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Sohani v. Sunesara

Court of Appeals of Texas, First District

March 1, 2018


         On Appeal from the County Civil Court at Law No. 1 Harris County, Texas Trial Court Case No. 1058441

          Panel consists of Justices Keyes, Brown, and Lloyd.


          Evelyn V. Keyes Justice

         In this case involving former business associates, Manisch Sohani and Anis Virani sued Nizar Sunesara for fraud and sought a declaratory judgment that Sunesara was not a member of three limited liability companies formed to manage the business of three retail shops that sold tobacco products and smoking accessories. Sunesara sought a declaration that he was a member of all three limited liability companies (collectively, the LLCs) and that he was entitled to one-third of the profits from the LLCs. After a jury trial, the jury found that Sunesara was a member of the LLCs and was entitled to one-third of the profits from the LLCs. The jury also found that Sohani and Virani were estopped from denying that Sunesara was a member of the LLCs and that Sunesara did not commit fraud against Sohani and Virani. The trial court entered a final judgment declaring that Sunesara was a member of the LLCs and was entitled to one-third of the profits from the LLCs. The trial court also awarded Sunesara trial and conditional appellate attorney's fees, court costs, and post-judgment interest.

         In three issues on appeal, Sohani and Virani contend that (1) the trial court's judgment conflicts with Business Organizations Code section 101.201, which requires that profits and losses of a limited liability company be allocated to each member based on the agreed value of the member's contributions "as stated in the company's records, " and none of the LLCs here had a written record of Sunesara's alleged contributions; (2) the trial court erroneously admitted documents that Sunesara disclosed less than thirty days before trial; and (3) the trial court lacked subject matter jurisdiction because Sunesara sought damages in excess of the jurisdictional limits of the county civil court at law.

         We modify the judgment of the trial court and affirm as modified.


         A. Initial Acquisition of Three Smoke Shops

         The parties to this case have known each other for nearly two decades. Sunesara and Virani are cousins, and Sunesara met Sohani through a fraternity at the University of Houston and later introduced him to Virani. The three men decided to go into business together, and this dispute arises out of that relationship.

         In 2002, Sunesara and Virani started selling smoking accessories and devices in flea markets in Houston and Austin on the weekends. Sunesara used his own funds to purchase inventory, and Virani contributed his time. Sohani, who owned a "general merchandise wholesale" business, was not involved in running the flea market shop, although he was one of their vendors. After having success with the flea markets, in 2003, Sunesara and Virani decided to start a brick-and-mortar retail shop selling smoking accessories in Houston seven days per week. They called this business Zig Zag Smoke Shop. Sohani, along with several other vendors, contributed inventory on credit to Zig Zag. Virani acted as the general manager of Zig Zag. Virani testified that he and Sunesara offered Sohani a portion of the ownership of Zig Zag, and they agreed to split profits in thirds.[1]

         In 2007 or 2008, Sunesara transitioned away from a daily focus on Zig Zag when Sohani offered him a sales and marketing position at his company, Mike's Worldwide Imports ("MWI"). Sunesara eventually became the chief financial officer of MWI. Virani also took a position in sales and marketing at MWI, but he continued managing the day-to-day operations at Zig Zag while he worked at MWI. At the time of trial, Virani was the chief financial officer of MWI.

         In 2012, Zig Zag was doing well, and Sunesara and Virani decided that they wanted to expand their business, so they found a second retail location. Sunesara and Virani called this store Burn Smoke Shop ("Burn I"). Sunesara testified that he contributed $10, 000 in cash for the startup of Burn I, and he gave this money to Virani. He stated that no records of this contribution exist and that he did not ask Virani for a receipt or documentation. Sunesara testified that he also contributed "deferred profits, " which he explained as an agreement among himself, Virani, and Sohani that they would obtain the inventory for Burn I from MWI and "that inventory would be paid back before we took out any profits from the business."

         Virani testified that Sunesara did not contribute anything to Burn I. He testified that Burn I acquired all of the fixtures in the shop from a company on credit and that Sohani, via MWI, contributed the inventory. Virani disagreed that Sunesara ever gave him $10, 000 in cash or that he contributed "deferred profits" because all of the profits from the shops went to Sohani to cover the inventory that he had contributed. Sohani testified that he provided inventory to Burn I, but he did not want to be otherwise involved with that shop.

         Toward the end of 2012, another retail smoke shop decided to sell its existing business, called EZ Smoke Shop, and Sunesara, Virani, and Sohani agreed to purchase this business. They then changed the name to Burn Smoke Shop Two ("Burn II"). Sunesara testified that he contributed $10, 000 in cash to the acquisition of this business and deferred profits. He stated that, as with Burn I, he gave the cash to Virani, and he did not receive a receipt or any kind of documentation concerning this contribution. Sunesara testified that Virani contributed $10, 000 in cash and became the manager of Burn II, while Sohani contributed inventory from MWI and assumed a personal guarantee for the purchase price of the shop, which was between $80, 000 and $100, 000.

         Virani testified that Sohani had another customer who owned a retail shop, who wanted to leave the industry, and who owed Sohani money, so Sohani and this other individual worked out a deal in which Sohani purchased the ongoing business and forgave some of the debt that the other person owed to him. Virani testified that Sunesara's only involvement in the acquisition of Burn II was that he wrote some of the checks on behalf of MWI to the prior owner of the shop. Sohani agreed with Virani that Sunesara did not contribute anything to the three shops. Virani stated that his contribution to the smoke shops was his time and effort in organizing the shops, getting them ready for business, and overseeing the day-to-day operations. Sohani testified that, with regard to Zig Zag and Burn I, in addition to contributing inventory from MWI, he also made arrangements with the shops' other vendors to assume around $40, 000 to $50, 000 in debt that the shops owed.

         SSV Corporation, which Sunesara incorporated in 2007, owned the assets of both Zig Zag and Burn I. It never owned the assets of Burn II. Sunesara and Virani both owned fifty percent of SSV Corporation. The trial court admitted a spreadsheet-Defendant's Exhibit 17-which purported to be a yearly cash flow statement that Virani prepared for SSV Corporation in 2011. This document reflected that monthly "profits/commissions" were paid to various people, including equal amounts to Virani, Sohani, and Sunesara. Sunesara testified that, although Sohani was not a formal owner of SSV Corporation, everyone "still considered him a partner" and he "was still a part of the company, " which is why he received profit distributions from SSV Corporation. Sunesara also testified that Virani handled the profit distributions and that he would deliver the cash distributions to Sunesara and Sohani each month.

         B. Creation of the LLCs

         Before the parties finalized the acquisition of Burn II, Sohani and Virani asked Sunesara to file paperwork with the Texas Secretary of State to form three limited liability companies to own and run the three smoke shops. Sunesara completed and filed Certificates of Formation for the LLCs: ZZSS, LLC, which managed Zig Zag Smoke Shop; BRNSS, LLC, which managed Burn I; and EZSS, LLC, which managed Burn II. Each of the Certificates of Formation listed Virani, Sohani, and Sunesara as governing persons of the LLCs. Sunesara testified that he showed each of the certificates to Virani prior to filing, and Virani authorized the filing of the documents. He stated that he did not show the certificates to Sohani but that Sohani had given him authorization to file the certificates. Sunesara's signature is on each of the three certificates, but neither Virani nor Sohani signed the certificates.

         Shortly after the creation of the LLCs, Virani sought to open a bank account for each of the LLCs with Chase Bank. Several days after Virani initially made this inquiry, he, Sohani, and Sunesara all went to a branch of Chase Bank, and each of them signed a signature card for each of the three LLCs. Virani and Sohani were present when Sunesara signed the signature cards. Each signature card listed Virani, Sohani, and Sunesara as a "Member." The "Business Depository Resolution" for each of the three accounts included a certification by the signatories that the business is "a limited liability company organized under the laws of the state/country of USA and the individuals signing this Resolution constitute all of the members or managers, as appropriate[, ] of the company." This document, like the signature cards, listed Virani, Sunesara, and Sohani as a "Member." Each of the three men signed this document under a heading stating, "For Limited Liability Company (all members/managers must sign)[.]" Sunesara testified that the bank required a copy of the Certificate of Formation for the LLCs before it would open the accounts and that Virani provided the certificates to the bank.

         Virani testified that Sohani had the idea to set up the LLCs in order to insulate each smoke shop from the others. Neither Virani nor Sohani had any experience in forming entities, so they asked Sunesara if he would complete the paperwork. Sohani testified that he told Sunesara that Sohani and Virani would be the owners of the LLCs. Virani disputed Sunesara's testimony that he showed Virani the Certificates of Formation for the LLCs prior to filing them with the Secretary of State. He testified that Sohani had authorized Sunesara to file the paperwork, but Sunesara should not have been listed as a member of the any of the LLCs. Instead, according to Virani's and Sohani's testimony, the only members listed on the Certificates of Formation should have been Virani and Sohani. Virani testified that the LLCs began operating in early 2013, and before that, SSV Corporation was operating Zig Zag and Burn I.

          Virani also testified that Sohani asked Sunesara to set up the bank accounts for each of the LLCs. Virani stated that he "inquire[d] about a bank account, " but his only involvement in setting up the accounts was signing the signature cards and the depository resolutions. He testified that he noticed Sunesara's name on the account documents, but this did not concern him because Sunesara was also listed on the accounts for MWI.

         The trial court admitted copies of the LLCs' franchise tax public information reports from 2013 and 2014. The reports from 2013 listed Virani, Sunesara, and Sohani as members, and Virani's name was typed in the box that said "Sign Here." The reports from 2014 listed only Virani and Sohani as members and reflected Virani's handwritten signature. The 2013 and 2014 federal income tax returns for the LLCs stated that Virani and Sohani each owned 50% of the LLCs.

         Virani testified that he never received a profit distribution from the LLCs because the profits went to MWI to pay back the inventory that Sohani contributed, as well as to the other creditors and vendors of the LLCs. Sohani testified similarly that profits from the LLCs have been used to pay for the inventory that MWI contributed, but he has not personally received any profit distributions.

         C. Deterioration of the Parties' Relationship

         In June 2012, after the parties had started Burn I but before they had acquired Burn II, federal law enforcement officers began conducting nationwide raids on retailers, wholesalers, and distributors in the smoke shop industry, targeting sellers of synthetic marijuana. Sunesara became concerned because this was a product that MWI and the retail shops were selling. Sunesara testified that he approached Sohani to discuss the issue, and he suggested that both MWI and the retail shops move away from selling this product. Sunesara told Sohani that he would quit if they did not stop selling this product, and his understanding was that the retail shops did stop selling it. He stated that he did not tell Virani and Sohani that he wanted to "give up any part of [his] ownership in the retail stores."

         Federal law enforcement raided MWI in June 2013. Officers questioned Sunesara, but he was not charged with any offense. Sunesara immediately took a leave of absence from MWI, and he testified that he never asked for his job back and he never went back to work at MWI.[2] Sohani testified that Sunesara later asked for his job back, but Sohani refused because Sunesara "left [him] in the most critical time."

         Virani testified that after the raid on MWI, in July 2013, he and Sohani realized that they did not have important documentation for the LLCs, such as operating agreements. After Virani conducted some internet research, he and Sohani drafted and signed form operating agreements for each of the LLCs. The signature page of the identical operating agreements, entitled "Certification of Members, " lists only Virani and Sohani as members of the LLCs and states, under each of their names: "Made 50% of contributions, Owns 50% of profits and assets." Sunesara's name is not included in any of the three operating agreements, and he had no involvement in drafting the agreements.

         Sunesara testified that he received monthly profit distributions from the LLCs for the first five months of 2013. He testified that, after he took a leave of absence from MWI, he regularly asked Virani "what the situation was with the profit distributions." He stated that Virani gave him excuses regarding why there were no profit distributions, and then the parties ceased communicating in October 2013.

         In November 2014, Virani and Sohani received a letter from Sunesara's attorney stating that Sunesara "wanted a share of his business" and was claiming an ownership interest in the LLCs, but, according to Virani, Sunesara "had no share in the business." Later, Virani and Sohani tried to open a bank account at a new bank, but they were told they could not do so because they needed Sunesara's authorization and signature as well. The LLCs also attempted to obtain a loan to pay back a portion of the debt owed to Sohani and MWI, but the bank would not issue the loan because it needed the signatures of the three people listed as members on the Certificates of Formation, which included Sunesara.

         D. Procedural Background

         Sohani and Virani initially filed suit against Sunesara in February 2015 in the Harris County Civil Court at Law Number One. Sohani and Virani asserted a cause of action for fraud, alleging that Sunesara improperly listed himself as a member of the LLCs on the Certificates of Formation and that he fraudulently represented that he was a member of the LLCs entitled to profit distributions and access to the books and records of the LLCs. Sohani and Virani also sought declarations that Sunesara was not a member of the LLCs, Sunesara did not have a membership interest in the LLCs, Sunesara was not entitled to review the books and records of the LLCs, and Sunesara was not entitled to any profit distributions or other sums from the LLCs.

         Sunesara answered and filed several counterclaims against Sohani and Virani, including claims for breach of fiduciary duty, breach of the duty of good faith and fair dealing, an accounting, quantum meruit, fraud, and promissory estoppel. Sunesara also sought a declaration that he was a member of the LLCs and was entitled to one-third of the profits from the LLCs. As affirmative defenses to Sohani and Virani's ...

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