Facts

Petitioner Stephen J. Ross founded U.S. Technology Resources ("USTR") to engage in the business of providing Internet technology (IT) outsourcing services to US-based companies through the use of less expensive IT labor in India. USTR came into formal existence as an LLC in October of 1998. It was wholly owned by petitioner until June 1999.

In June 1000, after months of discussion, an operating agreement was executed among Ross, Magnecomp Corporation ("Magnecomp") and Bob Dwinell. Magnecomp was a Comcraft company. The agreement provided for Ross to make capital contributions totaling $150,000 and to receive a 63 percent interest in USTR, and for Dwinell to make capital contributions totaling $2,000 and to receive 4 percent interest in USTR.

The agreement explicitly acknowledged that the disproportionate equity being obtained by Ross was mutually agreed upon as Ross was performing disproportionate hours to bring the LLC operational. The agreement designated Ross as the initial manager and CEO of the LLC.

The agreement initially contained a provision prohibiting any dilution of Ross as a result of further funding by Magnecomp. Around January or February of 2001, the agreement was amended by addendum entered into on Aug. 25, 2000 to provide for another Comcraft company, Tricase to become a member.

Pursuant to the addendum, Tricase invested $750,000 for a 20 percent interest; the dilution provision pertaining to Ross was eliminated; Ross' interest was reduced to 50.4 percent; and Ross' interest was subject to further dilution if and when Tricase exercised certain warrants via investment of an additional $750,000.

Eventually Tricase acquired Magnecomp's interest, invested significant further amounts into USTR and Ross' interest was reduced to less than 30 percent by the time he resigned in September 2004 as CEO and manager.

In June 2005, as a result of some urging by USTR's outside lenders and to increase USTR's borrowing capacity, Tricase agreed to convert its outstanding debt of $12,470,000 to equity. The conversion valued USTR at $23,750 and Tricase's interest was increased to 74.62 percent and Ross' interest was decreased to 10.45 percent.

On June 30, 2005, Tricase, holding the majority of interest in USTR, unilaterally amended the agreement and added a new provision whereby any member could be terminated upon the majority's consent, and that that member would be entitled to receive a return of his fully paid capital in the company. On Oct. 25, 2005, Tricase again unilaterally amended the agreement setting forth the terms for the buyout of the terminated members.

In a letter dated Nov. 9, 2005, Ross was provided notice from Tricase of the termination of his membership interest, and informed that a return of his $150,000 capital contribution would be delivered shortly and that he would be provided the amount of his final buy-out price in the very near future.

In a letter dated Dec. 15, 2005 from USTR's counsel, Ross received a statement of the final buy-out price. The letter concluded that the company had a value of $18.1 million and that the gross buy-out price of Ross' interest was $2,090,550 based on Ross having a 11.55 percent interest. The letter asserted a variety of itemized offsets totaling $3,072,276 for alleged damages resulting from self-dealing, gross negligence and breach of fiduciary duty. It concluded that the final buy-out price payable to petitioner was zero and that there was $981,726 plus interest owing to USTR by petitioner.

In January 2006, petitioner initiated this arbitration.

PETITIONER'S CONTENTIONS:
Petitioner contended that the USTR "buyout" price for his interest in the company was less than fair value, and that there was no merit to USTR's claims that he did not have a valid membership interest or that his alleged misconduct as CEO was a bar to recovering fair value for his interest.

RESPONDENT'S CONTENTIONS:
Respondent contended that the making of petitioner's capital contributions were insufficient, and accordingly petitioner had no viable equity interest to buyout; that petitioner concealed his failure to infuse actual cash; that the offset was not approved by the other LLC members or board members; and that the expenses which Ross offset, in material respects, were not supportable and did not fall with an IRS definition of "start up expenses."

Settlement Discussions

Respondent made a CCP Section 998 offer for $2.7 million.

Damages

Ross sought damages in excess of $11 million.

Result

Arbitration whereby respondent USTR will pay petitioner Ross $4.5 million plus interest at 10 percent from Nov. 9, 2005, $2,025.765.54 for attorneys fees and costs, and $127,243,11 for arbitration fees.