the interest, the court must determine a value as of the day before plaintiff’s petition, or, in this case, August 16, 2020, at the height of the COVID-19 pandemic restrictions.[1] Both parties proffered expert testimony regarding the value of both the hotel and the company.

Lennox, following the letter of the statute, valued the property and the company on August 16, 2020, at $45,000,000 and $38,262,827, respectively. From the indicated value of a 12.5% interest, approximately $4,783,000, sought to deduct a discount for lack of control (DLOC) and discount for lack of marketability (DLOM).

Plaintiff, on the other hand, used June 30, 2021, arguing that there were so few hotel transactions in the summer and fall of 2020 that a valuation in August 2020 would not produce a valid picture of the hotel on a going concern basis. Using the June 30, 2021, valuation date, Plaintiff contended that the value of the hotel and net asset value of the company were $71,500,000 and $66,847,165, respectively. Based on this, Plaintiff valued his 12.5% interest at $8,356,000.

As an initial matter, the court agreed with Plaintiff that, considering the economic circumstances at the time, the mid-2020 valuation date provided a more reliable basis to value the hotel and reflected “the fact that the Miami Beach hotel market was uniquely situated to be among the fastest recovering tourist areas after initial COVID restrictions were lifted.”

The court also declined to apply the DLOM and DLOC that Lennox sought. While the statute did not define “fair value” in the particular statutory provision involved in this case, it did define the term in an analogous provision dealing with statutory appraisal rights where the legislature specifically disallowed those discounts.

In calculating the value of Plaintiff’s 12.5% interest, the court also declined three other positions that Lennox asserted. First, Lennox had deducted as a liability the company’s proceeds under the Paycheck Protection Program. While those amounts may have been outstanding as of August 16, 2020, the program was designed to forgive the advance as long as the proceeds were expended for permitted uses. Since the company had complied with the program requirements, including the PPP loan as a liability was inappropriate.

Second, Lennox’s valuation had included more than a million dollars in future marketing expenses to recover from the shutdown. The court found that that adjustment to actual net assets was “not at all in line with [Lennox’s] spending.”

Finally, the court declined the company’s request to adjust the valuation by the “excess paid-in capital” of FIL. While not detailed in the opinion, it appears that while the equity was divided 75%, 12.5% and 12.5% among FIL, Plaintiff and wife, the actual funds predominantly came from FIL. “Such amount was not reported on Lennox’s books as a loan to or other liability of Lennox notwithstanding Castellanos had control and otherwise had Lennox financial documents amended when he took over day to day control of Lennox in July 2020.”

Presumably, Lennox’s lenders sought the assurance of a certain level of equity investment by the owners to support the financing of the project. All those funds appear to have been recorded as simple equity, which, since the company had just one class of stock, applied equally to each and every share. Had FIL’s excess capital contributions been recorded as some form of subordinated debt or second class of stock, there may have been a different result on this issue.

In the end, the court found that Lennox’s damages on its counter claims totaled $6,073,526. The court also determined that the value of Plaintiff’s 12.5% equity interest was $8,355,875[2] as of June 30, 2021. In accordance with the statute, the court also ordered Lennox to pay interest at the statutory rate from June 30, 2021, until satisfied, which Lennox was ordered to do within 10 days of the ruling. Curiously, the court did not address whether the damages on Lennox’s claims offset the purchase price of the stock (and reduced the amount on which interest should accrue).[3]

Conclusion

Disputes among family members are never good, and some of the worst involve family businesses. The most trusted people can turn out to be the ones least deserving of trust. In this case, the court clearly found that Plaintiff was the bad actor, but that did not stop it from using reason to find that exceptional economic circumstances warranted departing from the specific language of the statute to set a later valuation date that would better reflect economic reality.

[1]  On April 1, 2020, the Florida governor issued a state-wide “stay at home” order restricting commercial activities to “essential services.” Those restrictions were eased over time, but not fully removed until September 25, 2020. Even as state restrictions were easing during the summer of 2020, international travel was limited resulting in fewer tourists to the United States and U.S. residents’ concerns over the virus limited domestic travel.

[2]  Adjusted net asset value ($66,847,165) time 12.5% equals $8,355,895.63. The reason for the $21 difference is unknown.

[3]  A recent decision in New York state court found that alleged damages for, among other things, breach of fiduciary duty and self-dealing do not offset the purchase price obligation in a buy out of a minority owner. Hieber Reade Street LLC v. Taverna, Index No. 655454/2021 (NY County 2022)

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Michael J. Molder, JD, CPA, CFE, CVA, MAFF, applies 30 years of experience as a Certified Public Accountant and litigator to help investigate and analyze cases with complex financial and economic implications. He has acted as both counsel and accounting expert in pending and threatened litigation as well as participating in internal investigations of financial misconduct. As a litigator, Mr. Molder helped co-counsel understand complex financial and accounting issues in dozens of cases. In 2006, Mr. Molder returned to public accounting applying his unique skills to forensic engagements. He has also performed valuations of business interests in a wide variety of industries.

Mr. Molder has served as valuation expert for both plaintiffs and defendants in commercial litigation matters and owner and non-owner spouses in matrimonial dissolutions. He has participated in the valuations of businesses in a wide variety of industries, including: food service, wholesale and retail distribution, literary development and production, healthcare, manufacturing, and real estate development.

Mr. Molder has also investigated and valued damages in a wide variety of litigation contexts ranging from breach of contract claims to personal injury cases, and from employment disputes to civil fraud. He has consulted on many matters which have not involved the issuance of a report for litigation or resulted in deposition or trial testimony. Accordingly, the identity of these matters is protected by attorney client privilege.

Mr. Molder has also lectured widely on a variety of accounting and litigation related topics including business valuation, financial investigations in divorce proceedings, accountant ethics, financial statement manipulation and “earnings management.”

Mr. Molder can be contacted at (610) 208-3169 or by e-mail to Molder@lawandaccounting.com.