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Wait v. Elmen

Court of Appeals of Arkansas, Division I

November 29, 2017



          The Stuart Firm, P.A., by: Jason A. Stuart, for appellant.

          Watts, Donovan & Tilley, P.A., by: David M. Donovan and Staci Dumas Carson, for appellees.


         The appellee, Spencer Elmen, and the appellant, Steven Wait, are business partners. Elmen sought an injunction removing Wait from the management of a business.[1] The Pulaski County Circuit Court granted a preliminary injunction. Wait appeals, arguing, among other things, that the circuit court erred in granting the preliminary injunction without a proper showing of both irreparable harm and likely success on the merits. We agree that the circuit court abused its discretion. We reverse and remand for further proceedings consistent with this opinion.

         I. Background

         Elmen and Wait are members with equal 30 percent interests in two Arkansas limited liability companies-appellees Jackie, LLC, and Sodakco, LLC. Wait's mother and stepfather, Barbara Wait and Edwin "Ted" Ellem, each own 20 percent interests in Jackie and Sodakco. Under the terms of the LLC operating agreements, Elmen and Wait were designated managers. Wait was designated president, and Elmen was designated chief operating officer. Jackie and Sodakco operate a business under the name Cupid's Lingerie (Cupid's) in Jacksonville.[2] Sodakco owns the real estate, while Jackie operates the store on the Sodakco property. Wait is the manager of this location.

         Elmen, believing that Wait was diverting company assets for personal use, filed suit individually and derivatively on behalf of both Jackie and Sodakco against Wait.[3] Elmen alleged causes of action for conversion, breach of contract, fraud, gross negligence, and breach of fiduciary duty. Elmen sought monetary damages. He later filed a motion for preliminary injunction seeking injunctive relief in the form of removing Wait from any management role in the companies and requiring him to provide a full accounting of the financial affairs of the companies.

         Wait filed an answer denying all liability. Wait also raised affirmative defenses, including that Elmen could not maintain a derivative action because he had failed to secure the affirmative vote of more than one-half of the members of each company-as required by Arkansas Code Annotated section 4-32-1102 (Repl. 2016)-to authorize Elmen to file a lawsuit on behalf of each LLC.

         The circuit court held a hearing on the motion for preliminary injunction. The court received evidence of the Cupid's entities' operations at all locations. These entities had a ten-year history of bounced checks in the "thousands, " resulting in the return of inventory because it could not be paid for and in some cases vendors requiring either a credit card, a cashier's check, or cash on delivery. Elmen and Wait developed a pattern of transferring money from one store to another on a daily basis in order to keep checks from bouncing. They did so through Misty Hill, an employee who provides payroll and bookkeeping services for all of the Cupid's stores. Additionally, Hill testified that she would forge Elmen's or Wait's signatures on checks so that they would not realize when a company check was written and that she had paid herself additional salary above her authorized salary. Elmen and Wait were unaware of these extra payments.

         The court also heard undisputed evidence that the personal expenses for both Elmen and Wait were paid from the various Cupid's entities.[4] These expenses included car payments, house payments, utility payments, insurance payments, and fringe benefits. In addition to these expenses, Elmen withdrew $100, 000 from the various Cupid's entities to pay part of a $550, 000 settlement with a former business partner and took money to help pay a personal tax lien in favor of the IRS of over $100, 000.

         At the conclusion of the hearing, the circuit court ruled from the bench and subsequently entered an order granting the motion. The court barred Wait from any role in the administration, operation, management, banking, and financial affairs of either Jackie or Sodakco. The order also prohibited the companies from making any loans or paying any distributions or bonuses to the members and prohibited the comingling of assets or debt from the Jacksonville store with any other Cupid's store. The court further ordered the immediate suspension of salary payments to both Wait and Elmen. This appeal follows.

         II. Standard of Review

         In determining whether to issue a preliminary injunction pursuant to Civil Procedure Rule 65, the circuit court must consider two things: (1) whether irreparable harm will result in the absence of an injunction or restraining order and (2) whether the moving party has demonstrated a likelihood of success on the merits. Baptist Health v. Murphy, 365 Ark. 115, 226 S.W.3d 800 (2006); Three Sisters Petroleum, Inc. v. Langley, 348 Ark. 167, 72 S.W.3d 95 (2002). The circuit court may make factual findings that lead to conclusions of irreparable harm and likelihood of success on the merits, and those findings shall not be set ...

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